How markets work Flashcards
What is rational decision making for a consumer and producer?
A rational consumer will try maximise their utility or satisfaction with the goods and services they buy. A rational producer will use their resources to try maximise profits.
What is Utility?
Utility is the total satisfaction or benefit derived from consuming a good or service.
What causes movements up and down the demand/supply, curve/line?
A price change
What does the acronym PASIFIC stand for which shifts demand.
Population, Advertisements, Substitutes, Income taxes, Fashion and trends, Interest rates, Complements.
What does the acronym PINTSWC stand for which shifts supply.
Productivity, Indirect Tax, No of firms, Technology, Subsidies, Weather, Cost of production.
What is the formula for Price elasticity of demand (PED)?
% Change in quantity demanded / % Change in price
If PED (elastic) price increases, what happens to Total revenue?
Decreases
If PED (Inelastic) price increases, what happens to total revenue?
Increases
What factors influence PED?
Cost of switching suppliers, availability of close substitutes, brand loyalty… etc
What is the formula for Income elasticity of demand (YED)
% Change in quantity demanded / % Change in income
What type of good is YED positive and why?
Normal good, (when income rises, the Quantity demanded increases). If it’s between 0 and 1 it indicates the good is a necessity, if it’s between 1 and infinity it indicates a luxury good.
What type of good is YED negative and why?
Inferior good, (when income rises, quantity demanded decreases) . -for example including lower quality or generic foods, used or older cars etc. - people would buy less of these goods and may shift to higher-quality alternatives.
What is the formula for Cross elasticity of demand (XED)?
% Change in demand for good A / % change in price of good B
What does XED positive mean?
It is a substitute, and a close substitute has a strong elasticity of supply. (e.g. small change in relative to price).
What does XED negative mean?
It is a complement. A high complement would be considered as a high negative number.
What does XED 0 mean?
Unrelated product
What is the formula for Price elasticity of supply (PES)?
% Change in quantity supplied / % Change in Price
What does PES 0 mean?
Perfectly inelastic supply - supply does not change when price does.
What does PES 0-1 mean?
Inelastic supply - % change in supply is smaller than %
change in price.
What does PES 1 or more?
Elastic supply - % change in supply (responds more) to a % change in price.
What does PES = ∞ mean?
Perfectly elastic supply - There is only one price consumers are willing to pay.
What is price determination?
Price determination is the process of how the forces of demand for goods and services and the supply of goods and services in a market interact to determine the price.
What are the functions of the price mechanism?
Signalling - signals prices through shifts in the market
Incentive - e.g When prices rise, producers are incentivized to increase production, while consumers are incentivized to reduce their consumption.
Rationing - When the supply of a good is limited, its price increases, which can help to reduce demand and allocate the available quantity to those who are willing and able to pay the higher price.
Allocating resources - Prices adjust accordingly, and resources are allocated to where they are most valued. (sorted through signalling)
What is the difference between the consumer and producer surplus?
When the supply of a good is limited, its price increases, which can help to reduce demand and allocate the available quantity to those who are willing and able to pay the higher price.
List alternative views of consumer behaviour
- Influence of Other People’s Behaviour |herd-like mentality|- following the behaviour of one another
- Importance of |Habitual Behaviour | - is a routine followed. examples: coffee, vaping, smoking, alcohol
3.Consumer Weakness at Computation - consumers find it difficult to calculate the probability of something happening when they make purchasing decisions. For example, people may underestimate the long-term health consequences of eating processed meats or relying heavily on prescription painkillers.
