How Markets Work 1.2 Flashcards
What are the 3 assumptions of rational economic decision making?
- Consumers aim to maximize utility
- Producers aim to maximize profit
- Government aims to maximize satisfaction
What is Demand?
The ability and willingness to buy a particular good at a given price
What are the 7 Conditions of Demand? mnemonic
PIRATES
- Population
- Income
- Related Goods
- Advertisement
- Tastes
- Expectations
- Seasons
What is Diminishing Marginal Utility?
- What does it explain?
The satisfaction gained from the consumption of an additional unit of a good decreases as more of it is consumed
- Explains why the Demand Curve slopes downwards
What does PED stand for and what is it?
Price Elasticity of Demand
- The responsiveness to change in demand with an increase in price
What factors affect PED?
- Time (i.e. if they don’t need it right away)
- Substitutes
- Necessity
- Addictiveness
- % of total Expenditure
TANES
What is the significance of PED?
- Explain in terms of elastic and inelastic Demand Curves
Determines the effectiveness of the imposition of indirect taxes and subsidies
- I.e. more elastic Demand curve means lower incidence of tax for consumer
- more inelastic, consumers pay more, however less effective at reducing output (cus consumers still want it), and Government revenue increases
What is YED?
Income Elasticity of Demand
- The responsiveness to change in Demand with Change in income
What is the significance of YED?
- Lets firms know how sales are affected by Change in income
- Allows firms to know what goods to produce and how much
*obviously because if the population have more money, they more shit to spend it on init
What is XED?
Cross Price Elasticity of Demand
The responsiveness of Demand for Good A with change in price of Good B
What is the Significance of XED?
- Lets firms know how prices of goods from other firms will affect them (competition init)
What is Supply?
The ability and willingness to provide goods and services at a given price
What are the Conditions of Supply? (movement)
PINTSWC
- Productivity
- Indirect Taxes
- Number of Firms
- Technology
- Subsidies
- Weather
- Cost of production
What does PED stand for and what does it mean?
Price Elasticity of Supply
- The responsiveness of supply with change in price
What factors affect PES?
TWEASA
- Time
- Working below full capacity
- Ease of entry into the market
- Availability of the factors of production
- Stocks
- Availability of Substitutes
How is excess demand caused?
When the price is set lower than the equilibrium point
How is Excess Supply caused?
When the price is set higher than the equilibrium point
What are the 3 functions of the Price Mechanism? Explain them.
- Rationing Function: Only those who can afford the good can buy them
- Signalling function: The price Mechanism acts as a signal for where resources should be allocated (e.g., if price increases for a product, so does quantity)
- Incentive Function: Incentive for people to earn more so they can buy more; suppliers supply more to earn more
What is consumer and producer surplus?
- Consumer surplus: The difference between the price consumers are willing to pay and how much they actually pay
- Producer Surplus: The difference between the price suppliers are willing to supply at and the price they actually supply at
What is Indirect Taxes? What are the 2 types and explain them
Indirect Taxes: Tax on expenditure
- Ad Valorem: Tax proportional to the value of a good (percentage tax, e.g, VAT)
- Specific Tax: Specific cost added (e.g., 10p per litre)
What is the general impact of Indirect taxes?
- Supply falls and prices rise
What is a subsidy?
Subsidies: Grants by the government
What are the 3 Irrational Consumer Behaviours? Explain them.
- Influence of others: Herd behavior or following trends of other people to ‘fit in’
- Influence of Habitual Behaviour: Habits that dont change because it saves time and effort
- Consumer weakness at computation: Consumers who are not willing or able to make comparisons between goods/ services
