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BM Micro economics > 1.2 How markets work > Flashcards

1.2 How markets work Flashcards

1
Q

What is rational behaviour?

A

Assumptions that individuals make decisions based on logical and informed choices, aiming to maximise their utility

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2
Q

How are consumers assumed to act rationally?

A

By maximising their utility

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3
Q

How are producers assumed to act rationally?

A

By selling goods and services in a way to maximise their profits

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4
Q

What is demand?

A

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

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5
Q

Factors affecting demand

A

Changes in real income

Changes in taste/trends

Advertising/branding

changes in price of substitute goods

Changes in prices of complementary goods

Changes in demographics

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6
Q

How do changes in real income affect demand?

A

Real income determines how many goods/services can be bought by consumers. Higher real income= more money to spend= increase in demand

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7
Q

How do changes in tastes/trends affect demand

A

If goods start to become more ‘trendy’ then demand for them increases.

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8
Q

How does advertising and branding affect demand?

A

More effective advertising = more consumers aware of the product = increase in demand for the product

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9
Q

How does changes in the price of substitutes affect demand?

A

If there are two goods that are used for the same purpose, a consumer is likely to choose the cheaper one

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10
Q

How does changes in complimentary goods affect demand?

A

If a good needs another good to work that is too expensive then the demand will fall. e.g. a printer requires ink. If the price of ink increases substantially then the demand for the printer will fall.

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11
Q

How do changes in population affect demand?

A

More people= more potential customers= higher demand

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12
Q

What is marginal utility?

A

It i the additional utility (satisfaction) received from the consumption of an additional product.

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13
Q

How do you calculate total utility?

A

marginal utility of each unit added together

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14
Q

What is the law of diminishing marginal utility

A

It states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit

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15
Q

What does PED stand for

A

Price elasticity of demand

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16
Q

What does price elasticity of demand measure

A

Measures the responsiveness of demand due to a change in price

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17
Q

What is the formula for PED

A

% change in quantity demanded
/ % change in price

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18
Q

formula to calculate a % change

A

(new value - old value) / old value *100

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19
Q

What are the potential values of PED

A

PED can range from 0 to infinity but never negative.

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20
Q

What does a PED of 0 mean?

A

Good/service is perfectly inelastic. QD is completely unresponsive to a change in p

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21
Q

What does a PED of 0-1 mean?

A

Good/ service is relatively in inelastic. QD does not change much when price is changed

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22
Q

What does a PED of 1 mean?

A

Good/ service is unitary elastic. The % change in QD is equal to the % change in price

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23
Q

What does a ped of 1< mean?

A

Good/ service is relatively elastic. QD changes a lot when price is changed.

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24
Q

Wat does a PED of infinity mean?

A

Good/service is perfectly elastic. A small change in price leads to an infinite change in the quantity demanded.

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25
Factors that affect PED
Availability of substitutes, Addictiveness of the product,
26
what does YED stand for?
Income elasticity of demand
27
What does income elasticity of demand measure
The responsiveness of demand due to a change in income
28
What is the formula for YED
%change in quantity demanded/ %change in income
29
YED can be positive and negative? True or false?
True
30
PED can be positive and negative true of false?
False
31
What does a YED of 0-1 mean?
The good is a normal necessity. Demand increases when income increases. Relatively income inelastic
32
What does a YED of 1< mean?
The good is a normal luxury. Demand increase when income increases. Income elastic= income increases then demand increases a lot.
33
What does a YED of 0> mean? (negative)
The good is an inferior good. Demand decreases when income increases.
34
Factors that affect YED
Any factors in an economy which change the wage of workers. For example, economic growth, recession, minimum wage, taxation.
35
What does XED stand for
Cross price elasticity of demand
36
What does cross price elasticity of demand measure?
The responsiveness of demand of good A due toa change in price of Good B.
37
Formula for XED
%change in quantity demanded of good A / %change in price of Good B
38
XED can be positive and negative. True or false?
True
39
What does it mean if the XED is less than 0 (0>)
The goods are complimentary goods. negative= compliments
40
What does it mean if XED is more than 0 (0<)
The goods are substitute goods. positive= substitutes.
41
What does it mean if XED is 0?
The good are unrelated. There is no relationship between them.
42
Why is PED important to firms?
It allows them to maximise their profits. If their product is inelastic then they can raise their prices and profit maximise.
43
Why is PED important to governments?
It allows them to know which goods they can add taxes on without damaging firms.
44
What is supply?
Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period
45
Factors which affect supply
Costs of production, indirect taxes, subsidies, new technology, change in the number of firms in the industry,
46
How does costs of production affect supply?
If a good costs more for a firm to produce then they may make less of it, or none of it depending on how it affects profits.
47
How do indirect taxes affect supply?
Indirect taxes such as specific taxes change the cost of production, making the good more expensive to produce.
48
How do subsidies affect supply?
Subsidies are able to affect the cost of production for the firm. Making the good cheaper to make, increasing supply.
49
How do new technologies affect supply?
Increases productivity which lowers the costs of production. Therefore, supply can increase.
50
What does PES stand for?
Price elasticity of supply
51
what does PES measure?
the responsiveness of supply due to a change in price
52
What is the PES formula?
%change in quantity supplied / %change in price
53
PES can be positive and negative? True or false?
False
54
What do the values of PES vary between?
0 and infinity.
55
What does it mean if PES is 0
The good is perfectly inelastic. QS is completely unresponsive to a change in price
56
What does a PES of 0-1 mean?
The good is relatively inelastic. A change in price doesn't affect supply that much.
57
What does a PES over 1 mean?
The good is relatively elastic. A change in price largely affects supply.
58
What does a PES of infinity mean?
The good is perfectly inelastic. A small change in price leads to an infinite change in supply.
59
Factors that affect PES
Mobility of the factors of production, Availability of raw materials, Ability to store goods, spare capacity, Time period
60
How does the mobility of factors of production affect PES?
If producers are able to switch resources between products quickly then PES will be more elastic. (How fast producers can swap between different resources for different goods)
61
How does availability of raw materials affect PES?
If there are limited resources then PES will be inelastic as they are not able to make more goods without materials.
62
How does a firms ability to store goods affect PES?
If products can easily be stored then PES will be higher as producers are able to quickly increase supply
63
How does spare capacity affect PES?
If there is large amounts of spare capacity then supply will be elastic as they are able to increase production
64
What is spare capacity?
The unused or underutilised resources. The difference between the maximum sustainable level of production and the actual level of production.
65
How does time period affect PES?
If it takes a long time to produce a product such s fruit then it will be difficult to increase supply of it in the short run.
66
What are the four factors of production?
Land, Labour, Capital, Entrepreneurship.
67
What is land (factors of production)
Non made resources used in production such as coal.
68
What is capital (factors of production)
The money used to purchase items that are used to produce goods and services (capital goods). Such as machinery
69
What is Labour? (Factors of production)
People involved in the production process
70
What is entrepreneurship? (factors of production)
Individuals involved in organising the other factors of production.
71
What is short-run?
Any period of time in which at least one factor of production is fixed and is a limiting factor.
72
What is long-run?
Any period of time which all the factors of production are available. Allowing producers to vary all of their resources.
73
How does equilibrium occur?
Demand=Supply
74
How are prices determined in a free market economy?
The interaction of demand and supply in a market.
75
What is a market?
A market is a place that brings buyers and sellers together. Markets are physical and virtual.
76
When does excess demand occur?
When demand is greater than the supply
77
When does excess supply occur?
When supply is greater than demand
78
What is the price mechanism?
The interaction of demand and supply in a free market
79
What three functions does the price mechanism fulfill?
Rationing, signaling and incentive.
80
What is rationing (price mechanism)
Prices allocate scarce resources. When resources become scarcer, prices rise. If there is a surplus then price fall.
81
What is signaling? (price mechanism)
prices provide information to producers and consumers where resources are required and where they are not.
82
What is incentive? (price mechanism)
If price rises for a good/service it incentivises producers to allocate resources from a less profitable market into this market in order to maximise profits.
83
What does Adam Smith refer to the functions of the price mechanism as?
Mystery of the invisible hand
84
What is consumer surplus?
The difference between the amount the consumer is willing to pay and how much they actually pay.
85
What is producer surplus?
Producer surplus is the difference between the amount a producer is willing to sell a product for and how much they actually sell it for.
86
What is an indirect tax?
Paid on the consumption of goods/services. There are two different types and it only occurs if a consumer makes a purchase.
87
What is a producer subsidy?
A per unit amount of money given to a firm by the government, in order to increase production.
88
What is a merit good?
Products that are beneficial for society by the free market does not provide enough of them
89

BM Micro economics (2 decks)

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