1.2 how markets work Flashcards
1
Q
what is rational choice theory?
A
the theory that people are rational and self interested making decisions for highest personal utility (a dominant paradigm in economics)
2
Q
what factors are people influenced by in the real world?
A
emotional, cognitive and social biases/influences
3
Q
maximisation definition
A
economic agent trying to obtain the most they can from economic activity
4
Q
utility def
A
satisfaction/benefit one gets from consuming a good/service
5
Q
assumptions made in rational decision making
A
- all information available is used
- people unbiased by others
- people want to maximise utility or satisfaction
- consumers have stable preferences
6
Q
reasons suboptimal decisions are made
A
- limited calculating ability
- importance and bias of social networks
- emotion overtaking logic
- altruism overtaking pure self interest
- desire for instant reward
- sticking to default choices rather than considering others
7
Q
homo economicus model
A
agents can calculate every cost and benefit, can compute probabilities, do not feel any emotion/regret
8
Q
behavioural economics def
A
study of the psychological reasons why people make decisions they choose
9
Q
what is bounded rationality
A
limited decision making in individulas by limited intormation, intellect and time
10
Q
what is bounded self control
A
individuals having difficulty controlling impulses
11
Q
social norms
A
are the behavious accepted in a group
may cause marginal disutility if people are not making informed choices
12
Q
what is nudge theory
A
an attempt to manipulate social norms in a positive and non coersive manner
13
Q
what is habitual behavour
A
people following the same regular routine and it is hard to break out of
14
Q
what is loss aversion
A
people trying to manitain status quo by trying to minimise losses rather than optimise gains
15
Q
why is habitual behaviour important?
A
helps agents see patterns in demand as it is influenced by habitual behaviour
16
Q
what is a heuristic
A
a simple rule individuals ise ot make a judge,ent when making a decision
17
Q
who wrote about heuristics
A
kahneman and tversky
18
Q
3 heuristics
A
- availability: not using information available but only memories or info that is remembered
- representativeness: categorising in a decision based on past experiences
- anchoring and adjustment: use an arbitrary number when making an estimate of a differnt number
19
Q
example of irrational behaviour
A
vaping in young people - not previously hooked or addicted to nicotine - social norm - 24% of 16-19 year olds in the UK
20
Q
definition of demand
A
quantity of a g/s consumrs willing and able to consume at a given price
21
Q
demand curve and afffected by what
A
downwards sloping straight line
change in price = movement along
anything else - shift
22
Q
what is a veblen good and examlpe
A
as price increases demand increases
example: rolex watch or lamborghini
23
Q
pasific!
A
population: if up, demand up
advertising: if good advertising, more demand - like coca cola advert at xmastime
substitutes: if price of sub down, demand down - example coffee and tea
income: if income up, inferior good demand down and normal good demand up (private vs public transport)
fashion trend: changing trends reflect in changes in demand
interest: higher - lower d as cost of borrowing up
complements: if price up, demand for original good down - purchased together like tea and sugar
24
Q
what is a giffen good
A
demand up even if inferior as incomes increse - such as bread, wheat - necessities
25
labour demand
derived demand: demand for labour depends on demand of the g/s
26
marginal utility def
satisfaction gained for every additional unit consumed
27
law of diminishing marginal utiltiy
as consumption of a g/s increases, satisfaction dericed graduall increases at a decreasing rate to a point where increase is zero - total utility maximised
28
diminshin marginal utility
usually every unit additional product consumed is less satisfactory - consumers willing to pay a lower price for each additional unit (reflected in a downwards slopinf demand curve)
29
example of diminishing marginal utility
cheap clothing in fast fashion brands like SHEIN and h and m - people buy mroe and mroe but wear less and less so more trash - negative externalities and environmental effects
30
comaprision of total utility and marginal utility
at the peak of TU curve (negative parabola), will be same amount of units as y=0 on marginal utility graph
31
supply def
quantity of g/s suppliers are willing and able to sell at a given price
32
supply curve
upwards sloping straignt line
movement along-change in price
anything else-shift
33
determinants of supply - pintswc
productivity: more efficient or productive produciton lines - more supply
indirect tax: makes production more expensive so decreases supply
number of firms and their prices: if prices are rising, more firms enter the market and are willing to supply more
technology: technological advances up efficiency so up s
subsidies: lower CoP so can supply more at lower prices
weather: if crop dictated by weather, supply harder to change
cost of production: depending on this - created by input factors of production - the lower, the more i supply
34
example of subsidies in the UK
EVs, automotives, clean energy
35
market equilibrium def
point at which demand is equal to supply
36
market clearing price def
the price at which d=s.
all goods sold with nothing left over and no one left to satisfy
37
surplus def and in diagram
area above equilibrium, excess supply so prices need to be lowered
38
shortage def and in diagram
excess demand - below equilibrium - prices need to be raised
39
real life example of price determination and shrotage
shortage of avocados since 2018 so increased illegal activity and crime as well as massibve price increases to try get prices back to equlitlbrium
since they have been classed a superfood
40
what are economic incentives
things that provide economic agents with reasons to provide goods and services
41
what is the price mechanism
method by which prices of goods and services are achieved
42
what are the 3 functions of the price mechanism?
rationing, signalling, incentive
43
rationing function of PM
if there's increased demand or decreased supply, prices rise
44
signalling function of PM
changing prices show consumers.producers whether to join or leave a market
45
incentive function of PM
consumer/producer motivate to a course of action - suhc as higher prices leading to a supplier supply more.
46
graph for rationing funciton of PM
demand curve with P1 below equilibrium, and Q1 too much - too much demand not enough suply shift to equlilbrium
47
graph for incentive function oF PM
demand curve with P1 above equilibrium, and Q1 too much - too much supply not enough demand shift to equlilbrium
48
allocative efficiency
when consumer satisfaction maximised in production - Demand = supply
49
productive efficiency
when an economy uses minimum inputs to produce max output at lowest cost
50
economic efficiency
when there is both productive and allocative efficiency together
51
def of PED
responsiveness of demand to a change in price
52
formula PED
%change QD/ %change price
53
coefficients of PED
0: perfectly inelastic (vert. line)
0-1: price inelastic (slight slant - demand change less than price)
1: unitary elasticity: exact proportional change
1-inf: price elastic (close to horizontal - demand change more than price)
infinity: perfectly elastic - horiz line
54
factors affecting PED
proportion of income
luxury vs necessity
addictive good
number of uses
time - SR inelastic LR elastic
substitutes: mroe subs, more elastic
width of market: brand or indistry
55
example for factor affecting elasticity - tax on cigarettes
although many brands, all taxed - so price elastic if switch to ecigs or vapes but still negative
56
YED def
responsiveness of demand to change in income
57
yed formula
%change QD/ %change income
58
pos neg meaning yed
positive: normal good
negative: inferior good - as income rises demand falls
59
determinants of YED
necessity vs luxury
level of income - lower likely to spend higher proportion on necessity
standards of living - firms using YED in richer countries to produce more normal products / superior products
60
example of wealthy antions
2024 - Qatar, singapore. luxembourg
61
necessity YED value
low elasticity but positive
62
cross elasticity of demand def
responsiveness of a good to change in price of another good
63
XED formula
%change QD of x/ %change price of y
64
coefficient meaning of XED
positive: subsittutie
negative: complement
the more elastic the value, the closer the priducts
65
complements def
products bought together to be consumer alongside one another
66
example of company producing complements for more revenue`
apple - iphones and airpods, apple pen and ipad and keybpard etc
substitute with samsung or MS products
67
pes def
the responsiveness of supply to a change in price
68
formula for PES
%change QS / %change price
69
businesses relation to PED
more inelastic PED - more control over prices - can increase prices more
70
determinants to PES
price: firms are profit maxiimisers so if prices are higher they want to supply as much as possible
substitutes/mobility: if they can switch what they are producing easily, more likley to up QS
time: short run inelastic but long run more elastic to have time to adapt
71
what is consumer surplus
a measure of economic benefit/gain that consumers recieve when they can buy g/s at a price cheaper than what they are willing to pay
- difference of what consumers are willing to and must pay in market
72
consumer surplus on a graph
area below demand curve and above market price
73
production surplus def
difference between price producers are willing and able to supply a product and the price they recieve in the market
74
producer surplus on a graph
area above supply curve below market price
75
change in d and s on prod/cons surplus
increase in demand - increased CS and PS
increase in supply - increased CS, PS depends on elasticity
decrease in demand: decreased both
decrease in supply: deacrease in PS, decrease in CS
76
indirect tax def
tax on good or service increaseing supply costs for producers - collected by intermediaries on consumption, sale or use of g/s
77
specific tax and example
a tax per unit of consumption
ex: sugar tax in UK - 24p for 8g or above,5-8g 18p tax per litre
78
effect of sugar tax
sugar tax in UK - 24p for 8g or above,5-8g 18p tax per litre
effect - 2015-19 - drinks with over 5g of sugar fell by 34% in supermarkets
79
excise duty
tax on tobacco, alcohol and road fuel
80
government revenue from vat
2022-23 - £160 billion
81
government revenue from tobacco tax
2024 - est £10.4 billion
82
landfill tax UK
£94/tonne
83
direct tax def
tax on an individual or organisation paid straight to government
84
reduced VAT rates and examples
5% - womens sanitary products, children's car seats, contraceptives
0% (zero rated) - books, children clothes, bus fare, prescription drugs
exempt: private education (subject to change), burial or cremation service, national health service
85
what is stamp duty land tax
tax paid when buying property above a certain price - 500k pounds starting
86
regressive tax def
tax taking higher proportion of low income earners' income
87
ad valorem tax def
indirect tax expressed as a percentage
88
ad valorem tax diagram
pivotal shift of supply curve in - absolute amount of tax goes up as market price increases
89
specific tax diagram
shift by constant amount - vertical
does not depend on market price
90
plastic packaging tax
£200 / tonne of plastic packaging if not made up of at least 30% recycled plastic
91
justifications for indirect taxes
provides government revenue, can alter consumer and producer behaviour, addresses market failure
92
eval for indirect taxes
- who pays the tax?
- how much incident on consumer vs producer?
- how much revenue is made?
- how is the rev used?
- consequences of inequality?
- elasticity of good?
- consequences at all - unintended?
93
subsidy def
any form of government support offered mainly to producers that reduces marginal cost of supply
94
what does the UK government subsidise
biofuel - to farmers, furlough scheme to labourers, renewable electricity generaiton tech - feed in tarrif scheme
95
furlough scheme
uk gov spent £70 bn for 12 million jobs during Covid pandemic
96
diagram for subsidies
supply curve shifts out as cost of supply decrease - shared by consumer and producer
97
justificaitons for subsidies
- can help poorer families in crisis
- protecting jobs in industries hit by economic shocks
- can help increase geographical mobility of labour by making transport and housing cheaper (initial role of HS2 and bridging north south div)
- reducing costs of training and employing workers
98
drawbacks of subsidies
- firms may become overreliant
- distotrion of resource allocation
- excess production and environmental risk
- expensive afffff
- may be government failure if there is political lobbying
99
UK steel industry case study
- crises because of high international competition with high domestic costs
- 2021 had £21 bn output and over 30k jobs in small areas
- 2022 - Tata steel (largest) had a loss of £176 mill
- subsidy of £200 mil
- could be bad as supporting a failing industry - sunset
- decarbonisation costs very high
