Theme 1 Flashcards
define price elasticity of demand
a measure of how reactive the demand for a good or service is to a change in price
define price elasticity of supply
a measure of how reactive supply of a good or service is to a change in price
what factors determine the PED of a product
price as a % of income
availability of substitutes
brand loyalty
necessity or luxury
what is surge pricing
when demand is greater than supply, prices increase to incentivise supply
what is income elasticity of demand
a measure of how reactive the quantity demanded for a good or service is to a change in income
what is a good with a YED greater than 0
normal good
what is a good with a YED less than 0
inferior good
what is a good with a YED between 0-1
a necessity
what is a good with a YED greater than 1
luxury
what are the 4 types of efficiency
productive
allocative
x efficiency
dynamic efficiency
define the term creative destruction, and which economist coined this phrase?
Joseph Schumpeter’s theory of creative destruction refers to the need for constant innovation and competition in a capitalist society to find more efficient processes to replace old ones
define the term market failure
inefficient distribution of goods and services in the free market
what are the main functions of the price mechanism
ration, incentivise, signal and allocate
what is the relationship between wage rate and the demand for labour
as the wage rate for labour increases the demand for labour decreases
what factors affect the elasticity of labour demand
labour as a % of TC
Ease and cost of factor substitution
PED of final output- can higher costs be passed on to consumers
what are factors that affect the supply of labour
net migration
retirement age
real wage rate
occupational mobility
barriers to entry
what are government policies that can be used to increase the supply of labour
apprenticeships/ internships
housing market intervention- to prevent occupational immobility/ geographic
cut benefits
lower income tax
which two factors may cause a consumer to make a satisficing decision
bounded rationality- consumers may not have time to make a rational decision, over-abundance of choice or imperfect info
bounded self control- many consumers may not maximise utility because they lack self control, e.g making gambles you know won’t pay off
what is bounded rationality
the idea that humans are limited in their ability to make completely rational decisions due to cognitive limitations and time constraints.
what is bounded self-control
the idea that individuals’ self-control is limited and can be depleted over time or in the face of competing demands.
what is anchoring
individuals rely too heavily on the first piece of information they receive when making a decision, even if it is irrelevant or misleading
what is availability bias?
individuals give greater importance to information that is more readily available in their memory, rather than considering all relevant information equally
what is loss aversion
people feel the pain of losses more strongly than the pleasure of gains, making them risk-averse and hesitant to take actions that might result in losses.
what is choice architecture
the way in which the options are presented to individuals in a given context, which can affect their decision-making, often without limiting their choices.
