how markets work Flashcards
What is price determination
Where quantity demanded is equal to quantity supplied. This is known as price equilibrium or market clearing price
Where is the market clearing price shown on a graph
The intersection of the original demand line and supply line
Where is the new market clearing price shown on a graph
The intersection of the changed demand line and the supply line
What is the price elasticity of demand
The responsiveness of demand (hiw muxh does it change) after a change in the goods own price
What is the formula fir PED
Percentage change in QD ÷ Percentage change in Price
What does it mean to be elastic
Demand changes more than the price
What does it mean to be inelastic
Demand changes less than the price
What are factors that impact PED
.no of close substitutes
.price if product in relation to total income
.cost of switching between different products
.brand loyalty and habitual consumption
.necessity and luxury
.Time
The more the amount of close substitutes, the more…..the demand is
Elastic
If the % budget is high, demand is more…
Elastic
If the cost of switching is high, demand is more…
Inelastic
If levels of brand loyalty is high, demand is…
Less price elastic
Persuasive advertising can make demand price more….
Inelastic
Luxury goods are…
Elastic
Necessities are more…
Inelastic
More time is…
Elastic
Less time is…
Inelastic
If PED is 0, demand is…
Perfectly inelastic
How do you know if demand is inelastic
PED is between 0 and -1
If PED is -1, demand is…
Unitary elastic
How do you know if demand is elastic
PED is less than -1
What does the demand line have to look like to indicate that it is inelastic
Very steep
What does the demand line have to look like to indicate that it is elastic
Less steep
What does the demand line have to look like to indicate that it is unitary elastic
A inward curve
If a good is inelastic what do you have to do to the price to increase revenue
Increase price to increase revenue
If a good is elastic what do you have to do to the price to increase revenue
Decrease price to increase revenue
What is the Income Elasticity of Demand
Shows how responsive the demand for a product is to change in real income
What is the formula for YED
% change QD ÷ % change Real Price
What type of YED does normal goods have
Positive YED
What type of YED does inferior goods have
Negative
What type of correlation does the demand line for normal goods have
Positive correlation
What type of a correlation does the demand line for inferior goods have
Negative
What type of a good is it if the YED is greater than 1
Luxury good
What type of a good is it if the YED is greater than 0 but less than 0.5
Necessities
What is the cross price elasticity of demand
Measures the responsiveness of demand for good x following a change in the price of good y
Relationship of XED with substitutes
With substitutes there is an increase in the price of one good (ceteris paribus) will lead to an increase jn demand for a rival product
Relationship kf complementary goods and demand
A fall in one product causes an increase in demand for the complementary product
What type of XED is substitute
Positive
What type of a XED is complimentary goods
Negative
When can you identify a close substitute
When XED value is closer to 1
How to identify that a good is close complimentary
The XED value is closer to -1
What is price elasticity of supply
It measures the relationship between the change in quantity supplied and a change in price
What value shows that PES is elastic
Greater than 1
What value shows that PES is in elastic
Less than 1
How is elastic PES shown on a graph
Less steep line
How is inelastic PES shown on a graph
Very steep line
If supply is elastic, what does it allow producers to do
They can increase their output without a significant rise in costs or a time of delay
If supply is elastic what affect does this have on firms
Firms will find it hard to change their production in a given period of time and rise more significantly
What factors affect PES
.spare productive capacity
.ability to stockpile
.time period and production speed
.ease and cost of factor substitution
If you have spare capacity, PES is…
Elastic
If you can stockpile, PES is…
Elastic
If factors are substitutable, PES is…
Elastic
If it takes less time to produce, PES is…
Elastic
Is elastic supply more or less volatile
Less volatile
Is inelastic supply more or less volatile
More volatile
What is the topic Behavioural economics about
The psychological reasonings behind certain habits and purchasing
What is traditional economics
When consumers are always rational
What is traditional economic behaviour affected by
.perfect knowledge
.maximum utility
What is behavioural economics
Consumers are always irrational
What is behavioural economics impacted by
.social learning
.inertia
.computational weakness
What is computational weakness
Economics that are there but many people don’t understand the actual basis of it
What are examples of computational weakness
Food labels, pension, financial markets and mobile deals
What is herd behaviour
When we often make decisions based on those around us or to fit social norms
What is bounded rationality
Suggests that consumers opt to satisfied rather than maximise
What is habitual behaviour
Repeated purchasing as people prefer to carry on behaving as they have always done
What is choice architecture
The layout of ho choices are presented and sequenced
What is an example for choice architecture
Salad bar- put it before the hot food/main food, o that more people take more salad and m=be more healthy
What is the new law associated with choice architecture
It is that chocolate bars can’t be presented/ sold near the till to prevent impulse buying
What is intertia
You aren’t bothered to buy certain things so you buy others
What is indirect tax
It is is a tax on expenditure that is imposed by the government that increases the supply costs faced by producers and so market prices rise, leading to a fall in demand
What are examples of indirect taxes
VAT, health and environment tax (tobacco, landfill, plates ect…)
What are direct taxes often used for
To correct market failure by lowering demand
What are the 2 types of indirect tax
Specific tax and Ad Valoren tax
What is specific tax
Set tax per unit
What is Ad Valoren tax
Percentage tax
What is the indidencen of tax
It denotes whether the consumer or producer gets the burden of payment
How do u work it tax per unit, consumer and producer incidence (CI & PI)and total tax
Tax per unit= P1 - Pe
CI= P1 - Middle Price
PI= Middle Price - Pe
Total tax= Q1 x tax per unit
Who is the tax absorbed by if the supply is demand is elastic
It is absorbed by the supplier
Who is the tax absorbed by if the demand is inelastic
It is absorbed by the consumer
What is a a subsidy
It is a form of government support that helps lower price and increase consumption of a good or service
If demand is inelastic the subsidy is given to the….
Consumer
If demand is elastic subsidy is given to the…
Producers
What are the most common fields subsidies are given too
Environmental fields such as solar panels, electric cars ect…
Why are subsidies given to train apprenticeships
Because companies don’t want inexperienced people working and also have to pay them so the gov gives them a subsidy as a form of incentive which leads to a decrease in business cost
What are reasons why subsidies are generally given
.to help families
.to encourage output and investment in fledging sectors
.protect jobs in loss-making industries
.make healthcare and treatments more affordable