Microeconomics (2.1 to 2.7) Flashcards
1
Q
What is demand?
A
Demand is the behaviour of consumers and refers to quantity of a product that consumers are able to buy at at fixed price over a given period of time.
2
Q
What is the relationship between demand and quantity
A
Demand is direclty proportional to quantity, as demand increases, quantity increases. Movement of demand curve occurs due to price changes.
3
Q
How is demand displayed?
A
Demand is displayed by noting data from a demand schedule on a graph with price on vertical axis and quantity on horizonal axis, this is a demand curve
4
Q
What are assumptions of law of demand
A
Disposable income: Lower quantity demand, lower prices
Substitution effect: Price of competitors is lower, thus consumers choose competitors products and demand quantity decreases
Diminishing marginal utility: As consumers consume more products, satisfaction starts to decrease thus demand starts to decrease
5
Q
What is microeconomics?
A
Microeconomics is concerned with the behaviour of consumers and producers. Together, they form a market where goods and services are bought and sold.
6
Q
What are non price determinants of demand?
A
Factors that influence the ability of consumers to produce a good/service
Income -> Taste/Preference -> Future price expectations -> Price of related goods -> Number of consumers ->
7
Q
What is income?
A
Changes in consumer income can affect demand for products depending on the type of good
8
Q
What is inferior goods?
A
Inferior goods are those goods and services for which demand tends to fall when income rises.
9
Q
What is normal goods?
A
Increase in demand as consumer income rises, such as regular food items, luxury products such as sports cars or designer brand products.
10
Q
What are changes in consumer tastes and preferences?
A
Caused by social and culture changes over time.
EX: Increasing sustainability, could increase sales of electric car and decrease in sales in petrol cars
11
Q
What are future price expectations?
A
If consumers expect price of a good to raise in future, price of goods at current time might be lower at a later date due to introduction of new products.
EX:
- Reduced price of phone after launch of new model
- Anticipated seasonal sales such as black Friday
- Tax on petrol due to government announcements
12
Q
What is supply?
A
Supply is behavior of firms and refers to quantities of goods and services willing and able to produce at various prices over a period of time
13
Q
What does higher price in supply graph mean?
A
Higher price means that produce profits increase and so existing firms face incentive to increase output while new firms are attracted to enter the market increasing competitiveness.
14
Q
What does lower price in supply graph mean?
A
Lower price means lower profitability so firms have less incentive to produce thus output decreases and competitiveness decreases.
15
Q
What is market supply?
A
Market supply shows total quantity of a good or service
16
Q
What is law of diminishing returns?
A
law of diminishing returns states that when additional variable factors of production employed to fixed factors, marginal returns will eventually decrease. In short run, one factor fixed, usually capital.
17
Q
What are examples of the diminishing returns?
A
Additional workers are employed at first in a firm:
- Better division of labour
- Machines fully utilized
- Improved efficiency and production
- Marginal return for each additional worker increased.
However:
- Resources stay the same
- Output from land stays the same
18
Q
What is increasing marginal costs?
A
Cost of producing additional unit of output. This increases output as diminishing marginal utility returns. Firms only willing to increase output when price increased to cover for higher marginal costs.
19
Q
What are non price determinants of supply
A
S: Subsidies and taxes
T: Technology
O: Other related price goods (competitive joint supply)
R: Resources costs (CELL)
E: Expectations of producers
S: Size of the market
20
Q
What is consumer surplus?
A
difference between the amount the consumer is willing to pay for a product and the price they have actually paid
21
Q
What is producer surplus?
A
difference between the amount that the producer is willing to sell a product for and the price they actually do
22
Q
Community surplus
A
The consumer surplus plus producer surplus
23
Q
Marginal cost
A
Cost of a firm of producing one additional good or service
24
Q
Marginal benefit
A
Additional utility a consumer enjoys from consuming additional unit of a good or service
25
What is dead weight loss?
Units of goods or services that either consumers are willing to buy or producers are willing to sell that are outside of the community surplus area on a supply demand graph.
26
What is the rational choice theory
states individuals use logical and sensible reasons to determine the right choice connected to an individual’s best self-interest. Many theories assume that economic agents make decisions that result in maximizing their satisfaction
27
What is utility maximisation?
assumes economic agents select choices that maximise their utility to the highest level
28
What is perfect information?
assumes information is easily accessible about all goods and services on the market. It assumes individuals have access to all the information available to make the best decision
29
What is behavioural economics?
Study of how psychological factors influence human decision making as they are not always rational as economic models assume.
30
What is rule of thumb?
This is when individuals make choices based on their default choice based on experience
31
What is anchoring?
Anchoring bias occurs when individuals rely too heavily on an initial piece of information when making subsequent judgments or decisions
32
What is framing?
refers to how the presentation or wording of information can significantly influence people's choices or judgments
33
What are availability bins?
when people rely on immediate examples or information that comes to mind easily when making judgments or decisions. Influenced by y personal experiences, vividness of the information, media exposure, and emotional impact. Eg: Plane crash
34
What is bounded rationality?
argues that people make decisions without gathering all the necessary information to make a rational decision within a given time period. Limited because of
- An individual's thinking capacity
- Availability of information
- Lack of time available to gather all of the information and make a judgement
35
What is bounded self control?
Inability of consumers to restrain emotions, desires or impulses. Can lead to irrational decisions
36
What is bounded selfishness
Assumes consumers driven by self interests and aims to maximise personal welfare. However, people display altruism and willing to lose degree of personal benefits to help others.
37
What is imperfect information?
This means people make decisions based on limited information meaning they may not make the best choice. Asymmetric information may also lead to decisions based on limited information
38
What is choice architecture
refers to the intentional design of how choices are presented so as to to influence decision making by aiming to simplify the decision making process
39
What is default choices?
Preset courses of actions that will take effect if consumers do not specify or pursue other options.
40
What is restricted choices?
Restricted choices are limited number of choices where consumers are forced to make more rational choices
41
What is mandated choices?
Mandated choices is when consumers, required by law, decide whether they wish to participate in particular action.
42
What is profit maximisation?
MC = MR
MR = Marginal Returns
MC = Marginal Costs
43
What is Corporate social responsibilty?
Business activities involving ethical and environmental factors which can benefit internal and external stakeholders
44
Market share as a sign of gorwth
Some firms have the business objective of sales maximization which further lowers prices and has the potential to increases market share
45
What is satisfices
Refers to achieving satisfactory results to aim to be successful in multiple areas instead of optimal results in 1 particular area
46
Growth
Growth of firm to expand business such as increase in brand image, revenue, market share etc. Firms will also maximize revenue in order to increase output & benefit from economies of scale
47
What is Elasticity?
Refers to responsiveness of consumers following a change in price of product due to another variable.
48
What is elasticity of demand?
Measures responsiveness in quantity demanded in market as a result of change in price.
Elastic = Lots of change
Inelastic = No change in response (Product is necessity)
49
What is PED (Percentage Change of Elasticity of Demand) formula?
Change in percentage in Quantity of Demanded / Change in price percentage in price.
- Value of PED is always negative.
50
How to interpret PED values
0 = Perfectly Inelastic
0-1 = Relatively Inelastic
1 = Unitary (Proportional (1$ increase = 1 Unit quantity decrease))
1- Infinity= Relatively Elastic
Infinity = Perfectly Elastic.
51
What are determinants of PED?
T- Time: Time to look for a substitute good or service
I - Income: Class of person affected (Working, Medium, Wealthy)
N- Necessity: Whether the product is needed in order for one to survive.
S- Substitutes: Availability of the substitutes, other competitors
52
Total revenue rule
n order to maximise revenue, firms should increase the price of products that are price inelastic in demand and decrease prices on products that are elastic in demand
53
What is price discrimination?
- Firms have different market segments with differing PED. Students have lower income compared to adults. Thus firms can higher prices for price inelastic segments and lower price for price elastic segments to try maximise revenue.
54
What is dynamic pricing?
Changing prices of products or service during different periods of time like seasonal times (Airlines during holiday periods)
55
What are taxation policies for price elasticity?
When demand is price elastic, increase in price leads to proportionally greater fall in quantity demanded. Government can tax products with price elastic demand to discourage its consumption without significant tax burden on consumers.
56
What are taxation policies for price inelasticity?
When demand inelastic, proportionally less fall in demand hence when government tax price inelastic products like cigs or alcohol, government can use as source of government revenue/finance.
57
What is income elasticity of demand?
Measures responsiveness to quantity demanded to change in real income of consumers
58
What is income elasticity of demand formula ?
YED = Change in percentage in quantity demanded / Change in percentage in income levels
59
Interpreting YED values
0-1 - Necessity good: quantity demanded increases when income increases, Income inelastic which means that it is relatively unresponsive to a change in income
>1 - Luxury good: quantity demanded increases when income increases, Income elastic which means that it is relatively responsive to a change in income
< 0 Inferior good: Quantity demanded decreases when income increases,
60
Importance of YED
crucial for firms as it helps them understand consumer behaviour, analyse markets, plan strategies, make informed investment decisions, and adapt to changes in the sectoral structure of the economy
61
What is engel curve?
Visual representation of relationship between income and quantity demanded
62
Pricing / output decisions on goods following recession?
Inferior:
Recession leads to increase in output
Necessities:
Recession leads to decrease in output and reduced price
63
YED in primary sector?
- Low YED
- Necessity for production and consumption
- Demand is stable
64
YED in secondary sector?
- Higher YED value
- Demand more sensitive to change in income
- Grows more rapidly than primary sector
65
Developed vs less developed?
less developed = Increase in primary sector jobs, decrease in tertiary
More developed = Decrease in primary sector | Increase in tertiary jobs
66
What is PES?
Measures responsiveness of producer percentage change in quantity supplied due to change in price
67
Formula for PES?
Change percentage in quantity supplied / Change in percentage of price
68
Determinants of PES?
Mobility of the factors of production: If producers can quickly switch their resources between products, then the PES will be more elastic.
The rate at which costs of production increase: If rate of the marginal cost increase is low, the quantity supplied will be more elastic.
Ability to store goods: If products can be easily stored then PES will be higher as producers can quickly increase supply
Spare capacity: if prices increase for a product and there is a capacity to produce more, then supply will be elastic.
Time period: In the short run, harder to respond to an increase in prices as it takes time to produce the product but in long run, can change any of their factors of production so as to produce more
69
What is price mechancism?
Interaction of demand and supply in free market
70
What are types of resource allocation?
1. Signalling: Provides info to producers / consumers on where resources are wanted and where they aren't
2. Incentive: When price rises, incentivises to reallocate resources from less to more profitable market
71
What is rationing?
- When resources scarce, price rises, those that can pay will receive
- If in surplus, price falls, more consumers able to afford
72
What is availability bias?
Availability bias considers how individual decision-making is affected by information that comes easily into our minds. This information is often based on our experience of recent events and how the outcomes of these recent events affect our decision-making.
73
How does market mechanism work?
The market mechanism may result in socially undesirable outcomes that do not achieve efficiency, environmental sustainability and/or equity
Governments have policy tools which can affect market outcomes
74
What are reasons for government intervention?
Correct market failure
Earn government revenue
Promote equity
Support firms
Support poorer households
75
What is government revenue separated by?
Direct tax (levies on income and wealth)
Indirect tax a variety of goods and services (levies imposed on spending)
goods and services tax (GST) / value added tax (VAT) to most goods & services.
Examples:
provide public goods and services
invest in infrastructure
improve education
provide healthcare for the community
76
What are sources of government revenue?
Sale of goods and services from state-owned enterprises
Privatization processes (short-term policy)
Sovereign wealth funds: state-owned investment funds, bonds of other governments, investment in property and gold reserves
Public sector borrowing: when other sources of revenue do not meet its spending needs
77
How do government subsidies help?
support jobs
growth
modernise industry
improve sustainability
78
How do governments control levels of production?
Discourage demerit good even though it will impact businesses and employees because they can have negative effects on society
Regulation
Taxation policies
79
How do governments control levels of consumption?
Discourage demerit goods -> indirect taxes, bans on the advertisement/good, age restrictions, support programs
80
What is market failure?
Market fail to allocate resources efficiently and community surplus is not maximised
81
What is promoting equity?
Improve the equity of the income distribution in the economy.
82
What are prices controls?
Price controls are a form of government intervention that sets a maximum or minimum price that producers can charge for certain goods or services.
83
What is price ceiling?
A price ceiling is the legal maximum price set by the government for a particular good or service to make goods (such as food and rent) more affordable, especially for low-income consumers.
84
Aims of price ceilings?
increase consumption of the good or service
make certain G&S affordable (low-income consumers / generally to protect consumers)
Usually in markets of necessity / merit goods
85
Consequences of price ceiling?
Shortages
Non-price rationing (waiting in line, distributing coupons, favouritism)
Underground (parallel) markets
Underallocation of resources to the good and allocative inefficiency → society is worse off
Negative welfare impacts / deadweight loss
86
effects of price ceiling for consumers?
create a condition of excess demand. In the longer term, suppliers will adjust to this situation and supply less (Qs), so this actually decreases the overall consumer surplus
- individual consumers who are able to purchase the good at the lower price, their consumer surplus increases
-consumers are unable to purchase the product any more, so the overall value of consumer surplus in the market decreases
87
effects of price ceiling for producers and workers?
worse off - Fall in output = some may be fired
88
effects of price ceiling for government?
MAY gain political popularity among the consumers who are better off due to price ceiling
Aim to supply goods and services that are in shortage
89
What is price floor?
A price floor is the legal minimum price set by the government for a particular good or service, to protect the income of producers and workers, or to encourage supply of goods and services.
90
aims of price floor?
increase supply of a certain good or service
protect producer (income) / workers (good standard of living)
Increase the income of producers of G&S that the government considers important (minimize large price fluctuations / threatening foreign competition)
91
effects or price floor to producers?
ains (higher selling price)
BUT less cost conscious → inefficiency & waste of resources OR producing more of protected product than other products that could produce more efficiently
92
effects or price floor to workers?
Increase in output = more could be employed
Increase minimum wage = better standard of living
93
effects of price floor to consumers
worse off (higher prices & consume less)
94
effects of price floor to government?
increase spending on solving the consequences
→ store, destroy or selling the surplus abroad (dumping
→ harm other domestic industries
→ angry reaction from foreign governments) OR increase demand by advertising or restricting supplies of imports through protectionist policies (thus increase demand for domestic products)
95
What is a quota?
a fixed limit on the amount of a good or service that can be produced. This policy will often run alongside a minimum price policy to prevent an excess of the good being produced
96
What is indirect tax?
Government levy on the sale of goods and services, rather than on incomes or wealth.
97
What is Excise tax?
type of indirect tax imposed on the expenditure of certain goods and services.
98
Why do governments impose indirect tax?
The provision of certain goods leads to market failure and allocative inefficiency. Indirect taxes can be used to correct market failures.
99
What is specific tax?
A per unit tax, or specific tax, is a tax that is defined as a fixed amount for each unit of a good or service sold, independent of the amount sold
100
What is ad valorem tax?
A fixed percentage amount is imposed on each unit of output.
The more goods/services consumed, the larger the tax bill
101
What is tax incidence?
Tax incidence is the distribution of tax burden between consumers and producers.
102
What is subsidy?
A subsidy is a form of financial aid given by the government, usually to producers in order to (i) reduce the costs of production, (ii) increase output, and (iii) reduce prices.
103
Impact of subsidies on consumers?
Pay lower prices for greater quantities.
Hence, there is an increase in consumer surplus.
104
Impact of subsidies on producers?
Receive a higher price per unit and sell a larger amount of output.
Total revenue increases.
Hence, there is also an increase in producer surplus.
105
Impact of subsidies on workers?
Increased output leads to increased demand for labour.
Employment and wages increase, ceteris paribus.
106
Impact of subsidies on government
Required to finance the subsidy expenditure.
Opportunity costs arise from government expenditure.
107
What is direct provision?
Direct provision occurs when the government directly supplies goods or services in the best interest of society.
108
What are public goods?
It is non-rivalrous; its consumption by one person does not reduce consumption by someone else. It is non-excludable; it is not possible to exclude someone from using the good.
109
What are command control regulation and legislation?
Command and control regulation and legislation refer to the laws governing certain activities or industries. This aims to enforce or prevent certain behaviour that is seemed socially desirable.
110
What are examples of command control regulation and legislation?
Laws requiring car manufacturers to install airbags and other safety measures
Laws requiring passengers to wear seat belts
Environmental protection laws that limit the quantities of pollutants
Laws banning smoking and drinking in public areas
Minimum age laws for the purchase of demerit goods
Laws prohibiting the advertising of demerit goods.
111
Private good
Private goods are goods which firms are able to provide to generate profits. They can generate profits as these goods are excludable and rivalrous
112
Government intervention in response to public goods
Do nothing: no provision is offered
Provide the good/service themselves
Contract out: accept bids from private companies who wish to provide the good/service, choose the lowest priced bid and pay the company to provide the good/service
113
Equilibrium
occurs when demand = supply. At this point, the price is called the equilibrium or market-clearing price
This is the price at which sellers are clearing (selling) their stock at an acceptable rate
114
Consumer rationality
The assumption that individuals use rational calculations to make choices which are within their own best interest, using all the information available to them
115
Advantages of choice architecture
- nudge individuals towards making choices that are in their best interest or align with desired outcomes
- simplify complex decisions by providing clear and understandable options
- improved outcomes such as encourage healthier eating habits
- provide guidance, reduce biases, and increase the likelihood of individuals making choices they would consider to be better
116
Disadvantages of choice architecture
- form of manipulation as it attempts to influence people's decisions without their explicit consent
- may not be aware that their choices are being influenced, or they may not fully understand the consequences of their decisions due to the way choices are presented
- susceptible to biases inherent in the design process and may be used by companies to increase profits
- Changes in the presentation of choices can have unforeseen effects and the outcomes may not align with the original goals
117
Nudge theory
practice of influencing choices that economic agents make, using small prompts to influence their behavior
118
Advantages of nudge theory
- Cost effective
- Preserves freedom of choice
- Improved public health
- Better decision making
- Environmental sustainability
119
Disadvantages of nudge theory
- Ethical concerns
- Lack of transparency
- Unintended consequences
- Variable success rates
120
Advantages of price ceilings
- Some consumers benefit as they purchase at lower prices.
- stabilise markets in the short-term during periods of intense disruption
121
Advantages of price flooring
producers benefit as they receive a higher price with governments often purchasing excess supply by storing or exporting it
When used in demerit markets, output falls
Producers usually lower their output in the market to match the QD at the minimum price and this helps to reduce the external costs
122
Disadvantages of price flooring
It costs the government to purchase the excess supply and an opportunity cost is involved
Producers may become over-dependent on the Government's help
Producers lower output which may result in an increase in unemployment in the industry
123
Minimum wage
Minimum prices are also used in the labor market to protect workers from wage exploitation. Legally imposed wage level that employers must pay their workers
124
Adv / dis of minimum wage
Adv:
- Guarantees a minimum income for the lowest paid workers
- increase consumption
- incentivise workers to be more productive
Dis:
- Raises the costs of production for firms
- may force them to lay off some workers and increase unemployment
