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Microeconomics > How markets work Pt.1 > Flashcards

How markets work Pt.1 Flashcards

1
Q

Rational decision making

A

Decision making process based on people making choices that result in the optimal level of benefit/maximum level of utility for an individual

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2
Q

Rational decision making assumptions

A

1) Consumers aim to maximise utility
2) Firms aim to maximise profits

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3
Q

Demand

A

The amount of a product or service that customers are willing and able to pay for at a given price in a given time
- not effected by supply

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4
Q

x and y axis of demand curve

A

x: Quantity demanded
y: Price

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5
Q

Movements along and shifts of demand curve

A

Movements: change in price
Shifts: change in conditions of demand (factors) with exception of price, giffen and veblen goods and speculative demand

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6
Q

Movements along demand curve

A

Contraction (left): increase in price
Expansion (right): decrease in price
- A change in price doesn’t shift the demand curve, only moves it from one point to another

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7
Q

Shifts of demand curve
SCEPTIC

A

S ubstitute prices
C omplentary prices
E arnings
P opultation
T astes, preferences, ads
I nterest rate/ available credit
C onsumer confidence

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8
Q

Causes of outward shift in demand (increase)

A
  • Increasing disposable income (normal goods)
  • Decreasing disposable income (inferior goods)
  • Rising price of substitutes
  • Falling price of complements (cream for strawberries and cream)
  • Effective advertising
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9
Q

Causes of inward shifts in demand (decrease)

A
  • Change in consumer tastes/preferences
  • Rise in interest rates (goods bought on credit)
  • Potential fall in prices (consumers delay purchasing e.g. sales)
  • Rise in unemployment during recession
  • Appreciation of exchange rates (imports/substitutes cheaper)
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10
Q

Derived demand

A

Goods demanded because they are needed for the production of other goods
e.g. demand for steel driven by demand for cars

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11
Q

Why the demand curve slopes downward

A

Income effect:
- when price falls, the real income of the consumer rises
- increases purchasing power, allows more of that good to be bought
Substitution effect
- when price falls, it becomes cheaper relative to its substitutes
- consumers switch from more expensive substitutes
Diminishing marginal utility

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12
Q

Diminishing marginal returns vs Diminishing marginal utility

A

Returns focuses on how much of a certain factor of production should be used to make the product
Utility focuses on how much of a product a customer will use

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13
Q

The Law of Diminishing Marginal Utility (satisfaction)

A

Each extra unit of a good or service will eventually give less extra satisfaction
- consumers will be willing to pay less for more goods

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14
Q

Elasticity

A

Refers to how responsive something is to a change in a related factor
- Elastic: very responsive
- Inelastic: not very unresponsive

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15
Q

Factors that effect elasticity

A

Addictiveness
Necessity
Convenience

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16
Q

Price Elasticity of Demand (PED)

A

Measures the responsiveness of quantity demanded following a change in price

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17
Q

Income Elasticity of Demand (YED)

A

Measures the responsiveness of quantity demanded to change in real income

18
Q

Cross Elasticity of Demand (XED)

A

Measures the responsiveness of quantity demanded for good A following a change in price of good B (related good)
- we make important distinction between substitute products and complementary goods and services

19
Q

Formulae to calculate PED

A

%change in quantity / %change in price

20
Q

Formulae to calculate YED

A

%change in quantity demanded / %change in income

21
Q

Formulae to calculate XED

A

%change in quantity demanded of good X / %change in price of good Y

22
Q

Interpreting numerical values of PED

A

Unitary/Unit elastic: exactly (-)1 i.e exactly proportionally responsive
Perfectly elastic: infinity
Relatively elastic: PED>1
Perfectly inelastic: 0
Relatively inelastic: PED<1

23
Q

Interpreting numerical values of YED

A

Normal goods: positive but YED<1
(increased income leads to higher demand)
Luxury goods: positive YED>1
(increased income leads to a bigger percentage increase in demand e.g. sports cars)
Inferior goods: negative YED<0
(increased income leads to fall in demand e.g. cheap substitutes like supermarket coffee)

24
Q

Interpreting numerical values of XED

A

Substitute goods (in competitive demand): positive XED
Complement goods (in joint demand):
negative XED
Unrelated goods:
XED of 0

25
Q

Normal goods

A
26
Q

Luxury goods

A
27
Q

Inferior goods

A
28
Q

Factors that effect PED

A
  • Neccessity
  • Substitutes/competition
  • Convenience
  • Addictiveness
  • Cost of switching
  • Quality
  • Income proportion
  • Time
  • Peak
  • Loyalty
29
Q

Significance of elasticities of demand to firms and government in terms of

A
  • imposition of indirect taxes and subsidies
  • changes in real income
  • changes in the prices of substitute and complementary goods
30
Q

Elasticity and Total Revenue relationship

A

The more elastic a product is, the lower the total revenue due to fall in demand

31
Q

Supply

A

The quantity of a good/service that a producer is willing and able to sell onto the market at a given price in a given time period

32
Q

Movements along and shifts of supply curve

A

Movements: change in price
Shifts:

33
Q

Movements along supply curve

A

Contraction (left): decrease in price
Expansion (right): increase in price

34
Q

Causes of outward shifts in supply (increase)

A
  • Gov subsidies to cover some supply costs of firms
  • Fall in world price of imported components and raw materials
  • Reduction in the size of an indirect tax on producers
  • Improvement in labour productivity which lowers unit labour costs
34
Q

Causes of outward shifts in supply (increase)

A
  • Gov subsidies to cover some supply costs of firms
  • Fall in world price of imported components and raw materials
  • Reduction in the size of an indirect tax on producers
  • Improvement in labour productivity which lowers unit labour costs
35
Q

Causes of outward shifts in supply (increase)

A
  • Gov subsidies to cover some supply costs of firms
  • Fall in world price of imported components and raw materials
  • Reduction in the size of an indirect tax on producers
  • Improvement in labour productivity which lowers unit labour costs
36
Q

Price Elasticity of Supply

A

Measures the responsiveness of supply to a change in price

37
Q

PES formula

A

%change in quantity supplied / %change in price

38
Q

Interpreting numerical values of price elasticity

A

Perfectly elastic: infinity
Relatively elastic: PES>1
Perfectly inelastic: 0
Relatively inelastic: PES<1

39
Q

Determinants of PES

A

C omplexity of production
R aw materials
I nventories
M obility
E xcess capacity
S pan of time

40
Q

Short run vs Long run for PES

A

Producers of goods/ services typically find it easier to expand production in the long run rather than short run.
- in the short run, it’s costly/difficult to build a new factory, hire many new workers, or open new stores
- over a few years, all of these things are possible.

Microeconomics (5 decks)

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