Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Econ - T1 - Micro > How Markets Work > Flashcards

How Markets Work Flashcards

1
Q

What assumptions are made about consumer and firm behaviour?

A
  • Consumers act rationally, aim to maximise utility (satisfaction)
  • Firms act rationally, aim to maximise profits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Demand Definition

A

The amount a consumer is willing and able to buy at a given price over a certain time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why is the D Curve sloped downwards + what is this based on (2)

A
  • to show a fall in price leads to increase quantity of demand.

based on
- Substitution effect –> ↑P means Consumer will buy lower price substituted instead of higher price good e.g. margarine instead of butter
- Income effect –> ↑P means consumers suffer ↓R. Income. Purchasing power falls –> lead to fall in Demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What causes a movement along the Demand curve

A
  • Change in Price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What causes a shift in the Demand curve (6) ?

A
  • Real Incomes - ↑R. Incomes results in ↑D –> Rightward shift in D Curve
  • Size or Age distribution of Population - ↑in size of pop –> ↑D –> Rightward Shift
  • Tastes, Trends and Preferences –> ↓Popularity of product will cause ↓D –> Leftward Shift - Can be seasonal e.g. Mince pies popular in Christmas
  • Prices of Substitutes or compliments –> △P of related good will influence D - e.g. ↑P Beef leads to ↑D Lamb
    –> ↑P Petrol lead to ↓D cars + Left Shift
  • Advertisement - Successful advert –> ↑D –> Right Shift
  • Interest rates - affect cost of borrowing money - ↑Interest rates –> ↑Cost of mortgages –> ↓D for houses –> Left Shift
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Total Vs. Marginal Utility

A

Total Utility
- Total satisfaction gained from the total amount of product consumer

Marginal Utility
- the change in utility from consuming an additional unit of the product

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does the Law of Diminishing Utility state?

A
  • As consumption of a product increases, the consumers total utility increases but at a diminishing rate, and the marginal utility falls
    –> people prepared to pay less as consumption increases, results in inverse relationship between price and quantity demanded
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is PED + Equasion

A
  • Price elasticity of Demand
    –> Measures the responsiveness of QD in response to change of price
  • PED = %△QD / %△P
    –> Remember if its a fall in D, then its (-)

%△ = △Quantity/ OG Quantity x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Why is the PED always negative

A
  • Law of Demand
    –> Price and QD have an inverse relationship
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

When is PED Inelastic + what does it means?

A

Inelastic = PED between 0 and -1
- The change in P has led to a smaller % change in QD
Inelastic = steeper curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

When is PED Elastic + what does it means?

A
  • PED lower than -1 (e.g. -5 or -2)
  • △ in P has led to a larger % △ in QD
    Elastic = flater curve
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is Unit Elasticity

A
  • Change in P led to same Change in QD
  • Value of PED = -1
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What Factors influence PED

A
  • Availability of Substitutes –> substitutes available provide incentive to shift consumption when price rises –> Substitutes make D more elastic
  • Proportion of Income spent on Product –> if small % Income spent on product (e.g. salt) then D more Inelastic
    –> If high % Income spent on product e.g. Holiday then D more elastic
  • Nature of Product –> If product addictive e.g. alcohol or tobacco, D more inelastic
  • Durability –> long-lasting products e.g. cars D elastic as possible to postpone purchase
    –> non-durable e.g. milk, Inelastic as must be replaced regularly
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the relationship between PED and total revenue

A
  • When Demand is inelastic (Between 0 and -1) Price change will change TR in same direction (e.g. ↑P –> ↑TR)
  • When D is Elastic (Less than -1) Price change will change TR in opposite direction (e.g. ↑P –> ↓TR)
  • Unit elastic TR will stay same
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Significance of PED for Firms

A

If PED inelastic –> can ↑TR by ↑P
If PED elastic –> Can ↑TR by ↓P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Significance of PED for Cosumers

A
  • If inelastic firms may raise prices (to ↑TR) this will reduce R.Incomes of consumers (Decrease Purchasing power)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Significance of PED for Government

A
  • For gov to maximise TR will place indirect taxes on products with inelastic PED e.g. alcohol, tobacco
    –> but consumers will bear most of tax burden
  • Gov can tax products with elastic PED, meaning producers bear tax burden but could make business unprofitable
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is XED (cross elasticity of demand) + forumla

A
  • Measure of the responsiveness of QD of one product (Y) to △P of another product (X)

XED = %△QD (Product Y) / %△P (Product X)

%△ = Pnew-Pold / Pold x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does the XED tell you about the relationship of the products

A
  • Weather the products are Substitutes or Complements
  • (+) sign indicates products are substitutes –> ↑P of one cause ↑D for other
  • (-) sign indicates products are complements –> ↑P of one causes ↓D for other
20
Q

Significance of XED for firms

A

(Cross elasticity of Demand)

  • helpful for setting prices
    –> Firm selling product with close substitute, expect considerable ↓D for ↑P
    –> Complementary goods can command High P e.g. Printer relatively cheap, but Ink relatively expensive
21
Q

What does YED mean? (Income elasticity of Demand) + formula

A
  • measure of responsiveness of QD to change in Real Income

YED= %△QD / %△R.Income
–> %△ = Pnew-Pold / Pold x 100

22
Q

What does the YED tell you about the product

A
  • (+) sign indicated product is normal good –> ↑Real Income cause ↑D (+ vis versa)
  • (-) sign indicates product is inferior good –> ↑R. Income leads to ↓D
    –> Inferior good are goods which are lower quality versions of other higher-quality goods

When YED is between 0 and +1 is Inelastic
YED greater than 1 D = Elastic

23
Q

Significance of YED for Firms + Gov

A

Firms
- Know D for products is elastic (Greater than 1) D and TR will ↑ during economic growth, but ↓ during recessions
–> important for investment decisions

Gov
- Gov to maximise Tax Revenue during Economic Boom, place indirect taxes on products with elastic YED (greater than 1)
–> also help estimate tax revenues

24
Q

Supply definition

A

The amount producers are willing and able to supply at a given price over a certain period of time

25
Q

Why is the Supply curve upwards sloping

A
  • Indicates that more is supplied as P↑
    –> when P↑ it is more profitable for supply so have incentive to ↑production (+vis versa)
26
Q

What causes Shifts in Supply curve? (6)

A
  • Costs of production –> e.g. wages, raw materials, energy, rent –> ↑Costs cause supply curve to shift left (inwards)
  • Productivity of workforce –> ↑Productivity shifts S curve right (outwards)
  • Indirect taxes –> Taxes raise cost of Supply –> Cause shift inwards
    –> rise in VAT cause S curve to become steeper, whereas specific *unit) tax cause parallel shift in curve
  • Subsidies –> reduce cost of production –> outward shift in S curve
  • Tech - new tech and inventions result in increased productivity, S curve shifts out
  • discoveries of new raw materials –> e.g. country discovers new oil reserve, S curve shifts out (costs of production ↓)
27
Q

What is PES (Price elasticity of supply) + formula

A
  • measure of responsiveness of QS when a products price changes

PES= %△QS/ %△P

28
Q

Why is PES always positive

A
  • Supply curve is upwards facing
    –> P and Q always move in same direction
29
Q

When is PES Inelastic + Elastic

A

Inelastic
- when PES is between 0 and 1
–> Change in price led to smaller change in QS

Elastic
- PES greater than 1
–> △P led to larger △QS

30
Q

What factors influence the PES (4)

A
  • Time –> in SR (when at least 1 factor of production is fixed) difficult to change production, inelastic –> in LR (all factors of production variable) elastic
  • Stock –> If stock of finished goods is easily available supply will be elastic as able to quickly increase supply to match price change (e.g. not be able to store perishable goods)
  • Spare capacity –> if firm has underutilised machinery or workers possible to engage them more and supply elastic
  • Availability + cost of switching factors of production –> if labour or machinery is highly speiclised or expensive to relocate then supply inelastic
31
Q

When does an excess supply occur?

A

if P is set above equilibrium price (Pe)
–> If Price is set at P1, QD will be Q1 while QS will be at Q2
–> will create surplus of Q2-Q1
–> Market forces should cause P to fall to Pe which will eliminate excess supply

32
Q

When does an excess demand occur?

A
  • If Price set below Pe
    –> draw diagram
  • Will cause a shortage –> market forces will cause price to rise, eliminating excess demand
33
Q

What causes a change in Equilibrium Price

A
  • Shift in D curve
    Shift in S curve
34
Q

What would an Increase and Decrease in D do to equilibrium

A

Increase
- Cause right/outward shift in D curve
–> ↑P, ↑Q

Decrease
- Cause left /inwards shift in d curve
–> ↓P, ↓Q

35
Q

What would an Increase and Decrease in S do to equilibrium

A

Increase
- Cause right/outward shift in S curve
–> ↓P, ↑Q

Decrease
- Cause left/inward shift of S curve
–> P↑, Q↓

36
Q

What are the Key functions of the price mechanism?

A
  • Rationing Device –> market forces will ensure the amount demanded is equal to amount supplied
  • Incentive –> prospect of making profit acts as incentive for firms to product
  • Signalling device –> to producers to increase or decrease amount supplied
  • Changes in wants –> △ in D will be reflected in △ in P
37
Q

Define Consumer Surplus + where is it on diagram?

A
  • The differences between how much a consumer is willing to pay, and what thy actually pay (market price)
    –> the area under the D curve and above the Market price (e.i. the top triangle)
38
Q

Define Producer Surplus + where it is on diagram?

A
  • Difference between price firms are willing to sell the good for and the market price
    –> the area above the S curve and below the Market price (e.i. bottom triangle)
39
Q

What factors affect the Consumer Surplus?

A
  • Gradient of D curve
    –> Steeper the curve (more inelastic) the greater the consumer surplus will be
  • Shifts in Demand Curve –> e.g. increase in D (shift of D curve out) will increase Consumer Surplus
40
Q

factors affecting Producers’ Surplus?

A
  • Gradient of Supply curve –> steeper curve (more inelastic) greater the Producer Surplus
  • Shifts in Supply Curve –> Shift outwards of S curve (increase in Supply) will increase Producer Surplus
41
Q

What is an indirect tax’s + the two types and defenitions?

A

Indirect takes are taxes on expenditure
–> they Increase the Cost of supply and shift S curve Inwards
Two types
- Ad valorem –> a % of products price –> cause S curve shit inwards + become steeper (more inelastic) –> e.g. VAT which is 20%
- Specific tax –> flat tax rate, set amount of tax per unit –> creates a parallel inwards shift of S curve

42
Q

Who bears the incidence of tax when D for product is Inelastic

A
  • Incidence of tax = how the tax burden is distributed between groups e.g. consumer / producer
    –> when D is inelastic (PED between 0 and -1) consumer bears larger proportion of tax burden
    –> total tax revue goes to gov
43
Q

Who bears the incidence of tax when D for product is Elastic?

A

Incidence of tax = how the tax burden is distributed between groups e.g. consumer / producer
- When D is Elastic (PED lower than -1) Producer bears tax burden

44
Q
A
45
Q

List some reason why consumers might not behave rationally? (4) + implications of this

A
  • Influence of other people’s behaviour –> behaviour is affected and influenced by others called ‘social learning’ e.g. Everyone you know has apple smartphones more likely to have Apple phone, also with clothing brands
  • Habitual Behaviour –> Behaviour done automatically - Habits difficult to change requires incentives to change habits e.g. 5p for a plastic bag
  • Inertia –> people are loss averse (put more effort into preventing loss than winning a gain) e.g. people rarely change bank accounts
  • Information overloads + complexity of information

–> the principles of rationality will not always accurately describe human behaviour
- policies might have unintended / unpredicted results

Econ - T1 - Micro (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions