how markets work Flashcards
objective of consumer
maximise their economic welfare (utility/ satisfaction) from consumption by correctly spending their income
objectives of firms
maximise profits by producing at the lowest cost
dividend are then played to the shareholders
objectives of the government
maximise social welfare of the citizen
demand meaning
the ability and willingness to buy a particular good at a given price over a given period of time
causes of shifts in the demand curve
change in price of substitute
change in price of complements
change in real incomes
changes in the distribution of income (equal distribution causes more demand as poorer people spend more)
effects of advertising and marketing
change in regulation
interest rates
demography changes
seasons
trends
law of diminishing marginal utility
the utility from consuming an additional unit of a good will decrease as more of a good is consumed
consumer surplus meaning
difference between what consumers are willing and able to pay and what they actually pay
derived demand meaning
demand for the FOP to produce another good or service
price elasticity of demand (PED) meaning
the responsiveness of demand to a change in price of the good/ service
%change in quantity demanded/ %change in price
relatively elastic PED
PED more than 1
relatively inelastic PED
PED less than one
factors affecting PED
number of close substitutes available
price of product relative to total income
cost of substituting between different products
brand loyalty and habits
necessity or luxury good
addiction
If u need it now or had time to think
why firms use PED
the effect of a change in price on total revenue
changes in tax and weather the firm can pass on the cost to the consumer
price discrimination- can charge higher prices for the good when its needed and less when its not
EV for PED
not complete data
consumer demand changes over time
PED varies by time and region
not all firms profit maximise
elasticity will vary with each product
substitutes will change market strategies
cross elasticity of demand (XED) meaning
responsiveness of demand for one product to the change in price of another product
income elasticity of demand (YED) meaning
responsiveness of demand to a change in income
inferior good number and explanation
YED less than 0
rise in income will lead to a fall in demand for the good
normal good number and explanation
YED more than 0
rise in income will lead to a rise in demand for the good
luxury good number
YED more than 1
substitutes number and explanation
XED is larger than 0
increase in price of good B will increase demand of good A
complementary goods number and explanation
XED is smaller than 0
increase in the price of good B will decrease demand for good A
supply meaning
quantity of goods and services that a producer is willing and able to sell at a given price over a given time period
movements along a supply curve
extension- price rises producers will produce more ass there are more profits to be made
contraction- fall in price causes less profits so there will be less supplied
causes of shifts in the supply curve
change in the unit cost of production
better quality tech
depreciation in the exchange rate
cost of production
producers entering or leaving the market
weather conditions
speculation in the future (higher prices in future so stock the good)
taxes and subsides
price elasticity of supply (PES) meaning
responsiveness of supply to a change in price of the good or service
relatively elastic PES number
PES higher than 1
relatively inelastic PES number
PES lower than 1
factor affecting PES
spare production capacity - room to grow is more elastic
stocks of finished good - if high stocks and demand increases demand can be met
FOP mobility- if FOP are more mobile to shift to produce what is more in demand then its elastic
time to produce- short run inelastic as supply cannot meet demand. long run elastic as supply can meet demand
excess demand meaning
when quantity demanded is higher than quantity supplied
excess supply meaning
when quantity supplied is higher than quantity demanded
price mechanisms meaning
decisions of consumers and businesses interact to determine the allocation of resources
rationing function meaning
when there are scarce resources price increases cos of excess demand
the higher price causes some people not being able to afford the good or they lose interest
so the goods are rationed to the people who can afford it or desire it
signalling function meaning
where resources should be used
when prices rise producers more resources into the manufacturing of the product
changes in price lead to a change in supply and demand
incentive function meaning
change in behaviour of a consumer or producer
working harder leads to more benefits
producer surplus meaning
difference between the price producers are willing and able to supply at and the actual price they supply at
direct taxes meaning
levy on income wealth and profits
e.g. income tax, inheritance tax, national insurance, capital gains, corporation tax
indirect taxes meaning
levy on expenditure
e.g. VAT, sugar tax, alcohol, tobacco
specific/ unit tax meaning
set at a constant amount per unit of output
ad valorem tax meaning
set at a percentage of the selling price
indirect tax and PED effects on consumer and producer
if PED is inelastic burden can be passed onto the consumer
if PED is elastic burden is absorbed by the producer
subsidies meaning
government giving out loans to firms which do not need to be paid back
they are used to lower cost of production
effects of subsidies
increase output
lower prices
increase employment through parentships
reduce inequality
control inflation
increase demand during decline
encourage competition of merit goods
causes of irrational consumer behaviour
influence of others
habitual behaviour
weakness at computation
how does influence of others decrease utility
herb behaviour- make decisions based on people around you
social norms and trends
how does habitual behaviour decrease utility
mental shortcuts- helps people make quick but not perfect decisions
how does weakness at computation decrease utility
consumers are not willing or able to make comparisons between prices
