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Economics Theme 1 > Unit 2: How Markets Work > Flashcards

Unit 2: How Markets Work Flashcards

1
Q

What is the main objective of consumers when making economic decisions?

A

Maximizing utility

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2
Q

What is the main objective of producers when making economic decisions?

A

Maximising profit

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3
Q

What is meant by effective demand?

A

** Demand backed up by an ability to pay

i.e not just desiring the product

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4
Q

What are the 5 main determinants of demand?

A

Price, Income, other goods, brand reputation, tastes and preferences

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5
Q

What does a point on a demand curve show?

A

How much of a good will be demanded at a price level

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6
Q

What would cause an extension/contraction in the demand curve?

A

Change in price

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7
Q

What would cause a shift in the demand curve?

A

Any change in conditions of demand

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8
Q

Give an example of something that would shift the demand curve for potatoes to the right

A

Potatoes are revealed to be more healthy/prevent disease

demand changes

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9
Q

Give an example of something that would shift the demand curve for potatoes to the left

A

Potatoes revealed to cause cancer

demand decreases

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10
Q

Define demand

A

The quantity of a good or service that consumers choose to buy at any possible price in a given period

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11
Q

Define market demand

A

Total demand in a market for a good, the sum of all individuals’ demand, at each given price.

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12
Q

Define diminishing marginal utility

A

When an individual gains less additional utility from consuming a product, the more of it is consumed

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13
Q

Define contractions in demand

A

A movement along a demand curve to the left, showing there is a fall in the quantity demanded caused by an increase in price.
A move

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14
Q

Define extensions in demand

A

A movement along a demand curve to the right, showing there is an increase in the quantity demanded caused by a decrease in price.

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15
Q

Define the law of demand

A

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

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16
Q

Define the demand curve

A

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

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17
Q

Define a shift in demand

A

where the whole demand curve shifts to the right or left

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18
Q

Define a normal good

A

A good where the quantity demanded increases in response to an increase in income

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19
Q

Define an inferior good and give an example

A

A good where the quantity demanded decreases in response to an increase in income, e.g Asda smartprice baked beans

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20
Q

Define substitutes

A

When the demand for one good is likely to rise if the price of the other good rises (directly proportional)

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21
Q

Define complements

A

if an increase in the price of one good causes the demand for the other good to fall (inverse)

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22
Q

Define derived demand and give an example

A

When the demand for one good or service comes from the demand for another good or service. e.g cars and steel

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23
Q

Define joint supply and give an example

A

A good which is the by-product of another good, and so are produced together e.g.beef and leather, wool and sheepskin

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24
Q

Define composite demand and give an example

A

One good which is demanded for 2 different purposes e.g milk, for yoghurt and butter

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25
Q

Define elasticity

A

A measure of the sensitivity of one variable to changes in another variable

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26
Q

Define relatively elastic in terms of PED range of values

A

1 < PED < infinity

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27
Q

Define relatively inelastic in terms of PED range of values

A

0 < PED < 1

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28
Q

Define unitary elasticity in terms of PED range of values

A

PED = 1

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29
Q

Define income elasticity of demand in words

A

A measure of the sensitivity of quantity demanded to a change in consumers incomes

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30
Q

Define luxury good in terms of income elasticity

A

One for which the income elasticity of demand is positive, and greater than 1, such that as income rises, consumers spend proportionally more on the good

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31
Q

Define a necessity good in terms of income elasticity

A

A good for which the income elasticity is positive, and less than 1, such that as income rises, consumers spend proportionally less on the good

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32
Q

Define cross-price elasticity of demand (XED)

A

A measure of the sensitivity of quantity demanded of a good or service to a change in the price of some other good or service

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33
Q

Define supply

A

The quantity of a good or service that firms choose to sell at any given period

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34
Q

Define a firm

A

An organisation that brings together factors of production in order to produce output

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35
Q

Define a competitive market

A

A market in which individual firms cannot influence the price of the good they are selling, because of competition from other firms

36
Q

Define a supply curve

A

A graph showing the quantity supplied at any given price

37
Q

Define a cartel

A

An agreement between firms in a market on price and output with the intention of maximising their joint profits

38
Q

Define price elasticity of supply (PES)

A

A measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service

39
Q

Define market equilibrium

A

A situation in a market where Qd = Qs

40
Q

Define comparative static analysis

A

Examines the effect on equilibrium of a change in the external conditions affecting a market

41
Q

Define consumer surplus

A

The value that consumers gain from consuming a good or service over and above the price paid

42
Q

Define marginal social benefit (MSB)

A

The additional benefit that society gains from consuming an extra unit of a good

43
Q

Define producer surplus

A

The difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service

44
Q

Define marginal cost

A

The cost of producing an additional unit of output

45
Q

Define indirect tax

A

A tax levied on expenditure on goods and services, where the liability can be passed onto someone else e.g VAT

46
Q

Define direct tax

A

a tax charged directly to an individual based on a component of income e.g income tax

47
Q

Define the incidence of a tax

A

The way in which the burden of paying a sales tax is divided between buyers and sellers

48
Q

Define a subsidy

A

A grant given by the government to producers to encourage production of a good or service.

49
Q

What do we assume is the main objective of governments?

A

Improve economic and social welfare of citizens

50
Q

Name 4 factors affecting demand

A

Income

taste/preferences/trends

Weather/seasons

Other goods (substitutes, complements)

51
Q

PED formula

A

PED = % change in Qd / % change in P

52
Q

At what values is PED perfectly inelastic and perfectly elastic?

A

perfectly inelastic: 0

perfectly elastic: minus infinity

53
Q

Formula for YED (income elasticity of demand)

A

YED = % change in Qd / % change in Y (income)

54
Q

XED formula

A

% change in Qd of good A / % change in P of good B

55
Q

If a good is price elastic and price falls, what will happen to revenue ceterus paribus?

A

Increase

56
Q

If a good is price inelastic and price falls, what will happen to revenue ceterus paribus?

A

Decrease

57
Q

Revenue formula, and how to find revenue on a demand curve

A

Qd x P

Revenue = area under demand curve

58
Q

Name 4 factors affecting elasticity for consumers

A

PANT

Proportion of income spent on product, Availability of close substitutes, Necessity of luxury, Time

59
Q

At what values is YED perfectly elastic/perfectly inelastic (and which goods represent these for elastic)?

A

Perfectly inelastic: zero

Perfectly elastic: infinity, luxury goods and minus infinity, inferior goods

60
Q

At what values of XED are subtitutes and complements

A

Substitutes: greater than 0 to infinity

Complements: less than 0 to negative infinity

61
Q

What causes a movement in the supply curve?

A

Change in price

62
Q

What causes a shift in the supply curve?

A

Change in conditions of supply

63
Q

What is the relationship between Qs and price and why?

A

direct - higher P, higher Qs as there is a greater incentive to produce

64
Q

Name 5 causes of a shift in the market supply curve

A

Change in production cost per unit

Advance in production technology

More producers

Better weather (e.g farming)

Taxes (in), subsidies (out), and gov regulations

65
Q

Define the short-run

A

At least one factor of production is fixed

66
Q

Define the long-run

A

All factors of production are variable

67
Q

What type of elasticity is supply if you cannot increase at least one factor of production in the short run and why?

A

Supply must be inelastic as it cannot quickly respond to a change in demand.

68
Q

PES formula

A

PES = % change in Qs / % change in P

69
Q

At what values is PES perfectly inelastic, unitary, and perfectly elastic?

A

Perfectly inelastic: 0

Unitary: 1

Perfectly elastic: infinity

70
Q

Name 4 factors affecting PES

A

TASA
Time, Availability of PRODUCER substitutes, Spare capacity, Availability of stocks (e.g can product be stored - if so then it is elastic as can respond to P change)

71
Q

Define excess supply, and what will happen to prices

A

Too much output and not enough supply

Prices go down until they reach equilibrium

72
Q

Define excess demand, and what will happen to prices

A

Quantity producers are willing to supply is less than the quantity consumers want to purchase

Prices rise until they reach equilibrium

73
Q

Name 3 functions of the price mechanism

A

Rationing (prices ration scarce resources when D > S)

Signalling (Change in P provides information about change in market conditions and change to act on the signal)

Incentives (change in P provides incentive to increase/decrease production)

74
Q

How is consumer surplus found on a demand curve?

A

Area below demand curve but above market price

75
Q

How is producer surplus found on a supply curve?

A

Area above supply curve but below market price

76
Q

Define producer surplus

A

Difference between price a producer would have accepted and the price the producer received

77
Q

How does a price increase affect consumer / producer surplus?

A

Consumer: surplus decreases

Producer: Surplus increase

78
Q

How do indirect taxes affect the supply curve?

A

Shifts left as they cause an increase in supply cost.

79
Q

Name the 2 types of indirect tax, define, and give an example for each

A

Ad valorem tax: based on value of product e.g VAT

Specific tax: set amount per unit of product e.g excise duty

80
Q

How do ad-valorem taxes affect the supply curve, and why?

A

Skewed shift inwards - as P increases, willingness to supply decreases as cost has increased per unit of output

81
Q

How are consumers and producers benefitted by subsidies?

A

Consumers: lower price

Producers: cost of supply is cheaper

82
Q

What effect does a subsidy have on the equilibrium price if there is inelastic demand?

A

Larger (than if it were elastic)

83
Q

What effect does a subsidy have on the equilibrium quantity if there is elastic demand?

A

Larger (than if it were inelastic)

84
Q

Name 4 ways of assessing the effectiveness of a subsidy

A

Meeting aims

Changing productivity

Cost of subsidy compared to benefit

Correcting market failure

85
Q

Name 2 ways consumers act irrationally

A

Influenced by behaviour of others

Emotional factors

86
Q

Name 3 ways consumers don’t act perfectly rationally

A

Abiding to social norms

Habits

Availability bias (attaching an emotional connection to an event)

87
Q

Name 3 reasons why consumers cannot act perfectly rationally

A

Lack of available information

Limits on time for decision making

Computational weakness

Economics Theme 1 (4 decks)

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