2.1 Microeconomics Flashcards
Demand
The quantity of a good/ service that consumers are willing and able to buy at any price, per period of time.
Law of Demand
Inverse relationship between quantity demanded and price. As Qd falls, price rises (Vice versa)
Income effect
A factor why demand curve is downward sloping. As price of a product falls, consumers real income increases so they are able to buy more at lower prices.
Substitution effect
As price of a product falls, people replace high priced products wiht lower priced ones over rival/substitute ones.
Law of diminishing Marginal Utility
The more you consume, the less satisfaction you get per additional unit of consumption
Market
a place where buyers and sellers trade
Market Demand
the sum of all individual demand of a product for all price levels
Non-price Determinants of Demand
-Income
-Taste and preferences
-Future price expectations
-Number of consumers
-Price of related goods (substitutes and complements)
Normal good
Products consumers tend to buy as their real income increases. (Neccessities and Luxury goods) Positive YED.
Inferior goods
Producst with Negative YED. Demand fall when real income rises.
Complementary goods
Products in jointly demanded. (milk and cereal)
Substitutes
Products in competitive demand as they can be used in place of another (pepsi and coke)
Movements along the demand curve
Caused by price changes
Contraction in demand
decrease in Qd -> increase in P
Expansion in demand
increase in Qd -> decrease in P
Increase in demand
Shift to the right
Decrease in demand
Shift to the left
Shift
Occurs when there is any non-price factors that affects the demand for the product.
Supply
The quantity of a good or service that firms/producers are willing and able to sell at any price level, per time period.
Law of supply
Direct relationship between quantity supplied and price. As price increases, supply increases.
Law of diminishing marginal returns
A firm during the short run, when employing additional variable Fop, the profit gain will be less.
Short run
A period of time where at least one FoP is fixed.
Long run
A period of time where no FoP are fixed.
Marginal Cost
The cost of producing an additional unit of output
Market Supply
Sum of all individual supply of producers at all price levels for a given product
Non-price Determinants of supply
-Changes in cost of FoP
-Indirect taxes and subsidies
-Future price expectations
-Changes in technology
-Number of Firms
-Prices related to goods (joint and competitive supply)
Joint supply
The supply of a proudct that resulst in the output of at least 1 by product.
Indirect taxes
Government levies on expenditure, not income. This tax is payed by producers -> increasing cost of FoP
Market Equilibrium
Where Qd = Qs
Equilibrium
When a market is clear from shortages or surplus
Market Disequilibrium
When Qd /= Qs.
Surplus (Excess supply)
When P is above Pe.
Price Mechanism
The forces of demand and supply in the free market in order to allocate resources, thus determining production and consumption choices.
Signalling function
The forces of demand and supply signify where resources are required and where they are not, this will signal the producers to reallocate their resources to the product that requires it.
Incentive function
Price changes provide the incentive (motivation) for producers and consumers to change their behaviour in order to maximizing benefits thus reallocating resources towards producing it.
Rationing function
Price changes now ration scarce resources to only those who are willing and able to pay at the new price.
Consumer Surplus (CS)
The benefit/gain to buyers who can purchase at a lower price than what they were willing to. The area enclosed between Pe and Demand curve.
Producer Surplus (PS)
The benefit/gain to sellers who can sell at a higher price than what they were willing to. The area enclosed between Pe and Supply curve.
Social Surplus
PS+CS
Allocative efficiency
Socially optimal situation where resources are allocated where both producer and consumers maximize benefits.
Market Failure
Any situation where price mechanism allocates scare resources in an inefficient way.
Rational Consumer choice
Assume consumers always maximise benefits and producers maximise profit. Maximising Utility.
Homo economicus
The selfish, rational, utility maximising people.
Behavioural Economics
Study of economic decisions. Humans are not homo economicus, thus not always rational and influenced by society.
Assumptions of Traditional economic theory
Consumer Rationality
Utility Maximization
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