1.2 How markets work Flashcards
Why may consumers not behave rationally (3)
Habitual behaviour and its importance
The influence of others behaviour
Consumer weakness at computation
Bounded rationality suggests that when people make decisions they are limited by what 3 thhings
Information available to them
Intellectual limitations
Time available to make decisions
Define both nudge theory and computation
Nudge theory: An attempt to manipulate social norms through positive reinforcement
Computation: The ability to make correct decisions based on the information available to them
What does PED measure and its formula
It measures the responsiveness of demand to a change in price
Formula = % change in quantity demanded / % Change in price
What is the difference between PED & PID
PED= Means the % change in demand is greater than the percentage in price
PID = Means the % change in demand is less than the change in price
What is XED (Cross elasticity of demand) and its formula
It examines the extent to which changes in the price of one good affects the the demand for another good
Formula = % Change in quantity demanded of good A / % Change in price of good B
What is YED ( Income elasticity of demand ) and its formula
The responsiveness of consumers demand when their income changes
Formula = % Change in quantity demanded / % Change in income
What are the 5 determinates of supply in a makret
Technological progress
Impact of changing costs of production
Prices of other goods and services
Government policies (E.g taxes and subsidies)
Other factors
What does PES measure and its formula
It measures the % change in quantity supplied after a change in price
Formula = % change in quantity supplied / % change in price
What do market forces do
They intervene to push the market back towards the equilibrium price and quantity
What 5 factors impact the equilibrium price and quanitity
Market factors
Demand and supply
Government policies and initatives
Demographics and social trends
Quality of life considerations
