Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AS Microeconomics > 1.2 How Markets Work > Flashcards

1.2 How Markets Work Flashcards

1
Q

What is the aim of rational consumers in economic decision making?

A

To maximise utility

Utility is the satisfaction gained from consuming a product.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What do firms aim to maximise in rational economic decision making?

A

Profit

Firms are assumed to be run for their owners and shareholders.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the goal of governments in rational economic decision making?

A

To maximise social welfare

Governments work for the public and aim to increase public satisfaction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is demand in economic terms?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What causes a movement along the demand curve?

A

A change in the price of the good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a contraction in demand?

A

A movement along the demand curve due to an increase in price, leading to a fall in quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is an extension in demand?

A

A movement along the demand curve due to a decrease in price, leading to a rise in quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does a shift from D1 to D2 on the demand curve indicate?

A

A decrease in demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does a shift from D1 to D3 on the demand curve indicate?

A

An increase in demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What mnemonic can help remember the conditions of demand?

A

PIRATES.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does the ‘P’ in PIRATES stand for?

A

Population.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How does income affect demand for most goods?

A

If income increases, demand increases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are complements in economic terms?

A

Goods that are used together, such as DVDs and DVD players.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are substitutes in economic terms?

A

Goods that can replace each other, such as Nike and Adidas trainers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What effect does successful advertising have on demand?

A

It is likely to increase demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How does taste or fashion influence demand?

A

If something becomes more fashionable, demand increases; if less fashionable, demand falls.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What impact do expectations have on demand?

A

Expectations of future prices can increase or decrease current demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the law of diminishing marginal utility?

A

The satisfaction derived from consuming an additional unit of a good decreases as more of the good is consumed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does the demand curve slope downward indicate?

A

The inverse relationship between price and quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is price elasticity of demand (PED)?

A

The responsiveness of demand to a change in the price of the good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is unitary elastic PED?

A

When PED=1: quantity demanded changes by exactly the same percentage as price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is relatively elastic PED?

A

When PED>1: quantity demanded changes by a larger percentage than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is relatively inelastic PED?

A

When PED<1: quantity demanded changes by a smaller percentage than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is perfectly elastic PED?

A

When PED=infinity: a change in price means that quantity demanded falls to 0.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is perfectly inelastic PED?

A

When PED=0: a change in price has no effect on quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What factors influence price elasticity of demand?

A
  • Availability of substitutes
  • Time
  • Necessity
  • Percentage of total expenditure
  • Addictiveness
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What happens to tax incidence when demand is elastic?

A

Lower incidence of tax on the consumer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What happens to tax incidence when demand is inelastic?

A

Higher incidence of tax on the consumer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is income elasticity of demand (YED)?

A

The responsiveness of demand to a change in income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What defines an inferior good in terms of YED?

A

YED<0: a rise in income leads to a fall in demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What defines a normal good in terms of YED?

A

YED>0: a rise in income leads to a rise in demand.

32
Q

What defines a luxury good in terms of YED?

A

YED>1: a type of normal good where a rise in income leads to a larger rise in demand.

33
Q

What is cross elasticity of demand (XED)?

A

The responsiveness of demand for one product to the change in price of another product.

34
Q

What is cross elasticity of demand (XED)?

A

The responsiveness of demand for one product (A) to the change in price of another product (B)

Formula: %change in quantity demanded of A / %change in price of B.

35
Q

What does it mean if XED > 0?

A

Substitutes: An increase in the price of good B will increase demand for good A

Example: Coca Cola and Pepsi.

36
Q

What does it mean if XED < 0?

A

Complementary goods: An increase in the price of good B will decrease demand for good A

Example: DVDs and DVD players.

37
Q

What does it mean if XED = 0?

A

Unrelated goods: A change in the price of good B has no impact on good A.

38
Q

What is the definition of supply?

A

The ability and the willingness to provide a good or service at a particular price at a given moment in time.

39
Q

What causes a movement along the supply curve?

A

A change in the price of the good.

40
Q

What is a contraction in supply?

A

A decrease in quantity supplied due to a decrease in price.

41
Q

What is an extension in supply?

A

An increase in quantity supplied due to an increase in price.

42
Q

What is a shift in the supply curve?

A

A change in any of the factors which affect supply, the conditions of supply.

43
Q

What are the conditions of supply?

A

Factors affecting supply include:
* Costs of production
* Price of other goods
* Weather
* Technology
* Goals of the supplier
* Government legislation
* Taxes and subsidies
* Producer cartels.

44
Q

What is price elasticity of supply (PES)?

A

The responsiveness of supply to a change in price of the good.

45
Q

What does PES = 1 indicate?

A

Unitary elastic: Quantity supplied changes by exactly the same percentage as price.

46
Q

What does PES > 1 indicate?

A

Relatively elastic: Quantity supplied changes by a larger percentage than price.

47
Q

What does PES < 1 indicate?

A

Relatively inelastic: Quantity supplied changes by a smaller percentage than price.

48
Q

What does PES = infinity indicate?

A

Perfectly elastic: A change in prices means that quantity supplied falls to 0.

49
Q

What does PES = 0 indicate?

A

Perfectly inelastic: A change in price has no effect on output.

50
Q

What is the equilibrium point in price determination?

A

The point at which supply is equal to demand.

51
Q

What is excess demand?

A

When price is set below equilibrium, leading to a shortage in the market.

52
Q

What is excess supply?

A

When the price is set higher than the equilibrium, leading to unsold goods.

53
Q

What is the price mechanism?

A

A system that allocates resources based on the interactions of demand and supply.

54
Q

What is consumer surplus?

A

The difference between the price the consumer is willing to pay and the price they actually pay.

55
Q

What is producer surplus?

A

The difference between the price producers receive for a good and the minimum price they are willing to accept.

56
Q

What is consumer surplus?

A

The difference between the price the consumer is willing to pay and the price they actually pay, set by the price mechanism.

Illustrated by the orange triangle in the diagram, ABP1.

57
Q

What is producer surplus?

A

The difference between the price the supplier is willing to produce their product at and the price they actually produce at, set by the price mechanism.

Illustrated by the purple triangle in the diagram, P1B0.

58
Q

What does consumer surplus indicate?

A

The welfare gained by consumers for buying the good.

The total satisfaction consumers receive from buying the good is the total area under the demand curve.

59
Q

What happens to consumer surplus when demand is perfectly elastic?

A

There is no consumer surplus.

60
Q

What happens to consumer surplus when demand is perfectly inelastic?

A

Consumer surplus is infinite.

61
Q

What is the effect of a decrease in demand on consumer and producer surplus?

A

Both consumer and producer surplus fall.

62
Q

What is an indirect tax?

A

A tax on expenditure where the person who is ultimately charged the tax is not the person responsible for paying the sum to the government.

63
Q

What are the two types of indirect tax?

A
  • Ad valorem tax
  • Specific tax
64
Q

What is an ad valorem tax?

A

A tax where the tax payable increases in proportion to the value of the good.

65
Q

What is a specific tax?

A

A tax where an amount is added to the price, increasing with the amount bought rather than the value of goods.

66
Q

What happens to the supply curve when a specific tax is introduced?

A

The supply curve shifts from S1 to S2 due to an increase in the cost of production.

67
Q

What does the incidence of tax refer to?

A

The tax burden on the taxpayer.

68
Q

True or False: The more elastic the demand curve, the higher the incidence of tax on the consumer.

A

False.

69
Q

What is a subsidy?

A

A grant given by the government to encourage production or consumption of a good or service.

70
Q

What happens to supply when a subsidy is introduced?

A

Supply increases from S1 to S2 as production costs fall.

71
Q

What are the three main reasons people do not always behave rationally?

A
  • Influences of other people
  • Influence of habitual behaviour
  • Consumer weakness at computation
72
Q

What is ‘herding behaviour’?

A

When an individual copies the actions of a large group, often leading to market bubbles.

73
Q

How does habitual behaviour affect consumer decision making?

A

It creates a barrier to decision making, limiting consideration of alternatives.

74
Q

Fill in the blank: Many consumers aren’t willing or able to make comparisons between prices, leading them to buy _______ goods than needed.

A

[more expensive]

75
Q

What is one example of irrational decision making related to long-term effects?

A

Consumers postponing saving for their pensions.

AS Microeconomics (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions