1.2 Flashcards
How Markets Work (46 cards)
What are some alternative views of consumer behaviour?
- Consideration of the influence of other people’s behaviour, consumers do not always buy goods/services that maximise their utility as they are influenced by their friends/peers/famous peoples behaviours or brand labels.
- The importance of habitual behaviour, sometimes consumers do not buy the goods that maximise utility because they do what they have always done, because it is easier.
- Consumer weakness at computation, consumers do not buy goods/services that maximise utility as they find it difficult to, or choose not to do the calculations that would give them the best deal.
Marketers use tactics like this a lot to confuse consumers.
What are alternative views of consumer behaviour/reasons for consumers not acting rationally?
-Consideration of the influence of other peoples behaviour.
-Clothes
-Technology
Due to social media trends or friends and their interests.
-The importance of habitual behaviour (addiction).
-Grocery Stores
If a store is close to your house, you are more likely to go there for weekly shopping whether it is expensive or not as you know where everything is and its part of your routine.
-Consumer weakness at computation.
-Store vegetable
-Multi-pack foods
If a loose jacket potato is £1.50 per kilo and a pre-pack of 4 jacket potatoes costs 99p.
What is the definition of demand?
The quantity of a good or service that would be purchased at any particular price level - also known as effective demand as it shows how much consumers could actually afford.
Modelled by a demand curve.
What causes movements along the demand and supply curves?
A change in price
What are the reasons for the demand curve slop going downwards to the right?
Because different people are willing to pay different prices for goods and services depending on the value they place on a product. Due to the level of utility they derive or how rich they are - the rich tends to be less influenced by price.
What does the law of diminishing utility say?
That as we consume more our utility we derive reduces therefore price has to reduce to get people to buy more.
What is the definition of supply?
The volume of good and services that firms are willing to supply at each price level.
Why does the supply curve slope upwards to the right?
Because firms will want to supply more at higher prices for a number of reasons:
- Opportunity to make more profit when higher prices are charged
- At higher price, less efficient firms are able to supply the market and make a profit.
What is a market supply curve?
A sum on all the individual firms’ supply curves in an industry.
What happens when supply shifts?
The unit price changes at every single output point, either higher or lower.
What changes can cause a shift to happen?
-Productivity
-Tax
-Number of firms
-Technology
-Subsidises
-Weather
-Material costs
How is the price of a given product determined in the terms of economic theory?
At the point when demand and supply are equal which is known as equilibrium.
OR
Market clearing price, because at this point all that is supplied would be sold, hence the market has cleared.
What happens if price his set higher or lower than the market equilibrium price?
If price is set HIGHER than the market equilibrium price there will be excess supply whereas if price is set LOWER, there will be excessive demand.
If demand exceeds supply, what will happen to price and output?
Both price and output will fall.
What are the three functions of the price mechanisms?
-Rationing
-Signalling
-Incentive
What is the rationing function of price mechanism?
Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of this is to discourage demand and conserve resources. The greater the scarcity, the higher the price and the more the resource is conserved. e.g oil
What is the signalling function of the price mechanism?
Price changes send contrasting messages to consumers and producers. Rising prices give a signal to consumers to reduce demand or withdraw from a market completely, and they give you a signal to producers that they should increase production or enter the market.
Conversely, falling prices give a positive message to consumers, to consume more, but a negative message to producers, they produce less. e.g laptops and computers
What is the incentive function of the price mechanism?
An incentive is something that motivates a producer or consumer to follow a course of action or to change behaviour. Higher prices provide an incentive to producers to supply more, or to enter the market, because they provide the possibility or more revenue and increased profits. e.g the rise in the wage rate (price of labour), provides an incentive for the unemployed to join the labour market.
What is the price mechanism?
A term used to describe the means by which the many millions of decisions taken each day by consumers and businesses interact to determine the allocation of scarce resources between competing uses. This is the essence of economics.
How do you work out the percentage change?
Difference between the original and the new number divided by the original number that was mentioned in the question.
What is Price Elasticity Demand (PED)?
How responsive demand of a product or service is to a change in price.
What is the formula for PED?
Percentage change in quantity demanded divided by the percentage change in price.
How are the coefficients interpreted?
> 1 or >-1 = Elastic (Greater than)
<1 or <-1 = Inelastic (Less than)
If it is 1 or -1 it is unitary elastic.
PED
0 Perfectly Inelastic
0 to -1 Relatively Inelastic
-1 Unitary Elastic
-1 to infinity Relatively Elastic
infinity Perfectly Elastic
What is the difference between and Inelastic graph and an Elastic graph?
An Inelastic graph goes horizontally down and an Elastic graph goes vertically.
