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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
Q

Factors that affect PED

A

Availability of substitutes, Addictiveness of the product,

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26
Q

what does YED stand for?

A

Income elasticity of demand

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27
Q

What does income elasticity of demand measure

A

The responsiveness of demand due to a change in income

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28
Q

What is the formula for YED

A

%change in quantity demanded/ %change in income

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29
Q

YED can be positive and negative? True or false?

A

True

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30
Q

PED can be positive and negative true of false?

A

False

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31
Q

What does a YED of 0-1 mean?

A

The good is a normal necessity. Demand increases when income increases. Relatively income inelastic

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32
Q

What does a YED of 1< mean?

A

The good is a normal luxury. Demand increase when income increases. Income elastic= income increases then demand increases a lot.

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33
Q

What does a YED of 0> mean? (negative)

A

The good is an inferior good. Demand decreases when income increases.

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34
Q

Factors that affect YED

A

Any factors in an economy which change the wage of workers.
For example, economic growth, recession, minimum wage, taxation.

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35
Q

What does XED stand for

A

Cross price elasticity of demand

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36
Q

What does cross price elasticity of demand measure?

A

The responsiveness of demand of good A due toa change in price of Good B.

37
Q

Formula for XED

A

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

38
Q

XED can be positive and negative. True or false?

A

True

39
Q

What does it mean if the XED is less than 0 (0>)

A

The goods are complimentary goods. negative= compliments

40
Q

What does it mean if XED is more than 0 (0<)

A

The goods are substitute goods. positive= substitutes.

41
Q

What does it mean if XED is 0?

A

The good are unrelated. There is no relationship between them.

42
Q

Why is PED important to firms?

A

It allows them to maximise their profits. If their product is inelastic then they can raise their prices and profit maximise.

43
Q

Why is PED important to governments?

A

It allows them to know which goods they can add taxes on without damaging firms.

44
Q

What is supply?

A

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
Q

Factors which affect supply

A

Costs of production, indirect taxes, subsidies, new technology, change in the number of firms in the industry,

46
Q

How does costs of production affect supply?

A

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
Q

How do indirect taxes affect supply?

A

Indirect taxes such as specific taxes change the cost of production, making the good more expensive to produce.

48
Q

How do subsidies affect supply?

A

Subsidies are able to affect the cost of production for the firm. Making the good cheaper to make, increasing supply.

49
Q

How do new technologies affect supply?

A

Increases productivity which lowers the costs of production. Therefore, supply can increase.

50
Q

What does PES stand for?

A

Price elasticity of supply

51
Q

what does PES measure?

A

the responsiveness of supply due to a change in price

52
Q

What is the PES formula?

A

%change in quantity supplied / %change in price

53
Q

PES can be positive and negative? True or false?

A

False

54
Q

What do the values of PES vary between?

A

0 and infinity.

55
Q

What does it mean if PES is 0

A

The good is perfectly inelastic. QS is completely unresponsive to a change in price

56
Q

What does a PES of 0-1 mean?

A

The good is relatively inelastic. A change in price doesn’t affect supply that much.

57
Q

What does a PES over 1 mean?

A

The good is relatively elastic. A change in price largely affects supply.

58
Q

What does a PES of infinity mean?

A

The good is perfectly inelastic. A small change in price leads to an infinite change in supply.

59
Q

Factors that affect PES

A

Mobility of the factors of production, Availability of raw materials, Ability to store goods, spare capacity, Time period

60
Q

How does the mobility of factors of production affect PES?

A

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
Q

How does availability of raw materials affect PES?

A

If there are limited resources then PES will be inelastic as they are not able to make more goods without materials.

62
Q

How does a firms ability to store goods affect PES?

A

If products can easily be stored then PES will be higher as producers are able to quickly increase supply

63
Q

How does spare capacity affect PES?

A

If there is large amounts of spare capacity then supply will be elastic as they are able to increase production

64
Q

What is spare capacity?

A

The unused or underutilised resources. The difference between the maximum sustainable level of production and the actual level of production.

65
Q

How does time period affect PES?

A

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
Q

What are the four factors of production?

A

Land, Labour, Capital, Entrepreneurship.

67
Q

What is land (factors of production)

A

Non made resources used in production such as coal.

68
Q

What is capital (factors of production)

A

The money used to purchase items that are used to produce goods and services (capital goods). Such as machinery

69
Q

What is Labour? (Factors of production)

A

People involved in the production process

70
Q

What is entrepreneurship? (factors of production)

A

Individuals involved in organising the other factors of production.

71
Q

What is short-run?

A

Any period of time in which at least one factor of production is fixed and is a limiting factor.

72
Q

What is long-run?

A

Any period of time which all the factors of production are available. Allowing producers to vary all of their resources.

73
Q

How does equilibrium occur?

A

Demand=Supply

74
Q

How are prices determined in a free market economy?

A

The interaction of demand and supply in a market.

75
Q

What is a market?

A

A market is a place that brings buyers and sellers together. Markets are physical and virtual.

76
Q

When does excess demand occur?

A

When demand is greater than the supply

77
Q

When does excess supply occur?

A

When supply is greater than demand

78
Q

What is the price mechanism?

A

The interaction of demand and supply in a free market

79
Q

What three functions does the price mechanism fulfill?

A

Rationing, signaling and incentive.

80
Q

What is rationing (price mechanism)

A

Prices allocate scarce resources. When resources become scarcer, prices rise. If there is a surplus then price fall.

81
Q

What is signaling? (price mechanism)

A

prices provide information to producers and consumers where resources are required and where they are not.

82
Q

What is incentive? (price mechanism)

A

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
Q

What does Adam Smith refer to the functions of the price mechanism as?

A

Mystery of the invisible hand

84
Q

What is consumer surplus?

A

The difference between the amount the consumer is willing to pay and how much they actually pay.

85
Q

What is producer surplus?

A

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
Q

What is an indirect tax?

A

Paid on the consumption of goods/services. There are two different types and it only occurs if a consumer makes a purchase.

87
Q

What is a producer subsidy?

A

A per unit amount of money given to a firm by the government, in order to increase production.

88
Q

What is a merit good?

A

Products that are beneficial for society by the free market does not provide enough of them

89
Q
A

BM Micro economics (2 decks)

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