Micro 1.2 Flashcards
What is demand?
Demand is the ability and willingness to buy a particular good at a given price and at a given moment in time.
What is the rational consumer called?
Homo Economicus.
What do consumers aim to maximize?
Utility.
What do firms aim to maximize?
Profit.
What do governments aim to maximize?
Social welfare.
True or False: Economic agents always have the information necessary to act rationally.
False.
What causes a movement along the demand curve?
A change in the price of the good.
What causes a shift of the demand curve?
A change in any of the factors which affect demand, known as the conditions of demand.
What is a contraction in demand?
A decrease in quantity demanded due to an increase in price.
What is an extension in demand?
An increase in quantity demanded due to a decrease in price.
What mnemonic can help remember the conditions of demand?
PIRATES.
What does ‘P’ in PIRATES stand for?
Population.
What does ‘I’ in PIRATES stand for?
Income.
What does ‘R’ in PIRATES stand for?
Related goods.
What does ‘A’ in PIRATES stand for?
Advertising.
What does ‘T’ in PIRATES stand for?
Taste/fashion.
What does ‘E’ in PIRATES stand for?
Expectations.
What does ‘S’ in PIRATES stand for?
Seasons.
What is the law of diminishing marginal utility?
The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.
What is total utility?
The satisfaction gained by a customer as a result of their overall consumption of a good.
What is marginal utility?
The change in satisfaction resulting from the consumption of the next unit of a good.
How does the demand curve typically slope?
Downward, showing the inverse relationship between price and quantity.
What is price elasticity of demand (PED)?
The responsiveness of demand to a change in the price of the good.
What does a perfectly elastic PED indicate?
A change in price means that quantity falls to 0.
What does a perfectly inelastic PED indicate?
A change in price has no effect on output.
What is unitary elastic PED?
PED = 1: quantity demanded changes by exactly the same percentage as price.
What factors influence the price elasticity of demand?
- Availability of substitutes
- Time
- Necessity
- Percentage of total expenditure
- Addictiveness
What happens to tax incidence when demand is elastic?
The supplier covers the majority of the cost of the tax.
What happens to tax incidence when demand is inelastic?
The tax is mainly passed onto the consumer.
What is income elasticity of demand (YED)?
The responsiveness of demand to a change in income.
What is an inferior good?
A good for which YED < 0: a rise in income leads to a fall in demand.
What is a normal good?
A good for which YED > 0: a rise in income leads to a rise in demand.
What is a luxury good?
A type of normal good where YED > 1.
Fill in the blank: The more _______ the demand curve, the higher the tax revenue for the government.
inelastic
What is the effect of a subsidy on elastic demand?
Consumers see a small fall in price while producers gain a lot in extra revenue.
What is the effect of a subsidy on inelastic demand?
There is little change in output.
What indicates that a good is elastic in income elasticity of demand (YED)?
If the integer is bigger than one
Elastic goods typically include luxury items.
What indicates that a good is inelastic in income elasticity of demand (YED)?
If the integer is smaller than one
Inelastic goods tend to be necessities.
What is the formula for calculating the percentage change in price?
%change in price = (-1/5)x100 = -20%
This formula is used to analyze price elasticity.
What happens to total revenue if output increases by 10% and price decreases?
Total revenue falls by £6,000
Original total revenue was £50,000.
Define supply in economic terms.
The ability and willingness to provide a good or service at a particular price at a given moment in time.
What is the formula for cross elasticity of demand (XED)?
XED = %change in quantity demanded of A / %change in price of B.
What is the relationship between price changes of goods A and B in cross elasticity of demand?
A movement along the demand curve is caused by a change in the price of good B.
What does a shift from S1 to S2 in the supply curve represent?
A decrease in supply
Fewer goods are supplied at each price.
What is the impact of increased production costs on the supply curve?
The supply curve shifts to the left.
What is joint supply?
Where the production of one good automatically causes the production of another good.
What is competitive supply?
Where the production of one good prevents the supply of another.
How does weather impact agricultural supply?
Good weather increases supply, while bad weather decreases supply.
What is price elasticity of supply (PES)?
The responsiveness of supply to a change in the price of the good.
What does unitary elastic PES indicate?
PES = 1: quantity supplied changes by exactly the same percentage as price.
What is the equilibrium point in a market?
The point at which supply equals demand.
What occurs when the price is set below equilibrium?
Excess demand results in a shortage.
What happens when there is excess supply in the market?
Prices would have to fall to reach equilibrium.
What is the ‘invisible hand’ in economics?
The concept that the price mechanism sets prices through demand and supply interactions.
What is the rationing function of the price mechanism?
Prices ration goods based on consumer affordability and desire.
Define the signalling function of the price mechanism.
It signals where resources should be allocated based on price changes.
What is the incentive function of the price mechanism?
It incentivizes consumers to buy more and suppliers to produce more.
What is a real-world example of the rationing function?
High food prices during a supply shortage due to the coronavirus pandemic.
What factors can lead to a shift in the supply curve?
- Costs of production
- Price of other goods
- Weather
- Technology
- Goals of the supplier
- Government legislation
- Taxes and subsidies
- Producer cartels
What is the effect of a subsidy on supply?
A subsidy increases supply by affecting production costs.
Fill in the blank: If PES > 1, the supply is _______.
relatively elastic.
Fill in the blank: If PES < 1, the supply is _______.
relatively inelastic.
True or False: A perfectly elastic supply curve is represented by a vertical line.
False.
What does a perfectly inelastic supply curve indicate?
A change in price has no effect on output.
What is the incentive function in economics?
The incentive function encourages firms to allocate resources to the production of more houses due to high prices, as there is profit to be made.
What event in 1973 exemplified the rationing function of the market?
The OPEC oil embargo restricted the supply of oil, raising prices and deterring consumers who didn’t value oil highly.
Define consumer surplus.
Consumer surplus is the difference between the price consumers are willing to pay and the actual price they pay.
Define producer surplus.
Producer surplus is the difference between the price suppliers are willing to sell a product for and the actual price they receive.
What happens to consumer surplus when demand decreases?
Consumer surplus falls as both price and output decrease.
What is the effect of a decrease in supply on consumer and producer surplus?
A decrease in supply leads to a fall in both consumer and producer surplus.
What is an indirect tax?
An indirect tax is a tax on expenditure where the business pays the tax but the customer is charged instead.
What is an ad valorem tax?
An ad valorem tax is a tax that increases in proportion to the value of the good, such as VAT.
What is a specific tax?
A specific tax adds a fixed amount to the price of a good, regardless of its value.
How does an indirect tax affect supply?
An indirect tax causes the supply curve to shift left, increasing prices and decreasing output.
What is the incidence of tax?
The incidence of tax refers to the tax burden on the taxpayer.
If the demand curve is perfectly elastic, who pays the tax?
The supplier pays all the tax.
What is a subsidy?
A subsidy is a grant given by the government to encourage production or consumption of a good or service.
What are the three main reasons people may not behave rationally in consumer behavior?
- Influences of other people
- Influence of habitual behavior
- Consumer weakness at computation
What is ‘herding behavior’?
Herding behavior occurs when individuals copy the actions of a large group, often leading to market bubbles.
How do habits affect consumer decision-making?
Habits reduce decision-making time but can create barriers to considering alternatives.
What is an example of consumer weakness at computation?
Consumers may buy more expensive goods due to poor price comparison or lack of self-control.
Fill in the blank: The total satisfaction consumers receive from buying a good is the total area under the _______.
[demand curve]
True or False: Perfectly inelastic demand means consumer surplus is zero.
False
True or False: An increase in demand generally increases both consumer and producer surplus.
True
