1-2 How markets work Flashcards
(42 cards)
1
Q
What is demand?
A
- Demand is the quantity of a good or service that a consumer is willing and able to pay for at a given time.
2
Q
What are the factors that shift the demand curve?
A
- PIRATES
- Population
- Income
- Related goods
- Advertising
- Tastes
- Expectations
- Seasons
3
Q
What are the three types of demand?
A
- Derived demand, this is when demand for one good is linked to the demand for a related good.
- Composite demand, this is when the good demanded has more than one use.
- Joint demand, goods that are bought together.
4
Q
What is the law of diminishing marginal utility?
A
- The law of diminishing marginal utility states that as an extra unit of the good is consumed, the marginal utility, i.e., the benefit derived from consuming the good, falls. Therefore, consumers are willing to pay less for the good.
5
Q
What is PED?
A
- The price elasticity of demand is the responsiveness of a change in demand to a change in price.
6
Q
What is the formula to calculate PED?
A
- PED = percentage change in quantity demanded / percentage change in price.
7
Q
What is a price elastic good?
A
- Very responsive to changes in price. PED > 1.
8
Q
What is a price inelastic good?
A
- Not very responsive to changes in price. PED < 1.
9
Q
What is a unitary elastic good?
A
- Has a change in demand that is equal to a change in price. PED 1.
10
Q
What is a perfectly inelastic good?
A
- Demand does not change when price changes. PED 0.
11
Q
What is a perfectly elastic good?
A
- Demand falls to zero when price changes. PED Infinity.
12
Q
What are the factors that influence PED?
A
- Necessity, a necessary good will be relatively price inelastic.
- Substitutes, if a good has lots of substitutes it will be relatively price elastic.
- Addictiveness, if a good is addictive it will be relatively price inelastic.
- Proportion of income spent on a good, if low then relatively price inelastic.
- Durability of good, if durable consumers will wait to buy another one.
- Peak and off-peak demand, during peak, prices will be more price inelastic.
13
Q
What effect does PED have on tax revenue?
A
- If a good is relatively price inelastic, firms will put the indirect tax onto the consumer.
14
Q
What effect does PED have on subsidies?
A
- If a good is relatively price elastic, then firms will likely pass on subsidy to consumers in the form of lower prices in order to increase demand.
15
Q
What effect does PED have on total revenue?
A
- If a good is price inelastic, then firms can raise prices to increase total revenue.
16
Q
What is YED?
A
- Income elasticity of demand is the responsiveness of a change in demand to a change in income.
17
Q
What is the formula for YED?
A
- YED = percentage change in quantity demanded / percentage change in income.
18
Q
What are inferior goods?
A
- Goods that see a fall in demand as income increases. YED < 0.
19
Q
What are normal goods?
A
- Demand increases as income increases. YED > 0.
20
Q
What are luxury goods?
A
- Increase in income causes a large increase in demand. YED > 1.
21
Q
What is XED?
A
- Cross elasticity of demand is the responsiveness of a change in demand of one good, X, to a change in price of another good, Y.
22
Q
What is the formula for XED?
A
- XED = percentage change in quantity demanded of good X/ percentage change in price of good Y.
23
Q
What are complements?
A
- Complementary goods have a negative XED. If one good becomes more expensive, the quantity demanded for both goods will fall. Close and weak.
24
Q
What are substitutes?
A
- Substitutes can replace another good, so the XED is positive, and the demand curve is upward sloping. Close and weak.
25
What is supply?
* Supply is the quantity of a good or service that a producer is able and willing to supply at a given price during a given period of time.
26
What are the factors that shift supply?
* PINTSWC
* Productivity
* Indirect Taxes
* Number of Firms
* Technology
* Subsidies
* Weather
* Costs of production
27
What is joint supply?
* This is when increasing the supply of one good will increase or decrease the supply of another good.
28
What is PES?
* The price elasticity of supply is the responsiveness of a change in supply to a change in price.
29
What is the formula to calculate PES?
* PES = percentage change in quantity supplied / percentage change in price.
30
What are the different forms of PES?
* Supply elastic, PES > 1.
* Supply inelastic, PES < 1.
* Perfectly elastic supply, PES 1.
* Perfectly inelastic supply, PES Infinity.
31
What are the factors that influence PES?
* Time scale
* Spare capacity
* Levels of stocks
* How substitutable factors are
* Barriers of entry to the market
32
What are the functions that the price mechanism uses to allocate resources?
* Rationing, with scarce resources, price increases when there is an excess of demand.
* Incentive, higher prices would encourage firms to enter the market.
* Signalling, price acts as a signal to consumers and firms entering the market to show where resources are needed.
33
What is consumer surplus?
* This is the difference between the price the consumer is willing and able to pay and the price they actually pay.
34
What is producer surplus?
* This is the difference between the price the producer is willing to charge and they price they actually charge.
35
What are indirect taxes?
* Indirect taxes are imposed by the government and they increase production costs for producers.
36
What are the two types of indirect taxes?
* Ad valorem, percentages such as VAT.
* Specific, such as duties.
37
What is a subsidy?
* A payment from the government to a producer to lower their costs of production and encourage them to produce more.
38
What are the advantages of subsidies?
* Increase output and lower prices for consumers
* Increase in employment
* Reduce inequality in society
* Can help control inflation
* Could boost demand during a recession
* Encourage the consumption of merit goods
* Increase LRAS
39
What are the disadvantages of subsidies?
* Government failure
* Government revenue could be better spent elsewhere
* Usually, taxpayer pays for the subsidy
* If demand is elastic, the subsidy will have a large effect on equilibrium price.
40
What is a consumer subsidy?
* Encourages consumers to purchase more of a particular good or service.
41
What is a producer subsidy?
* Lowers the costs of production.
42
What are the reasons for consumers acting irrationally?
* The influence of other people’s behaviour
* The importance of habitual behaviour
* Consumer weakness at computation
