1.2 how markets work - definitions Flashcards
Utility
Satisfaction that consumers get from the goods and services that they buy
Demand
The amount of a product that consumers are willing and able to purchase at any given price
PIRATES
Non-price factors that influence demand
Population
Income
Related goods (complements/substitutes)
Advertising
Taste/fashion
Expectations
Seasons
and gov legislation
PINTSWC
Non-price factors that influence Supply
Productivity
Indirect taxes
Number of firms in the market
Technology
Subsidies
Weather
C.O.P.
and legislation
PED
(%ΔQD / %ΔP) PED value is always negative
The reactivity of demand to price
PED <1
Price inelastic. A change in price results in a proportionately smaller change in demand
PED > 1
Price elastic. A change in price results in a proportionately greater change in demand
Factors Influencing PED
Time, Competition for the same product, Branding, the proportion of income spent on a product, Product types vs the product of an individual business, habit–forming nature of the good.
Factors influencing YED
Necessities ( basic goods that a customer needs to buy) & Luxury (goods that customers like to buy if they can afford to)
Normal Goods
When incomes increase, demand for normal goods goes up.
Inferior Goods
When incomes increase, demand for inferior goods falls
XED
The responsiveness of demand for one good to the change in price of another good (%ΔQD Good B / %Δ P Good A)
Substitute Goods
Goods that are very similar and can be close alternatives for each other. Substitutes have positive XED
Complementary Goods
Goods that go together well or are actually used or consumed together. Complementary goods have negative XED
Supply
The amount of a product which suppliers will offer to the market at a given price
PES
(%ΔQS / %ΔP) PES value is always positive.
Price mechanism
This refers to the way in which prices respond to changes in supply or demand, so that a new equilibrium is reached and the market clears.
Equilibrium
When Supply is equal to Demand
Total revenue
Price X Quantity
Excess demand
When Demand exceeds Supply - there are market shortages
Excess supply
When Supply exceeds Demand- there are unsold goods in the market
Consumer Surplus
The extra amount of money consumers are prepared to pay for a good, above what they actually pay
Producer Surplus
The extra amount of money that producers are paid, above what they would be willing to take
Direct tax
A tax that is paid straight from your income
Indirect tax
A tax is a tax on spending
Ad valorum tax
A tax that increases the price by a certain percentage. For example, VAT
Tax incidence
This is the idea of WHO actually pays the tax, the consumer or the producer
Subsidy
A grant given to a firm to encourage the firm to produce more and/or lower the price of its goods.
Reasons for irrational behaviour
-Influence of others
-Habitual behaviour
-Computational problems
-Inertia
