How markets work 1.2 Flashcards
(47 cards)
What are the assumptions of rational decision making for consumers
Consumers aim to maximise utility - the satisfaction gained from consuming a product
What are the assumptions of rational decision making for firms
Firms aim to maximise profits
What are the assumptions of rational decision making for governments
Governments aim to maximise social welfare
What is demand
Demand is the willingness and ability to buy a particular good at a given price and at a given moment in time
Movements on the demand curve
A movement along the demand curve is caused by a change in price
for example a decrease in price causes an extension in demand and an increase in price causes a contraction in demand
Shifts of the demand curve
A change in any of the factors which affect demand, the conditions of demand
What are the conditions of demand / factors shifting the demand curve
Population
Advertising
Substitutes
Income
Fashion
Income tax
Complements
What is diminishing marginal utility
The utility derived from the consumption of an additional unit of a good will decrease as more of the good is consumed
Does the demand curve slope upwards or downwards
Downwards as when the prices increases the quantity demanded decreases
What is supply
Supply is the ability and willingness to provide a good or service at a particular price at a given moment in time
What can cause movement on the supply curve
A change in price can cause a movement on the curve for example an increase in price can mean supply will increase and cause an extension
Also a decrease in price will lead to supply decreasing and causes a contraction on the supply curve
What does a shift in a supply curve mean
If the curve shifts to the left it means less goods or services is being produced at a given price
A right shift means more goods or services are being produced at a given price
What are the conditions of supply
Productivity
Indirect taxes
Number of firms in the market
Technology
Subsidies
Weather
Cost of production
What is an elasticity of demand
An attempt to measure the responsivness in quantity demanded to changes in other variables
What does it mean if a good is elastic
quantity demanded is relatively responsive to changes in price,income and change in price of a substitute
What does it mean if a good is inelastic
quantity demanded is relatively unresponsive to changes in price,income and price of the substitute
What is the definition and equation for Price elasticity of demand
PED - responsiveness of demand to a change in the price of the good
What does it mean if a good has PED = 1
The good is unitary elastic , quantity demand chages by exactly the same percentage as price
What does it mean if a good has PED > 1
The good is relatively elastic , quantity demand changes by a larger percentage than price , so demand is responsive to price
What does it mean if a good has PED < 1
The good is relatively inelastic, quantity demanded changes by a smaller percentage than price , so demand is relatively unresponsive to price
What does it mean if a good has PED = ∞
The good is perfectly elastic , a change in price means that quantity demand will fall to zero , demand is very responsive to price
What does it mean if a good has PED = 0
The good is perfectly inelastic, a change in price has no effect on quanity demanded , so demand is completely unresponive to price
Factors affecting price elasticity of demand
Proportion of income
Loyalty
Addictiveness
Necessity
Time
Substitutes
What is the significance of PED
The price elasticity of demand along with the price elaticity of supply determine the effects of the imposition of indirect taxes and subsidies
The more elastic the demand is the lower the incidence of tax on the consumer
The more eleastic demand is the sonsumer will see a small fall in price only
