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Economics > 2.1 Demand, Supply and Equilibrium > Flashcards

2.1 Demand, Supply and Equilibrium Flashcards

1
Q

Demand

A

the willingness and the ability to purchase a particular good at a given price and time, ceteris paribus

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2
Q

Movements along the demand curve

A

a change in price will lead to a change in the quantity demanded which will lead to a movement along the demand curve.

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2
Q

the Law of demand

A

States that as price increases, the quantity demanded will decrease. and vice versa
ceteris paribus

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3
Q

Shifts in the Demand Curve (non-price determinants)

A

Tastes and preferences
Income
Related foods (substitutes and complements)
Expectations
Size of the market

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4
Q

Horizontal summing

A

the values on the x axis are added together, and the values on the y axis do not change

Market demand refers to the sum of all individual demand for a particular product at each price level.

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5
Q

Assumptions of the law of demand

A

3 causes of negative relationship between price and quantity demanded
income effect
substitution effect
law of diminishing marginal utility effect

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6
Q

Income effect (HL)

A

when the price of a product falls, then people will have an increase in their ‘real income’.
people will be likely to buy more of the product with the income they have

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7
Q

Substitution effect (HL)

A

when the price of a product falls, then the product will be relatively more attractive to people than other products, whose prices have stayed unchanged, and so it is likely that consumers will purchase more of the product, substituting it for products that were previously purchased.

Essentially: the substitution effect causes consumers to replace higher priced products with lower prices ones.

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8
Q

Law of diminishing marginal utility (HL)

A

As consumption increases, the marginal utility derived from each additional unit declines.

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9
Q

Supply

A

the willingness and ability to produce a particular good at a given price and time, ceteris paribus.

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10
Q

The Law of supply

A

as the price increases, the quantity supplied will also increase, vice versa
curve is upwards sloping

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11
Q

Shifts in the supply curve (non-price determinants)

A

Technology
input costs
government intervention (taxes, subsidies)
expectations
related goods (supplier substitutes)
supplier numbers

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12
Q

Indirect tax

A

A tax on goods and services, also known as expenditure tax

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13
Q

Subsidy

A

A payment by the government to a producer per unit of output to increase the supply of a good or lower production costs.

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14
Q

Assumptions underlying the law of supply (HL)

A

The law of diminishing marginal returns
increasing marginal costs

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15
Q

The law of diminishing marginal returns (HL)

A

After a certain optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
= related to the concept of diminishing marginal utility

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16
Q

Increasing marginal costs (HL)

A

marginal cost is the increase in cost caused by producing one more unit of the good.

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17
Q

Equilibrium

A

is where there is no tendency to change.
is where the supply and demand intersect

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18
Q

equilibrium surplus

A

when the price is higher than the equilibrium
excess supply
QS>QD

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19
Q

equilibrium shortage

A

when the price falls below the equilibrium
excess demand
QD>QS

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20
Q

Explaining an Equilibrium Diagram

A
  1. Interpret the question and state assumptions and which determinant is occuring.
  2. curve shift
  3. effect on price and quantity
  4. effect on the other curve
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21
Q

Allocative Efficiency

A

resources are allocated into their best possible use (the most efficient way from society’s pov)
consumer surplus is maximized
Marginal social cost (MSC) = supply curve
Marginal social benefit (MSB) = demand curve
MSB = MSC is allocative efficiency

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22
Q

Producer surplus

A

when producers sell a product at a price higher than they were willing to sell it for

23
Q

Consumer surplus

A

when consumers buy a product at a price lower than they were willing to pay

24
Q

how to calculate consumer and producer surplus from a diagram

A

bxh/2

25
Q

Critique of the maximizing behavior of consumers and producers

A

consumer and producer choices are the outcome of complex decision making
Welfare is maximized if allocative efficiency is achieved
constant change produces dynamic markets

26
Q

Rational Consumers Choice (HL)

A

states that individuals use logical and sensible reasons to determien the right choice associated with an individual’s best self-interest.
Consumers => utility
producer => profit maximization

27
Q

Traditional economics assumes… (HL)

A

consumer rationality
- people make decisions for self interest
Utility maximization
- people want maximum utility
Perfect information
- people are aware of alternative product available on the marekt including the prices, and people use all the available information to make their decision

28
Q

limitations of the assumptions of rational consumers choice (HL)

A

we assume that people aim to maximize their own well being while making decisions but people rarely behave in a well-informed way.
behavioral economics recognises the power of social conformity on decision making

29
Q

5 factors of limitations to the assumptions of rational consumer choice (HL)

A

biases - rule of thumb, anchoring and framing, availability
bounded rationality
bounded self-control
bounded selfishness
imperfect information

30
Q

Biases 1 - Rule of thumb (HL)

A

making decisions in a practical way without having to be exact: judging a situation by experience and sticking to a default choice

31
Q

Bias 2 - Anchoring (HL)

A

people view the unfamiliar by comparing it to something else that is more familiar to them. It’s also when we use irrelevant information to make decisions due to it being the first bit of information we come across

32
Q

Bias 3 - Framing (HL)

A

presenting information in such a way that it creates a bias in favour of a particular decision

32
Q

Bias 4 - Availability (HL)

A

when people overestimate the likelihood of an event or frequency of occurrence either because something similar has happened recently or because they feel emotional about a similar event. People misjudge things because certain examples come easily to their minds

32
Q

Bounded rationality (HL)

A

decisions are often based on incomplete information because rationality is bounded by:
people’s thinking capacity
the availability of information
time

32
Q

Bounded self-control (HL)

A

People conform to social norms and group preferences. People exercise self-control only within limits.

Post-purchase, consumers may reflect and ask whether they really need to buy a particular product.

32
Q

Bounded selfishness (HL)

A

we assume that consumers care only about their own well-being Sometimes we sacrifice personal welfare for the public good.
we are only interested in ourselves and won’t choose for the benefit of society.

32
Q

Imperfect information (HL)

A

is when people have inaccurate, incomplete or unreliable information, so decision making is not optimal

32
Q

Status quo/inertia bias (HL)

A

when consumers are faced with a bewildering set of choices, they would prefer to maintain status quo and do nothing

32
Q

Hyperbolic discounting (HL)

A

tendency for humans to prefer smaller short term rewards over larger later rewards.

32
Q

Choice architecture (HL)

A

is the deliberate design of different ways of presenting choices to members of society

we prefer simplicity
effective choice architecture helps people avoid making poor choices or irrational decisions

32
Q

Default Choices (HL)

A

When a person is automatically signed up into a system, or it is the given decision if no action is take. People change their default course of action to something else more rarely than if they were given both choices at the start

33
Q

Restricted choices (HL)

A

limits the choices available to people. the choice for consumers is restricted but still there.

34
Q

mandated choice (mandated that you will choose) (HL)

A

when people are required to make an advanced decision and declare whether/how they wish to participate in a particular activity.

35
Q

Nudge theory (HL)

A

the practice of influencing the choices that people make.
they are created by choice architects using small prompts or tweak to alter social and economic behavior, but without taking away the power for people to choose
(the intervention should be easy and cheap to avoid)

36
Q

When does the Nudge Theory work best? (HL)

A

E - easy (removing friction and simplifying things in order to influence people)
A - attractive (break through attention, personalisation of a message, emphasize loss aversion - people don’t like to miss out on oppurtunities/bargains
S - social (humans are influenced by what others do)
T - timely (determining when people are most responsive)

37
Q

Profit Maximization (HL)

A

is the greatest positive difference between total revenue and total costs. it is achieved by increasing total revenue or minimizing costs of production.

38
Q

When does profit maximization occur? (HL)

A

at the output level where the marginal cost (MC) equals the marginal revenue (MR), MR=MC.
profit increases if MR>MC
decreases if MC>MR
maximized when each additional unit of output creates no extra loss or extra revenue

39
Q

Corporate social responsibility (CSR) (HL)

A

firms aim for ethical objectives rather than aiming solely or primarily for profit

40
Q

Market Share (HL)

A

a firm’s portion of total value of sales in a particular industry. A measure of a firm’s relative size. - some large firms like to stay market leaders and remain competitive to improve brand loyalty and economies of scale.

41
Q

how to calculate market share (HL)

A

Industry’s total sales revenue

42
Q

Satisficing (HL)

A

aiming for a satisfactory or adequate level of profit rather than the maximum profit.

43
Q

Growth (HL)

A

Increasing the size and scale of the firm.

44
Q

How can growth be measured (HL)

A

sales revenue
product range
number of employees
number of stores/outlets
volume of output
production capacity
value of assets
capital invested

45
Q

Marginal Revenue (MR) (HL)

A

is the extra revenue received from the sale of an extra unit of ouput

46
Q

Marginal Cost (MC) (HL)

A

is the cost of producing an extra unit of output.

Economics (9 decks)

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