Microeconomics Flashcards
Define demand
The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period, ceteris paribus.
state the law of demand
The principle that as the price of a product decreases, the quantity demanded of it will increase, ceteris paribus.
what are the assumptions underlying the law of demand?
- Human nature and behaviour
- Income effect
- substitution effect
- law of diminishing marginal utility
what causes movements along the demand curve?
changes in price
what are the non-price determinants of demand?
-changes in income
-changes in the price of related goods
-tastes and preferences, future expectations, number of consumers, seasonal changes
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Define supply
Supply is defined as the quantity of a good or service that producers are willing and able to offer at various prices during a specific time period, ceteris paribus
state the law of supply
the price of a product increases, the quantity supplied will usually increase, ceteris paribus.
what are the assumptions underlying the law of supply? [HL]
- the law of diminishing marginal returns
- increasing marginal cost of production
what causes movements along the supply curve?
changes in price
what are the non-price determinants of supply?
- changes in costs of production
- techonoogical change
- future expectations
- number of firms in the market
- changes in prices of related goods
- government intervention
what is market equilibrium?
The point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied.
what is disequilibrium?
A state where quantity demanded does not exactly equal quantity supplied, due to changes in the external environment (non-price determinants of demand and supply).
what is surplus?
When the quantity demanded of a good is less than the quantity supplied; occurs when the price in the market is above the equilibrium price. Also known as excess supply.
what is shortage?
When the quantity demanded of a good is more than the quantity supplied; occurs when the price in the market is below the equilibrium price. Also known as excess demand.
what is the price mechanism?
The way in which price changes affect quantity demanded and quantity supplied, thus determining resource allocation in a market.
Define allocative efficiency
Producing the optimal combination of goods from a society’s point of view; achieved when the economy is allocating resources so that no one can be better off without making somebody else worse off.
What is Consumer surplus?
The difference between the price that consumers pay and the price that they are willing to pay.
What is producers surplus?
Difference between the price producers are willing and able to sell it and the price earned from selling the good at the market price.
What is the social/community surplus?
The sum of the consumer surplus and producer surplus; the total benefit gained by society when the market is at equilibrium.
Define rational behaviour
In economic theory, behaviour of a consumer or producer that seeks to maximise utility or profit, respectively; behaviour that exhibits stable preferences over time.
Define bounded rationality
the idea that human rationality is limited in predictable ways.
Define imperfect information
A situation in which the parties to a transaction have different or limited information.
when consumers will maximise their total utility?
when the marginal utility is zero
Define bounded self-control
The idea that human beings have some self-control, but that it is limited.
Define bounded selfishness
The idea that human beings, while somewhat selfish, also act as conditional cooperators.
Define choice architecture
The way choices are structured for consumers. there are three types of choice: deafult choice, mandated choice and restricted choice
Define Default choice
A situation where an option is automatically set for consumers, but that they can change it if they wish.
Define restricted choice
A situation where consumer choices are limited.
Define mandated choice
A situation where an organisation forces a consumer to make a choice at a defined point in time.
Define nudges
Any arrangement of the choice architecture that alters people’s choices without limiting choices or significantly changing incentives.
Define Price elasticity of demand (PED)
PED A measure of how much quantity demanded of a good or service changes in response to a price change of the same good or service.
PED=(% change in the quantity demanded of good X) / (% change in the price of good X)
Range of values of price elasticity of demand (PED)
PED>1 Price elastic demand
0
What are the determinants of price elasticity of demand (PED)
- number and closeness of substitutes
- degree of necessity and how widely a prodcut is defined
- the time period considered
- The proportion of income spent on the good
Hoe does PED vary along the demand curve? [HL]
the higher part is elastic while the lower is inelastic
How is the demand for the commodities or primary goods (goods that come directly from land)?
Inelastic
Define Income elasticity of Demand (YED)
A measure of how much quantity demanded of a good or service changes in response to an income change.
How, by looking at the YED, we can understand the type of good produced in the market?
YED>0 Normal good
YED<0 Inferior good
How can we classify the demand by looking at the YED?
|YED| > 1 Income elastic demand
-1>YED<1 Income inelastic demand
Define the price elasticity of supply (PES)
A measure of how much the quantity supplied of a good changes when there is a change in its own price.
Range of values of PES
PES>1 price elastic supply
PES<1 Price inelastic supply
PES=0 perfectly inelastic supply
PES=∞ Perfeclty elastic supply
What are the determinants of PES?
- Time period considered
- Mobility and cost of factors of production
- Unusued capacity
- Ability to store stock
How is the supply for the primary commodities?
inelastic
Why do governments intervene?
- earning government revenue
- supporting firms
- supporting households on low income
- influencing the level of production
- influencing the level of consumption
- correcting market failure
- promoting equity
Define Price ceilings
Price ceiling set by the government that are set below the equilibrium price.
What are the possible consequences of imposing a price ceiling?
- it produces shortages
- it generates a rationing problem
- it promotes the creation of parallel markets
- it eliminates allocative efficiency and geenrates welafre loss
What are the consequences of imposing price ceiling on the stakeholders?
consumers: some worse off and some better off
producers: worse off
workers: worse off
Government : mught be better off if gains popularity
Define floors
Price floors are minimum prices set by the government that are set above the equilibrium price.
what are the possible consequences of imposing price floor?
- it produces surpluses
- it promotes the creation of black markets
- the government needs to dispose the surplus
- it might create firm inefficiency
- it eliminates allocative efficiency and generates welafre loss
What are the consequences of imposing price floors on the stakeholders?
consumers: worse off
producers: if the governemtn purchases the surplus better off, if not worse off
workers: better off
government: opportunity cost if purchses the surplus
Define indirect taxes
Taxes paid indirectly by consumers when they purchase a good, as indirect taxes are included in the price of the good.
what are the effects on the stakeholders?
consumers: worse off
producers: worse off
government: better off
employment: worse off
Define subsidies
Subsidies are per-unit payments that are used to lower production costs and increase the output of the market.
what are the effects on the stakeholders?
consumers: better off
producers: better off
government: worse off
employment: better off
Define regulation
Regulation is when governments monitor firms and industries to confirm that they are abiding by relevant legislation.
Define legislation
Laws enacted by governments to limit, prohibit, or require certain behaviours.
Define consumer nudges [HL]
Consumer nudges use gentle reinforcement and suggestion to influence market participants towards the desired behaviour.
Define market failure
it occurs when the market fails to allocate resources efficiently and MSB≠MSC
what is meant with the term merit good?
Goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market.
what is meant with the term demerit good?
Goods that have negative effects when consumed and cause negative externalities of consumption.
Define negative externality of production
When the production of a good or service generates a negative effect on a third party or society, which has not been factored into the costs of producing the good.
Define positive externality of production
A positive externality of production is when the production of a good or service generates a positive effect on a third party or society, which has not been factored into the costs of producing the good.
Define negative externality of consumption
Negative externalities of consumption occur when an individual’s consumption of a good generates a negative effect on third parties who were not factored into the decision to consume that good
Define positivie externality of consumption
A positive externality of consumption is when the consumption of a good or service generates a positive effect on a third party or society, which was factored into the costs.
Define common pool resources
Common pool resources are rivalrous but non-excludable; for example, fish in the sea.
what is meant with rivalrous good?
The condition that occurs when someone consuming a good or service prevents someone else from consuming the good or service at the same time.
what is meant with non-excludable good?
The condition that occurs when someone cannot be prevented from consuming a good or service.
Define public goods
Public goods are goods that are both non-rivalrous and non-excludable; for example, street lights
Define club goods
Club goods are excludable but non-rivalrous. An example is a movie theatre or toll highway.
Define asymmetric information
When one party in a transaction has more information than the other party
Define moral hazard
A situation in which one participant takes on more risk because they know they will not pay the consequences of that risk. There is asymmetric information after the transaction has taken place.
