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Economics - Theme 1 > Theme 1, How Markets Work CC2 > Flashcards

Theme 1, How Markets Work CC2 Flashcards

1
Q

price mechanism

A

mechanism through which price is determined in a free market sytem

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2
Q

invisible hand

A

Adam Smith

describe thway in which resources are allocated in a market economy to the advantage of everyone

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3
Q

market equilibrium

A

the equilibrium price and quantity is determined by the intersection of the demand and supply curve
QD = QS

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4
Q

excess supply

A

when price is set above the equilibrium price, there will be too much supply in relation to demand
S > D

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5
Q

excess demand

A

when price is set below the equilibrium market price leading to a situation where demand > supply

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6
Q

quantity demanded

A

the quantity of a good or service that consumers are willing and able to buy at a given price

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7
Q

quantity supplied

A

quantity of a good that suppliers are willing and able to sell at a given price

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8
Q

market definition

A

any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

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9
Q

demand curve

A

a graph showing how much of a good will be demanded by consumers at any given price

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10
Q

law of demand

A

states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus

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11
Q

extension of demand

A

price fall causes an increase in QD, ceteris paribus

movement down the curve

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12
Q

contraction of demand

A

price rise causes a fall in QD, ceteris paribus

movement up the demand curve

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13
Q

substitutes

A

two goods that can replace eachother
if the price of Good A rises, the QD of Good B will rise
eg Xbox and Playstation

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14
Q

complements

A

two goods that are usually bought together
if the price of Good A rises, QD of Good B will decrease
eg cereal and milk

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15
Q

changes that will shift the demand curve

A
  • changes in real income
  • changes in tastes and fashions
  • substitutes
  • complements
  • advertising and branding
  • changes in size/age distribution of popn.
  • expectations of future prices
  • derived demand
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16
Q

derived demand

A

needed to produce another good

eg if QD rises for cars, QD for steel to make the cars will also rise

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17
Q

relationship between price and quantity demanded

A

inverse, downward sloping

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18
Q

supply curve

A

graph showing the QS by a firm at any given price

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19
Q

total revenue

A

the income gained from selling a product

revenue = price x quantity sold

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20
Q

profit/loss

A

profit/loss = total revenue - total costs

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21
Q

production costs

A

costs which firms must pay to provide a good/service

they can be fixed or variable costs

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22
Q

extension of supply

A

a price rise will cause a movement along the supply curve to the right (rise in QS)

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23
Q

contraction of supply

A

a price fall will cause a movement along the supply curve to the left (fall QS)

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24
Q

relationship between price and quantity supplied

A

positive

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25
Q

factors causing the supply curve to shift

A
  • change in production costs
  • improvement in production methods
  • substitutes
  • goods in joint supply
  • weather or natural disasters
  • aims and objectives of producers
  • expectations of future prices
  • indirect taxes and subsidies
  • new firms enter/leave the market
  • increase in the factors of production eg labour
26
Q

shifting of the supply curve - substitutes

A

alternatives

if the price of Good A increases, supplies may switch from selling Good B to Good A to make more of a profit

27
Q

shifting of the supply curve - goods in joint supply

A

a good is in joint supply with another when it is supplied for two different purposes, ofte when one is a by-product of another
if price increases for beef, farmers will rear more cattle and will produce more leather

28
Q

composite demand

A

competitive supply
when a good is used for two or more purposes
if more of the good is used for one purpose, less of this good is available for the other purpose

29
Q

consumer surplus

A

difference between the amount a consumer is willing to pay and the amount they actually pay
area of under demand curve but above equilibrium price

30
Q

producer surplus

A

difference between the price producers are willing to supply a good for and the actual market price
area above supply curve and below the equilibrium price

31
Q

Price Elasticity of Demand

A

PED
responsiveness of quantity demanded to a change in price
% change in QD / % change in price

32
Q

price elastic demand

A

the % change in price will lead to a greater proportionate change in QD
PED > 1

33
Q

price inelastic demand

A

the % change in price will lead to a smaller proportionate change in QD
PED < 1 (between 0 and 1)

34
Q

unitary elastic demand

A

a % change in price will lead to the same % change in QD

PED = 1

35
Q

perfectly inelastic demand

A

the % change in price will lead to no change in QD

PED = 0

36
Q

perfectly elastic demand

A

QD is infinite at a particular price

PED = infinity

37
Q

determinants of price elasticity of demand

A
  • availability of substitutes
  • necessity or luxury?
  • proportion of income spent on a good
  • habit forming goods
  • brand loyalty
  • short or long run?
38
Q

relationship between PED and revenue:

  • if elastic and the price falls then ….
  • if elastic and the price rises then ….
  • if inelastic and the price falls then ….
  • if inelastic and the price rises then ….
A
  • revenue rises
  • revenue falls
  • revenue falls
  • revenue rises
39
Q

if the gradient of the demand curve is relatively steep, what is the PED?

if the gradient of the demand curve is relatively shallow, what is the PED?

A
  • inelastic

- elastic

40
Q

where will you find these points on a demand curve:

  • unit elastic, PED = 1
  • perfectly elastic, PED = infinity
  • perfectly inelastic, PED = 0
A
  • midpoint of the demand curve
  • where demand curve touches y-axis
  • where demand curve touches x-axis
41
Q

Price Elasticity of Supply

A

PES
measures the responsiveness of supply to a change in price
% change in supply / % change in price

42
Q

price elastic supply

A

percentage change in supply is greater than the percentage change in the price of the good
PES > 1

43
Q

price inelastic supply

A

percentage change in supply is less than the percentage change in the price of the good
PES < 1

44
Q

short run

A

a period in which at least one factor of production is fixed

45
Q

long run

A

a period of time in which all factors of production are variable

46
Q

supply is unitary elastic

A

% change in price will leade to the same % change in QS

PES = 1

47
Q

supply is perfectly inelastic

A

% change in price will have no impact on supply

PES = 0

48
Q

supply is perfectly elastic

A

change in price will lead to an infinite amount being supplied
PES = infinity

49
Q

factors that influence price elasticity of supply

A
  • level of spare capacity
  • state of economy
  • how easily production can be switched to a different product?
  • level of stock
  • perishability of goods
  • can new firms enter market easily?
  • short run and long run
  • nature of product (eg agriculture)
50
Q

Income Elasticity of Demand

A

YED
responsiveness of quantity demanded to a change in income
% change in demand / % change in income

51
Q

YED > 1

A

demand is income elastic

52
Q

YED < 1

A

demand is income inelastic

53
Q

normal good description

normal good YED

A

if income rises, demand rises
if income falls, demand falls

positive

54
Q

luxury good description

luxury good YED

A

as income rises, consumers spend proportionally more on the good

positive and greater than 1

55
Q

inferior good description

inferior good YED

A

if income rises, demand will fall
eg mcdonalds, bus journeys

negative

56
Q

Cross Elasticity of Demand

A

XED

measures the responsiveness of demand for one good following the change in the price of another good

57
Q

positive XED

A

substitutes

58
Q

negative XED

A

complements

59
Q

XED = 0

A

no relationship

60
Q

XED > 1

A

cross elastic

61
Q

XED < 1

A

cross inelastic

Economics - Theme 1 (8 decks)

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