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Econ > T1.2 - Econ > Flashcards

T1.2 - Econ Flashcards

1
Q

State 3 forms of irrationality

A

Weakness of computation
Habitual behaviour
Herd behaviour

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2
Q

Explain ‘Weakness of computation’

A

Consumers/producers fail to properly understand the costs & benefits of choices presented to them

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3
Q

Explain ‘Habitual behaviour’

A

Consumers/ Producers continue to behave in the same way over time even though better alternatives become available

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4
Q

Explain how consumers (households) rationalise

A

Use their income to maximise the fulfilment of their wants/needs
Consumers utility (=happiness) maximised

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5
Q

Explain how producers (firms) rationalise

A

They see to profit maximise

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6
Q

Define demand

A

Demand is the willingness and ability of consumers to purchase a good at a given price

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7
Q

Travel by bus is an example of a good for which demand decreases as income increases. This is referred to as a…

A

Inferior good

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8
Q

One explanation of the shape of a downward sloping demand curve is the law of diminishing marginal utility. What does this law suggest?

A

As consumers consume additional quantities of a good, the satisfaction derived from consuming each additional unit diminishes

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9
Q

What is utility?

A

Utility is a measure of satisfaction from consumption

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10
Q

What is marginal utility?

A

Marginal utility refers to the additional satisfacation or utility gained from consuming one more unit of a good or service

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11
Q

What is the law of diminishing marginal utility?

A

The law of diminishing marginal utility states that as a person consumes more units of a particular good or service while keeping the consumption of other goods constant gained from each additional unit will decrease

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12
Q

Define disutility

A

Disutility refers to the negative feelings, discomfort, or displeasure associated with certain activities, goods or services

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13
Q

When is total utility maximised?

A

Total utility for a single product is maximised when a consumer consumes the quantity of that product where the marginal utility is zero

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14
Q

What does the rational choice theory assume?

A

Rational choice theory assumes that consumers always behave rationally in allocating their limited budget between different products to maximise total satisfaction from purchases

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15
Q

What is the condition for maximising total utility?

A

MUA/PA = MUB/PB

Marginal utility/ Price of given product

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16
Q
A
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17
Q

Causes of shifts of a demand curve:

A

Changing prices of substitutes in competitive markets
Effects of advertising and marketing changing people’s tastes
Changes in the size and age structure of a nation’s population

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18
Q

Define Price Elasticity of Demand (PED)

A

Price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price

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19
Q

State the formula for PED

A

PED = %change in Quantity demanded/ Change in PRICE OF x

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20
Q

Factors affecting price elasticity of demand

A

Number of close substitutes
Habitual demand
Strength of customer brand loyalty

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21
Q

Define Income elasticity of demand (YED) & formula

A

YED measures the responsiveness of demand following a change in real income

Formula: %change in demand / %change in income

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22
Q

Describe Normal goods

A

Normal goods have a positive income elasticity of demand so as consumers’ income rises, more is demanded at each price

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23
Q

Describe inferior goods

A

Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises

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24
Q

Examples of inferior goods

A

Urban bus transport
Cigarettes
Own-labels cereal
Economy foodstuff
Economy class travel

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25
Q

Describe normal luxury goods

A

Income elasticity of demand exceeds +1 so as incomes rise, the proportion of a consumer’s income spent on that product will go up

26
Q

Describe normal necessities

A

YED is positive but less than 1

27
Q

Describe normal necessities

A

XED measures responsiveness of the quantity demanded of one good to a change in the price of another related good

28
Q

Do substitutes have a positive or negative XED

A

Positive

29
Q

What is XED?

A

Cross price elasticity of demand

30
Q

What is PED?

A

Price elasticity of Demand

31
Q

What is YED & it’s formula?

A

Income elasticity of demand

%changeQd/% of income

32
Q

Define supply

A

Supply is defined as the quantity of a good or service that producers are willing and able to supply at a given price

33
Q

What is the law of supply?

A

The Law of Supply is that as the price of a product rises, so businesses expand supply

34
Q

What is the standard theory?

A

Standard theory assumes that rational firms choose an output and price that aims to maximise profits

35
Q

What is market supply?

A

Market supply is the total supply brought to the market by producers at each price

36
Q

Cause of shifts in market supply curve

A

Changes in the unit costs of production
Lower unit cost - mean a business can supply more at each price
Higher unit cost - cause an inward shift of supply perhaps due to a rise wage rates

37
Q
A
37
Q

Define joint supply

A

Joint supply is where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product

38
Q

Define Price Elasticity of Supply

A

PES measures the responsiveness of the quantity supplied of a good or service to changes in its price

39
Q

Which two factors influence the position of the demand curve

A

Change in consumer income
Consumer preferences/tastes

40
Q

State 6 factors that influence PED:

A

Number of close substitutes
Degree of necessity
Breadth of definition
Strength of customer brand loyalty
% of income
Habitual behaviour

41
Q

What are the types of goods according to YED

A

<———————————————————>
Inferior goods (anything below 0)
Normal goods (Anything above 0)
Necessties (0-1)
Luxury goods (+1)

42
Q

What are the types of goods according to XED?

A

<——————————————————->
<- Complemetary
-> Substitutes
Strong/close (-1 )
(-1 to 1) weak substitutes (inelastic)

43
Q

Define substitutes

A

Substitutes are the same good or service that fulfil the consumers wants or needs of a similar good

44
Q

Why is the demand curve downwards sloping?

A

Diminishing marginal utility due to as we consume more, we are less likely to pay less for each succesive unit

45
Q

Why is the supply curve upwards sloping

A

As price increases, supply increases

46
Q

What is the relationship between prices, revenue & PED?

A

When demand in price inelastic, a rise in price leads to a rise in total revenue

When demand in price elastic, a fall in price leads to a rise in total revenue

47
Q

Why is it important for a business to understand its YED?

A

Helps firms predict the effect of changes in the macroeconomic cycle on their sales

48
Q

Define consumer surplus

A

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they actually do pay

49
Q

What happens to consumer surplus when demand is inelastic?

A

When demand is inelastic, there is greater consumer surplus because there are some buyers willing to pay a very high price to continue consuming the product

50
Q

What is Producer surplus?

A

Producer surplus is the difference between the price producers are willing & able to supply a good or service for and the price they actually recieve

51
Q

What is price discrimination?

A

This is a way of turning consumer surplus into producer surplus

52
Q

What is an indirect tax?

A

An indirect tax is a tax imposed by the government that increases the supply costs of producers

53
Q

What are excise duties?

A

They are indirect taxes levied on three major categories of goods
Alcoholic drinks
Tobacco products & road fuels

54
Q

What is the formula for tax revenue?

A

Consumer burden + producer nurden = tax revenue

55
Q

What is ad valorem?

A

An ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is usually shown as a percentage

56
Q

What is progressive tax?

A

Progressive tax as income rises, so does the % paid in tax
Taxes the rich proportionally more than the poor

57
Q

What is regressive tax?

A

Regressive tax is a tax imposed by a government which takes a higher percentage of someone’s income from those low incomes
This means that those with lower incomes pay more in tax relative to their income

58
Q

What is the formula for the Real value

A

nominal value/ current index x new index

59
Q

What is a Government subsidy?

A

A subsidy is any form of government support - financial or otherwise - offered to producers and (occasionally) consumers

60
Q

What is price mechanism?

A

The price mechanism is a fundamental concept in economics that uses the forces of supply & demand to allocate resources and determine prices in a market economy

61
Q

What are main functions of price mechanism?

A

1) Allocate - changing market prices allocate scarce resources among competing uses
2) Rationing - higher market prices serve to ration scarce resources when market demand outstrips supply
3) Signaling - prices adjust up or down to demonstrate where resources are required, and where they are not
4) Incentives - when the price of a product rises quantity supplied increases as businesses respond

Econ (6 decks)

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