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Economics (Tina) > Demand, Supply and Equilibrium > Flashcards

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

The Law of Demand

A
  • Price increase, quantity demanded decrease
  • Price decrease, quantity demanded increase
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3
Q

Non-price Determinants for Shifts in Demand Curve

A

PEPSIC

Preference
Expectations
Population
Substitutes
Income
Complementary

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4
Q

Assumptions of the Law of Demand (HL)

A
  • The income effect
  • The substitution effect
  • The law of diminishing marginal utility
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5
Q

Income Effect (HL)

A
  • When the price of a product decreases, people’s real income effectively increases, allowing them to buy more of the product
  • Conversely, if the price of a product rises, people’s real disposable income decreases, leading to a reduced quantity demanded
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6
Q

Substitution Effect (HL)

A

When the price of a product falls, it becomes more attractive compared to products with unchanged prices, leading consumers to buy more of the cheaper product and substitute it for more expensive ones

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7
Q

The law of diminishing marginal utility (HL)

A

As consumption increases, the additional satisfaction from each unit decreases, so consumers buy more only at lower prices. Eventually, marginal utility reaches zero, and they stop wanting more

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8
Q

Supply

A

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

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9
Q

The Law of Supply

A

Price increase, quantity supplied increase
Price decrease, quantity supplied decrease

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10
Q

Shifts in the Supply Curve (non-price determinants)

A
  • Input costs
  • Price of other goods the supplier could make (sometimes called a “supplier substitute”)
  • Weather
  • Technology
  • Expectations
  • Government intervention
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11
Q

Indirect tax/Expenditure

A

A tax on goods and services

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12
Q

Subsidy

A

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

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13
Q

Assumptions underlying the law of supply (HL)

A
  • The law of diminishing marginal returns
  • Increasing marginal costs
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13
Q

The law of diminishing marginal returns (HL)

A

After reaching an optimal production level, adding more of a production factor results in smaller output increases

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14
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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15
Q

Equilibrium

A

Is where the supply and demand intersect

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16
Q

Allocative efficiency

A

Resources are allocated into their best possible use (the most efficient way from society’s point of view)

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17
Q

Consumer surplus

A

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

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17
Q

Producer surplus

A

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

18
Q

HL ONLY - Rational consumer choice

A

Rational choice theory states that individuals make logical decisions to maximize their self-interest:

  • consumers aim to maximize utility
  • producers aim to maximize profit
19
Q

Biases 1 - Rule of thumb

A

Making decisions in a practical way without having to be exact; judging a situation by experience and sticking to a default choice.

E.g. Children choosing the same food at McDonalds
E.g. When we assume that discounted prices are cheaper than the average price
E.g. Drivers in autopilot mode when choosing route home

20
Q

Biases 2 - Anchoring

A

People understand the unfamiliar by comparing it to something familiar and often make decisions based on the first piece of information they encounter, even if it’s irrelevant

21
Q

Biases 3 - Framing

A
  • Presenting information in such a way that it creates a bias in favour of a particular decision

E.g. Yogurt is sold as 90% fat free it would be more successful than if labelled 10% fat

22
Q

Bias 4 - Availability

A

People tend to overestimate the likelihood of an event occurring due to recent similar occurrences or emotional associations with similar events.

23
Q

Bounded rationality

A

People often make decisions without access to all relevant information or the ability to process it all due to limited capacity

Decisions are often based on incomplete information because rationality is bounded by:

  • people’s thinking capacity
  • the availability of information
  • time

E.g. When ordering at a restaurant, customers will make suboptimal decisions because they feel rushed by the waiter

24
Q

Bounded self-control

A

People conform to social norms and group preferences (which may not be their own preferences). People exercise self-control only within limits.

25
Q

Bounded selfishness

A

While rational consumers are assumed to prioritize their own well-being, they sometimes act reciprocally or altruistically, sacrificing personal welfare for the public good.

26
Q

Imperfect information

A

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

27
Q

Choice architecture

A
  • Choice architecture is the deliberate design of different ways of presenting choices to members of society.
  • Effective choice architecture helps people avoid making poor choices or irrational decisions.
28
Q

Default choices

A
  • When a person is automatically signed up into a system, or it is the given decision if no action is taken

E.g. employees enrolled in a pension scheme
E.g. restaurants default side option is a salad

29
Q

Mandated choices

A

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

E.g. applying for a new driving license, we are asked whether we wish to donate organs in the event of death

E.g. Governments ask individuals to declare how they will vote (by post or in a polling station).

30
Q

Nudge theory

A

Nudges are created by choice architects using small prompts or tweaks to alter social and economic behaviour, but without taking away the power for people to choose

31
Q

Nudge Theory - When does it work best?

A

E - Easy (removing friction and simplifying things in order to influence people)

A - Attractive (break through attention)

S - Social (humans are influenced by what others do)

T - Timely (determining when people are most responsive)

32
Q

HL ONLY - Business objectives

A

profit maximisation (MR = MC)

  • profit increase if MR > MC
  • profit decrease if MC > MR
33
Q

Alternative business objectives

A
  • Corporate social responsibility (CSR)
  • Market share
  • Satisficing
  • Growth
34
Q

Market Share

A

A firm’s portion of total value of sales in a particular industry

35
Q

Corporate social responsibility (CSR)

A

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

36
Q

Satisficing

A

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

37
Q

Growth

A

Increasing the size and scale of the firm

38
Q

Status quo/inertia bias

A

When confronted with numerous choices, consumers prefer to maintain status quo and do nothing

39
Q

Hyperbolic discounting

A

Tendency for humans to prefer smaller short term rewards over larger later rewards

40
Q

Movement along demand curve

A
41
Q

Movement along supply curve

A
42
Q

Consumer and Producer Surplus

A
43
Q

Shift in Demand

A
44
Q

Shift in Supply

A
45
Q

Explaining a diagram

A

1. Interpret the question and state assumptions and which determinant is occurring.
2. Curve shift.
3. Effect on price and quantity.
4. Effect on the other curve (extension or contraction).

E.g.

Assuming that jam and marmalade are substitutes (one can be used in place of the other), which is a determinant of demand, if the price of marmalade increases then consumers will buy more jam. This shifts the demand curve for jam outwards, increasing demand, from D to D1, which will cause the price to increase from P to P1, and the quantity to increase from Q to Q1. This leads to an extension along the supply curve.

Economics (Tina) (19 decks)

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