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economics > 1.2 How markets work > Flashcards

1.2 How markets work Flashcards

1
Q

what is rational decision making

A

making choices that maximise utility whilst having a limited budget

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2
Q

aspects of rational decision making

A

consumers are independent
consumers have fixed preferences
consumers have perfect info
consumers make the optimal choice

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3
Q

what is maximising utility

A

getting as much satisfaction from a product as possible.
all economic agents want to maximise this

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4
Q

total utility

A

the total amount of satisfaction from a given level of consumption

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5
Q

marginal utility

A

the change in satisfaction from consuming an extra unit

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6
Q

diminishing marginal utility (DMU)

A

marginal utility decreases when an extra unit of the product is consumed - making consumers less willing to pay the same for a repeated purchase

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7
Q

what is demand

A

the quantity of a good or service that consumers are willing and able to buy at a given price at a given time

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8
Q

derived demand

A

the demand for a factor of production used to produce another good or service (labour)

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9
Q

what is the relationship between demand and price of a good

A

inverse relationship - #
as prices fall, demand extends
as prices increase, demand contracts

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10
Q

what is the income effect

A

when price of a product falls, the consumer can maintain the same consumption for less money, increasing real income and assuming the good is normal, as real incomes rise, more of the product can be bought

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11
Q

what is the substitution effect

A

when price of a good falls, the product becomes cheaper than its substitutes, meaning consumers will switch to the now cheaper item. the more subs and convenience of changing, the bigger the effect will be

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12
Q

non price changes in demand

A

population
income
related goods
advertising
trends
expectations
seasonality

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13
Q

joint demand

A

when demand for a product is positively related to another product - complementing products are joint in demand

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14
Q

composite demand

A

where goods have more than one use - so an increase in demand for one product leads to a fall in another.

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15
Q

ped formula

A

ped = %change in demand/%change in price

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16
Q

ped = 0

A

perfectly inelastic - demand curve is vertical - qd does not change at all when there is a change in price

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17
Q

ped between 0 and -1

A

demand is inelastic - qd not particularly responsive to price changes

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18
Q

ped between -1 and - ∞

A

demand for the product is elastic
sensitive to price changes

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19
Q

ped = -∞

A

perfectly elastic -
d curve is horizontal and demand will fall to 0 if price rises

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20
Q

factors affecting PED

A

number of substitutes
ease of switching
is the good a necessity or luxury
proportion of a consumers income spent on the good
time period allowed for change
habitual consumption

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21
Q

YED

A

the sensitivity of demand in result of a change in incomes

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22
Q

YED formula

A

%Change in QD/%Change in income

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23
Q

normal goods

A

YED value of 0 to +1
as consumer income rises, so does the demand for normal goods

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24
Q

luxury goods

A

have a YED of +1 or greater
demand for these products rises more than proportionately to a change in income

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25
inferior goods
YED below 0 (negative) when incomes rise, demand for these items decrease and consumers can buy more premium products
26
cross price elasticity of demand (XED)
measures the responsiveness of demand for good x following a change in price for good Y ( a related good)
27
formula for XED
% change in Demand for good X / % change in Price for good Y
28
+ XED value
shows products are substitutes - an increase in price will lead to an increase in demand for another product greater value shows closer relation
29
- XED value
shows products are compliments - an increase in price of X leads to a contraction of demand for product Y
30
supply
the quantity of goods or services producers are willing and able to supply at a given price in a given time period
31
what is the relation between market price and quantity suplied
positive relation as supply curve is upward sloping
32
reasons for the upwards sloping supply curve
profit motive - when market prices increase, it is logical for firms to increase output to increase revenue production and costs -when output expands, a higher cost is needed to cover production new entrants into the market - higher prices encourages new firms to enter, increasing supply.
33
non price factors increasing supply
productivity indirect tax number of firms technological advancements subsidies weather cost of production
34
what is pes
the relationship between a change in qs and a change in market price if pes is elastic, producers can increase output without a rise in cost or time delay if pes is inelastic it is hard to change output in a given time period
35
pes formula
%Change in quantity supplied / % change in price
36
pes > +1
supply is price elastic
37
pes <1
supply is price inelastic
38
pes = 0
supply curve is perfectly inelastic - curve drawn vertically
39
pes = ∞
supply is perfectly elastic horizontal supply curve
40
factors that affect pes
spare production capacity stocks of finished products and components ease of cost and factor substitution complexity of production time period and production speed - production is more elastic, the longer the time for adjustment is
41
pes in the short run
when at least one factor of production is fixed pes is relatively inelastic
42
pes in the long run
a period of time in which all factors of time are variable - allowing for changes in factors of production - pes will be elastic
43
what happens after an outwards shift of demand
leads to a shortage at the existing market price - leads to a rise in price - acting as a signal to suppliers to increase output which moves up the supply curve and eventually increases the price level
43
market equilibrium
a state of balance between supplier and consumer - a price in which consumers are willing to buy at and producers are willing to sell at
43
incentives function
consumers send info to producers about changing needs and wants
43
what is excess demand
when qd exceeds qs happens when market price is below equilibrium results in an upward pressure on price
43
signalling function
prices perform a signalling function - rising and falling to reflect scarcity and surpluses. if prices are rising due to increased demand, its a signal to expand production to meet higher demand
43
what is excess supply
when supply is greater than demand and there are unsold goods in the market put downwards pressure on price. as prices fall, there is an extension of demand which cuts surplus and takes a market towards equilibrium
44
government intervention
may introduce indirect taxes and subsidies creating signals for when to and not to purchase products
44
rationing function
prices ration scarce resources when demand outstrips supply. when there is a shortage, prices will be increased leaving only those willing and able to buy the products
44
producer surplus
the difference between the price producers are willing and able to sell a product for and the actual price they get for the product in the market.
44
what is an indirect tax
a tax imposed by the government that increases the supply costs faced by consumers. always the vertical distance between two supply curves.
44
what is consumer surplus
the difference between the max price consumers are willing to pay and the actual price they pay for the product.
44
different types of shifts caused by tax
specific tax - parallel shift as it is a set amount ad valorem tax - pivot shift as the tax increases as the price of the product increaes (% TAX I.E VAT)
44
What is a subsidy
a payment from the government used to create an outward shift in the supply curve by lowering the equilibrium price and increase the output of the products
45
assumptions of rational behaviour
agents act independently agents have fixed tastes and preference agents gather complete information agents always makes the optimal choice
45
effect of ped on subsidies
when ped is inelastic, subsidy has a larger effect on equilibrium price when ped is elastic, subsidy has less of an effect on price and more on quantity produced
45
justifications for subsidies
helps poorer families with food and child care helps encourage output and investment into struggling industries reduces cost of training and employing workers
46
how do economic agents act in reality
influence by social networks lack self control loss adverse
47
3 reasons why consumers may not behave rationally
social norms herd mentality habitual behaviour
48
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economics (3 decks)

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