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Economics > Micro- how markets work > Flashcards

Micro- how markets work Flashcards

1
Q

what do consumers aim to maximise?

A

their utility. So marginal utility and price are equal

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2
Q

what (and why) do firms aim to maximise?

A

profit:
- for survival
- to reinvest profits
- to offer manager and staff members better rewards

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3
Q

what influences the way in which governments act?

A

they should act in ways that best serve the population by trying to maximise overall welfare

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4
Q

what impacts on demand for a good?

A
  • willingness and ability to pay

- availability of substitutes and complements

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5
Q

what is a complement good?

A

an increase in the price of one good will cause a decrease in the quantity demanded of the other or vice versa

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6
Q

what is the income effect?

A

when prices fall, consumers can afford a greater quantity of good and services (assuming income is fixed). So demand for these goods and services increase

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7
Q

what is the substitution effect?

A

when the price of one good falls, consumers will buy more of the cheaper good or service and less of the more expensive one. So demand for cheaper good increases and expensive decreases

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8
Q

what does an increase in income mean for a normal good?

A

an increase in quantity demanded eg. cars

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9
Q

what does an increase in income mean for an inferior good?

A

a decrease in quantity demanded eg. rice

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10
Q

what does a rise in price lead to?

A

a contraction in demand

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11
Q

what does a fall in price lead to?

A

an extension in demand

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12
Q

what is diminishing marginal returns?

A

the more of something you add, the lower the impact of each additional unit. Consumers may be willing to pay a lower price for a higher volume because they gain less utility from each extra unit

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13
Q

what are substitute goods?

A

an increase in the price of one good will increase the quantity demanded of another

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14
Q

what is the equation for PED?

A

% change in quantity demanded/ % change in price

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15
Q

when is demand elastic?

A

when PED>1

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16
Q

when is demand inelastic?

A

when PED<1

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17
Q

what is unitary elasticity?

A

when PED=1

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18
Q

what is PED?

A

PED measure how much quantity demanded will respond to a change in price

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19
Q

why is PED always negative?

A

as an increase in price would result in a decrease in demand. When one increases the other decreases

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20
Q

what is the equation for income elasticity of demand?

A

% change in Qd/ % change in income

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21
Q

what income elasticity do normal goods have?

A

positive- as income rises, demand increases

22
Q

what income elasticity do inferior goods have?

A

negative- as income rises, demand decreases

23
Q

what is cross price elasticity of demand?

A

when a change in price of one good can change the quantity demanded of another

24
Q

what is the equation for XPED?

A

% change in quantity demanded of good A/ % change in price of good B

25
Q

what is the XPED for complement goods?

A

negative- a fall in the price of one good will lead to an increase in quantity demanded for another good

26
Q

what is the XPED for substitute goods?

A

positive- a fall in the price of one will lead to a fall in the quantity demanded of the other

27
Q

what is perfectly elastic demand and how is it shown?

A

horizontal line- PED=+/- infinity- any price increase will cause demand to drop to 0

28
Q

what is perfectly inelastic demand and how is it shown?

A

PED=0- vertical line- any price change won’t affect demand

29
Q

what affects the elasticity of demand?

A
  • type of good
  • availability of substitutes
  • impact of indirect taxes
  • percentage of income and time
  • impact of subsidies
30
Q

how do you calculate total revenue?

A

price per unit x quantity

31
Q

what are the causes of supply curve shifts?

A
  • changes in the price of inputs (factors of production)
  • changes in govt policy
  • a discovery of new technology (allowing firms to produce at a lower cost)
32
Q

how will the price of a good affect the supply?

A

a rise in price will almost always lead to an extension in supply as firms are incentivised to increase output

33
Q

how does technology and production affect supply?

A

a reduction in costs of production will increase supply and technology advances can increase efficiency lowering costs

34
Q

what is the equation for PES?

A

% change in quantity supplied/ % change in price

35
Q

why do firms aim for high PES?

A

so that they can rapidly react to changes in price and demand by:

  • improving technology
  • introduce flexible working patterns
  • have excess production capacity
36
Q

what are the factors that affect PES?

A
  • perishable goods- perish due to weather conditions
  • recessionary periods- high periods of unemployment firms try to expand production as their ability to attract labour is higher
  • agility- keeping high levels of stock so they can make quick responses
37
Q

why is supply often more inelastic in the short run?

A
  • capacity is fixed
  • one or more factors of production are fixed (usually capital)
  • often hard to increase production straight away
38
Q

why is supply often more elastic in the long run?

A
  • no factors of production are fixed
  • firms are able to increase capacity
  • more time to react to price and demand shifts
39
Q

what is the equilibrium price?

A

the only price where the amount consumers want to buy is equal to the amount producers want to sell

40
Q

what is disequilibrium?

A

when the market is not at a stable price and quantity

41
Q

what is the price mechanism?

A

the price mechanism shows how supply and demand interact. The price mechanism involves using the invisible hand to achieve an efficient allocation of resources

42
Q

what are the three functions of the price mechanism?

A
  • incentive function: rising prices encourage firms to expand their level of output because of higher profits
  • signalling function: if the price of a good changes, this signals to the consumer or producer that they should change their level of consumption or production
  • rationing function: resources are scarce. The price of a good rations that good. The limits supply to those who are willing and able to pay for it
43
Q

what are the advantages of the price mechanism?

A
  • it is allocatively efficient
  • there is no time cost because no-one needs to be paid to monitor it
  • the process is efficient because prices are as low as possible
  • consumers have control over what producers make
44
Q

what are the disadvantages of the price mechanism?

A
  • some goods objectively shouldn’t be produced through the price mechanism eg. an organ
  • there will be missing markets for some goods
  • there will be a huge disparity in wages for low and high skill workers, increasing inequality
  • it has no moral overlay or beliefs until the govt intervene
45
Q

what is consumer surplus?

A

the sum of all the extra benefit consumers in a market get from buying and consuming a good or service

46
Q

what is producer surplus?

A

the difference between the price producers are able to supply a good at and the price they do

47
Q

what is total surplus?

A

producer+consumer surplus. The total benefit to society of economic agents buying or selling a good or service

48
Q

what are indirect taxes?

A

indirect taxes are taxes on consumption. The more inelastic demand is, the more of an indirect tax is passed on to consumers

49
Q

what implications do indirect taxes have if demand is perfectly elastic?

A

the burden would fall completely on the producer

50
Q

what are subsidies?

A

grants issued by the government to correct a market failure by encouraging the consumption and production of a good with positive externalities

51
Q

what influences consumer behaviour?

A
  • social norms
  • anchoring (past experience of decisions)
  • availability bias
  • rules of thumb and habits

Economics (6 decks)

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