1.2 How Markets Work Flashcards
What are the 3 main assumptions of rational economic decision making?
- Consumers aim to maximise utility.
2.Firms aim to maximise profit (Profit Motive).
- Governments aim to maximise social welfare.
What are some factors that could cause the demand curve to shift?
- Population
- Income
- Related Goods
- Advertising
- Taste / fashion
- Seasons
- Expectations
What is Diminishing Marginal Utility?
The Law of Diminishing Marginal Utility states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.
What is the formula for Price Elasticity of Demand (PED)?
% change in quantity demanded / % change in price
What is the PED value for unitary elastic PED?
PED = 1
What is the PED value for relatively elastic PED?
PED > 1
What is the PED value for relatively inelastic PED?
PED < 1
What is the PED value for perfectly elastic PED?
PED = infinity
What is the PED value for perfectly inelastic PED?
PED = 0
What are factors influencing PED?
- Availability of substitutes
- Time
- Necessity
- Addictive
- % of income
What is the formula for Income Elasticity of Demand (YED)?
% change in quantity demanded / % change in income
What is the YED value for an inferior good?
YED < 0
What is the YED value for a normal good?
YED > 0
What is the YED value for a luxury good?
YED > 1
What is the formula for Cross Elasticity of Demand (XED)?
% change in quantity demanded of A / % change in price of B
What is the XED value for substitute goods?
XED > 0
What is the XED for complementary goods?
XED < 0
What is the XED value for unrelated goods?
XED = 0
What are some of the factors influencing supply?
- Costs of Production
- Price of other goods
- Weather
-Technology
- Legislation
- Taxes and subsidies
- Producer cartels
What is the formula for Price Elasticity of Supply (PES)?
% change in quantity supplied / % change in price
What is the PES values for unitary elastic PES?
PES = 1
What is the PES value for relatively elastic PES?
PES > 1
What is the PES value for relatively inelastic PES?
PES < 1
What is the PES value for perfectly elastic PES?
PES = infinity
What is the PES value for perfectly inelastic PES?
PES = 0
What are some of the factors affecting PES?
- Time
- Stocks
- Working below full capacity
- Availability of factors of production
- Availability of substitutes
What is Consumer Surplus?
The difference between the price the consumer is willing to pay and the price they actually pay.
What is Producer Surplus
The difference between the price the supplier is willing to produce their product at and the price they actually produce at.
What is an Indirect Tax?
A tax on expenditure where the person is ultimately charged the tax is not the person responsible for paying the sum to the government. E.g. VAT.
What is the Incidence of Tax?
The tax burden on the taxpayer.
