1.2 How markets work - Basic Concepts + definitions Flashcards
Utility
The satisfaction to an individual from consuming a product.
Diminishing Marginal Utility
As an individual consumes more of a product, each successive unit generates less utility. (This falls with consumption)
Demand
The quantity of a good consumers are willing and able to buy at a given price per period.
Supply
The quantity of a good producers are willing and able to sell at a given price per period
Market
Institution where buyers are in contact with sellers to arrange sale of goods.
Ceteris Paribus
All other factors remaining constant.
Equilibrium
The price and quantity which is acceptable to both buyers and sellers so long as conditions of demand and supply stay constant
Excess demand
Where quantity of a product consumers are willing and able to buy at a given market price, exceeds the quantity producers are willing and able to supply
Excess supply
Where quantity of a product producers are willing and able to supply, exceeds the quantity consumers are willing and able to buy at a given market price
Disequilibrium
A combination of price and quantity traded which has a tendency to change for the given demand and supply conditions
Joint demand
When demand for one good involves demand for another good (complement)
Joint supply
Where supply of one good necessarily involves supply of another
Consumer surplus
Measure of consumer welfare, the maximum price a consumer is willing to pay for a good minus the market price
Producer surplus
Measure of producer welfare, the surplus of market price the producer would be prepared to accept
Price elasticity of demand (PED)
The responsiveness of quantity demanded to a change in price, ceteris paribus.
% change in quantity demanded / % change in price
Income elasticity of demand (YED)
The responsiveness of quantity demanded to a change in income, ceteris paribus.
% change in income / % change in income
Cross price elasticity of demand (XED)
The responsiveness of quantity demanded of one good to a change in price of another, ceteris paribus.
% change in quantity demanded of A / % change in price of B
Price elasticity of supply (PES)
The responsiveness of quantity supplied to a change in price, ceteris paribus.
% change in quantity supplied / % change in price
Normal good
Good whose demand rises as income rises eg. luxuries and necessities
Inferior good
Good whose demand falls as income rises, opposite of normal good
Substitute good
Good which is an alternative to a particular good from the consumer’s point of view
Framing
Notion that consumer choice depends on the way the question is presented, rather than on an objective comparison of competing options.
Altruism
Behaviour motivated by concern for others’ welfare rather than one’s own eg. unselfishness
