Theme 1: How do Markets Work Flashcards

1
Q

When making economic decisions, consumers aim to maximise their …….. and firms aim to maximise ……..

A

Utility and Profits

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2
Q

Consumer Utility

A

total satisfaction received from consuming a good or service

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3
Q

Two ways to make a decision are?

A

Intuition and Rational

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4
Q

Limitations of rational decision making?

A

Takes longer despite possibly being fairer.

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5
Q

What are the assumptions of the bounded rationality model?

A

1- The first satisfactory alternative is selected. 2- The decision maker recognises they perceive the world as simple. 3- The decision maker recognises the need to be comfortable without considering every alternative. 4- Decisions could be made by heuristics.

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6
Q

Heuristics

A

Mental shortcuts or “rules of thumb” that often lead to a solution (but not always).

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7
Q

Factors that shift the demand curve are?

A

Population Income Related goods Advertising Tastes and Fashions Expectations Seasons

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8
Q

Derived demand

A

Demand for one good is linked to the demand for a related good.

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9
Q

Composite demand

A

When the good demanded has more than one use so assuming supply stays the same an increase in one good leads to a decrease in supply of another.

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10
Q

Joint demand

A

When goods are bought together.

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11
Q

diminishing marginal utility

A

Decreasing satisfaction or usefulness as additional units of a product are acquired

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12
Q

equation for price elasticity of demand

A

% change in quantity demanded / % change in price

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13
Q

unitary elastic

A

describes demand whose elasticity is exactly equal to 1

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14
Q

inelastic demand

A

A situation in which an increase or a decrease in price will not significantly affect demand for the product

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15
Q

elastic demand

A

A situation in which consumer demand is sensitive to changes in price

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16
Q

perfectly inelastic

A

quantity does not respond at all to changes in price (E=0)

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17
Q

perfectly elastic

A

demand which falls to zero when price changes

18
Q

Factors effecting PED

A

Necessity Substitutes Addictiveness Proportion of income Durability Peak and off peak

19
Q

If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on ……………

A

consumer

20
Q

If a firm sells a good with an elastic demand, they are likely to put most of the tax burden on ……………

A

themselves (the firm)

21
Q

Equation for income elasticity of demand

A

% change in quantity demanded / % change in income

22
Q

Luxury goods have a PED of YED ……

A

> 1 as income increases this causes an even bigger increase in demand/

23
Q

Normal goods have a PED of YED ……

A

> 0 as demand increases as income increases

24
Q

Inferior goods have a PED of YED ……

A

<0 as they see a fall in demand as income rises.

25
Q

Equation for cross elasticity of demand

A

% change in quantity demanded of good X / % change in price of good Y

26
Q

Complementary goods have a ………. XED

A

negative

27
Q

Substitute goods have a ………. XED

A

Positive

28
Q

Unrelated goods have a ………. XED

A

0

29
Q

Factors that cause a shift in the supply curve

A

Productivity Indirect taxes Number of firms Technology Subsidies Weather Costs of production

30
Q

equation for price elasticity of supply

A

% change in quantity supplied / % change in price

31
Q

Factors effecting PES

A

the number of producers, spare capacity, ease of switching, ease of storage, length of production period, time period of training, factor mobility, and how costs react.

32
Q

What are the 3 main functions the price mechanism uses to allocate resources

A

Rationing Incentive Signalling

33
Q

Consumer surplus

A

The difference between what a firm is willing to pay and the price they actually pay.

34
Q

Producer surplus

A

The difference between the price the producer is willing to charge and the price they actually charge.

35
Q

Economic welfare

A

The total benefit society receives from an economic transaction.

36
Q

How is economic welfare calculated

A

The area of producer surplus and consumer surplus added together.

37
Q

Two types of indirect taxes

A

specific tax and ad valorem tax

38
Q

Consumer subsidies affect demand and do/do not shift the ………. curve.

A

do not supply

39
Q

Producer subsidies lower the cost of production and do/do not shift the ………… curve.

A

do supply

40
Q

What are the 3 reasons why a consumer might not act rationally?

A

1- The influence of other peoples behaviour. 2- The importance of habitual behaviour. 3- Consumer weakness at computation.