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How Markets work Flashcards

1
Q

Market

A

Where consumers and producers come into contact with each other to exchange goods and services

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2
Q

Utility

A

The amount of satisfaction obtained from consuming a good or service

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3
Q

Rational decision Making

A

Where consumers allocate their expenditure on goods and services to maximise utility and producers allocate their resources to maximise profits

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4
Q

Demand

A

The quantity of a good or service purchased at given price over a given time period

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5
Q

Demand curve shape

A
  • Slopes downwards from left to right
  • As Price falls, Quantity demand increases
    *
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6
Q

Movement along demand curve

A

When there is change in price

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7
Q

Fall in price for demand

A

Extension

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8
Q

Rise in Price for demand

A

Contraction

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9
Q

Marginal Utility

Downward sloping demand curve can be explained by marginal utility

A

The utility or satisfaction obtained from consuming one extra unit of a good or service

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10
Q

Diminishing marginal utility

A

As successive units of a good are conumed, the utility gained from each extra unit will fall

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11
Q

Shifts in Demand Curve

A
  • A fall in the price of complementary goods
  • rise in the price of subsitute goods
  • Change in fashion/taste
  • increased advertising
  • increase in real incomes
  • decrease in income task
  • increase in population
  • increase in credit facilities
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12
Q

Price elasticity of demand

PED

A

The responsiveness of demand for a good or service to a change in its price

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13
Q

Equation for PED

A

Percentage change in quantiy demanded for Good A / Percentage change in price for Good A

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14
Q

Price elastic

A

Greater change in demand than change in price

PED > 1

Negative or Positive

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15
Q

Price inelastic

A

Greater change in price than change in demand

PED < 1

negative or positive

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16
Q

Unit elasticity

A

PED = 1

Change in demand = Change in Price

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17
Q

Perfectly Inelastic

A

PED = 0

change in price has no effect on quantity demanded

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18
Q

Perfectly elastic

A

PED = ∞

A rise in price causes demand to fall to 0

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19
Q

Total revenue

A

The price per unit of a good multiplied by the quantity sold

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20
Q

Determinants of Price elasticity of demand

A
  • Availability of subsitutes
  • Luxury and necessity goods
  • Proportion of income spent on good
  • Addicitive and habit-forming goods
  • Time period
  • Brand Image
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21
Q

Income elasticity of demand

A

The responsiveness of demand for a good or service to a change in real income

22
Q

Equation of IED

A

Percentage change in demand for a good / Percentage change in real income

23
Q

Normal good

A

A good with a positive IED

As income rises, so does demand for good

24
Q

Inferior good

A

A good with a negative IED

As real income rises, demand good falls

25
Cross elasticity of demand
The responsiveness of demand for good B to change in price of good A
26
Equation for XED
Percentage change in demand for good B / Percentage change in price of good A
27
Subsitute goods XED
XED is positive for subsitute goods
28
Complementary goods
XED is negative for compelmentary goods
29
Unrelated goods XED
XED is zero for unrelated goods
30
Supply
The quantity of a good or services that firms are willing to sell at given price over a period of time
31
Supply curve shape
* Slopes upwards from left to right * As price rises encourages firm to supply more to increase profit
32
Rise in price for supply
Extension
33
Fall in price for supply
Contraction
34
Shifts in Supply Curve
* Improvements in technology * reduction in labour costs * reduction in capital cost * a reduction in transport cost * discovery of new plots of land * increase in number of firms in industry * change in weather * reduction in indirect tax * increase in government subsidies
35
Price elasticity of supply
The responsiveness of the supply of a good or service to a change in its price
36
Equation for PES
Percentage change in supply of a good / Percentage change in price of a good
37
Determinants of PES
* Level of spare capacity * State of the economy * Level of stocks of finished goods in a firm * Perishability of the product * Ease of entry to an industry * Time period under consideration
38
Equillibrium Price
The price where the quantity demanded equals the quantity supplied for a good or service in a market
39
Excess Demand
Where the quantityd demanded exceeds the quantity suplied for a good at the current market price
40
Excess supply
Where the quantity supplied exceeds the quantity demanded for a good at the current market price
41
Price Mechanism
The use of market forces to allocate resources in order to solver the economic problem Refers to the way price responds to a change in demand or supply
42
Functions of the price mechanism
* A rationing device * An incentive device * A signalling device
43
Consumer surplus
The extra amount of money consumers are prepared to pay for a good or service above what they actually pay
44
Producer surplus
The extra amount of money paid to producers above what they are willing to accept to supply a good or service
45
Tax
A tax is a compulsory charge made by the government on goods, services, incomes or capital
46
Indirect tax
A tax imposed on goods or services supply by businesses.
47
Specific tax
A fixed amount
48
Ad valorem tax
A percentage of the price of the good
49
Subsidy
A goverment grant to firms, which reduces production, costs and encourages an increase in output
50
How Habitual behaviour shows itself
* Preference for the status quo * Thinking short tern

Microeconomics (8 decks)

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