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Microeconomics > 1.2 How Markets Work > Flashcards

1.2 How Markets Work Flashcards

1
Q

What is demand?

A

The ability and willingness to buy a particular good at a given time

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2
Q

Why does the demand curve slope downwards?

A
  • Income effect: the impact of a change in price on a consumers income
  • Substitute effect: how easily a good can be replaced with another
  • Diminishing marginal utility
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3
Q

What is diminishing marginal utility?

A

Reduced rate of satisfaction gained from consuming additional units of a good

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4
Q

What is normal good?

A

Goods and services which see a rise in demand when incomes rise

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5
Q

What is an inferior good?

A

Goods and services which see a fall in demand when incomes rise

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6
Q

What are 6 conditions of demand?

A
  1. Income levels
  2. Substitute goods
  3. Complementary goods
  4. Advertising
  5. Population
  6. Government policy
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7
Q

What is supply?

A

The ability and willingness of firms to produce a good or service at a particular price at a given time

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8
Q

Why does the supply curve slope upwards?

A

As the price level increases, more firms are incentivized by profit to join the market and to extend their supply

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9
Q

What are 7 conditions of supply?

A
  1. Production costs
  2. Indirect taxes
  3. Number of firms
  4. Technology
  5. Subsidies
  6. Weather
  7. Cartels
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10
Q

What is joint supply?

A

When two or more products are derived from a single source. Increased production of one will lead to increased production of the other

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11
Q

What is competitive supply?

A

When the production of multiple goods require the same resources. Increasing the production of one, decreases the other

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11
Q

What are the 3 functions of the price mechanism?

A
  1. Incentive: rising prices give a profit incentive for producers to extend supply
  2. Rationing: resources become scarce leading to price rises, discouraging consumers from entering the market and allocating goods to those willing to pay
  3. Signalling: notifies producers of the market conditions
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12
Q

What is the price mechanism?

A

The way price changes in response to changes in demand or supply, so that new equilibrium position is reached

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13
Q

What is consumer surplus?

A

The extra satisfaction gained by a consumer for paying a price that is lower than which they were prepared to pay

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14
Q

What is producer surplus?

A

The difference between what producers are willing and able to supply a good for and the price they actually receive

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15
Q

Where is consumer surplus found on a diagram?

A

Below the demand curve, above the price line

16
Q

What is allocative efficiency?

A

The optimal distribution of goods and services in an economy to meet the needs and wants of society

17
Q

What is price elasticity of demand?

A

A measure of the responsiveness of demand to a change in price

18
Q

What is the difference between relatively inelastic and relatively elastic demand?

A

Relatively inelastic: large % change in price will result in a smaller % change in demand
Relatively elastic: small % change in price will result in a larger % change in demand

19
Q

What is the difference between perfectly inelastic and perfectly elastic demand?

A

Perfectly inelastic: % change in price has no effect on the quantity demanded
Perfectly elastic: % change in price leads to an infinite change in demand

20
Q

What is the equation for price elasticity of demand?

A

% change in quantity demanded / % change in price

21
Q

Name 4 factors that affect PED

A
  1. Number/closeness of substitutes
  2. Degree of necessity
  3. Proportion of income
  4. Time
22
Q

What is the difference between consumer and producer burden?

A

Consumer burden is the amount which consumer surplus has reduced by the imposition of a tax

Producer burden is the amount which the imposition of a tax will reduce producer surplus

23
Q

What is tax incidence?

A

A measure of how the burden of tax is distributed between firms and consumers (taxpayer)

24
Q

What is cross price elasticity of demand?

A

A measure of how much a price change for one good impacts the quantity demanded for another

25
Q

What is the equation for cross price elasticity of demand?

A

% change quantity demanded of A / % change in price of B

26
Q

What is the significance of XED?

A
  • Firms can become aware of their competition (substitutes) and allies (complementary)
  • Aware of how price changes by other firms will affect them in order to make appropriate action
27
Q

What is price elasticity of supply?

A

A measure of the responsiveness of supply following a change in price of a good

28
Q

What is the equation for price elasticity of supply?

A

% change in quantity supplied / % change in price

29
Q

What are 5 factors influence PES?

A
  1. Time period: the longer the time period, the more elastic as easier to increase production in long-term
  2. Storage ability: if firms can store goods it is easier to react to demand changes
  3. Factor mobility: how easy FOP can be switched from one productive use to another
  4. Spare capacity: if FOP are not being fully utilised then it is easier to increase output
  5. Barriers to entry: if it is difficult for new firms to enter the market then supply cannot respond to price changes
30
Q

What do the 4 economic agents aim for when making decisions?

A
  • Rational consumer: to maximise utility
  • Rational firms: to maximise profit
  • Rational workers: to balance welfare at work with high pay and benefits
  • Rational governments: to maximise the welfare of the electorate
31
Q

What is rationaility?

A

A decision making process based on making choices that result in the optimal level of benefit or utility for an individual

32
Q

What are 5 reasons for irrational behaviour

A
  • Influenced by social networks (herd mentality): making decisons based on the choices/actions of others
  • Habitual behaviour: a pattern of repeated and regular consumption of a good/service
  • Limited capacity to calculate costs and benefits
  • Lack of self control/immediate satisfaction
  • Consumer inertia: the tendency of consumers to choose the same products over time
33
Q

What is irrationality?

A

Actions or decisions that are not based on reason or sound judgement

34
Q

What is the difference between a negative and positive XED?

A

Positive: the demand for one good increases when the price for the substitute good increases

Negative: the demand for one good decreases when the price for the complimentary good increases

Microeconomics (6 decks)

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