1.2 How Markets Work Flashcards
What do consumers aim to maximise when making economic decisions?
Their utility
What do firms aim to maximise when making economic decisions?
Their profits
Consumer utility
Total satisfaction received from consuming a good or service
Demand
Quantity of a good or service that consumers are willing and able to buy at a given price during a given period of time
What will cause changes ALONG a demand curve?
Changes in price
Factors that shift the demand curve
PIRATES P - population. I - Income. R - Related goods A - Advertising T - Tastes E - Expectations S - Seasons
3 types of demand
Derived, Composite and Joint.
What is joint demand?
When goods are bought together.
What is derived demand?
When demand for one good is linked to the demand for another. For example, demand for bricks derived from the demand of house building.
What is composite demand?
When the demanded good has more than one use.
What is the demand curve like and what it does it show?
Downward sloping showing the inverse relationship between price and quantity demanded.
Law of diminishing marginal utility
Per extra unit of the good consumed, the benefit derived from its consumption falls.
PED
The responsiveness of a change in demand to a change in price. PED = Percentage change in QD/Percentage change in price.
Numerical value for a price elastic good
PED is greater than 1.
Numerical value for a price inelastic good
PED is less than 1.
Numerical value for a unitary elastic good
PED is 1.
What happens to demand when price is changed for as perfectly inelastic good
For a perfectly inelastic good, when price is changed demand isn’t affected. PED = 0.
Numerical value for a perfectly elastic good
PED is infinity.
Description of price elastic
A good that is very responsive to a change in its price. Change in price leads to an even bigger change in its demand.
Description of unitary elastic
A good that has a change in demand which is equal to the change in price.
Description of perfectly elastic
Demand falls to zero when price is changed
Description of perfectly inelastic
Demand doesn’t change when price is changed.
6 factors that influence PED
1) Necessity
2) Substitutes
3) Addictiveness
4) Proportion of income spent on the good
5) Durability
6) Peak and off-peak demand
Elasticity of demand and tax revenue; raising government revenue.
The burden of income tax will fall differently on consumers and firms depending on whether the good is elastic/inelastic. If a sold good has an inelastic demand, then firms would place the burden on the customer, this is the most effective for raising gov rev. however if the good has an elastic demand, then firms would take the burden on themselves.
Elasticity of demand and subsidies
Payment from gov to firms to encourage the production of a good and to lower average costs. Benefit of the subsidy can go to the producers in the form of extra revenue or the consumer in the form of lower prices.
PED and total revenue
TR = Price x Quantity sold.
If a good has an inelastic demand then firms can raise prices and quantity sold will not fall significantly, and therefore increase revenue. However if a good has an elastic demand, if firms raise prices its demand would fall and therefore decrease revenue.
YED
Responsiveness to a change in demand to a change in income. YED = % QD/% in income.
Inferior goods and YED value.
Good that see a fall in demand as incomes increase.
YED is less than 0.
Normal goods and YED value
Goods that see an increase in demand when incomes increase.
YED is greater than 0
Luxury goods and YED value
Good that see a bigger increase in demand when income is increased.
X elasticity of demand
Responsiveness of a change in demand of one good, to a change in price of another good.
XED = %Change in QD of X/ %Change in P of Y
Complementary goods and XED
Negative XED, if one good becomes more expensive, the QD for both would fall.
XED : Close compliments VS weak compliments. (Fall in price)
Close compliments: If there’s a fall in Price in good X then the QD of good Y would increase.
Weak compliments: If there’s a fall in price in good X then the QD of good Y would be increase but less significantly.
Substitute goods and XED
Positive XED, one good can replace the other. Upward sloping demand curve.
XED: Close substitute VS weak substitutes (Fall in price)
Close substitutes: A fall in price of good X would decrease the QD of good Y.
Weak substitutes: A fall in price of good X would less significantly decrease the QD of good Y.
Numerical value of XED for unrelated goods
0, no effect on one another.
Why are firms interested in XED?
Firms need to be aware of their competition and those producing complementary
goods. They need to know how price changes by other firms will impact them so
they can take appropriate action.
Supply
Quantity of a good or service firms are willing and able to produce at a given price over a given period of time.
Movements along the supply curve
Changes in price
Shifting of the supply curve
PINTSWC + D P - productivity I - Indirect Taxes N - Number of firms T - Technology S - Subsidies W - Weather C - Costs of production \+ Deprecation in the Ex rate.
Productivity and the supply curve
Higher productivity causes an outward shift in supply, because costs for the firm fall
Indirect Taxes
Inwards shift in supply
Number of firms
The more firms there are, the higher the supply is. Outward shift.
Technology
Improvements to technology increase supply. Outward shift.
Subsidies
Subsidies increase supply. Outward shift.
Weather
Favourable weather conditions increase quantity supplied.
Costs of production
The lower the costs of production, the higher the supply.
Joint supply
Increasing the supply of one good causes an in/decrease supply of another good.
PES
Responsiveness of a change in supply to a change in price.
PES = %Change in QS/% Change in Price
