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ECON FR > 1.2 HOW MARKETS WORK > Flashcards

1.2 HOW MARKETS WORK Flashcards

1
Q

i. What is utility?

A

-The satisfaction or benefit derived from consuming a good or set of goods

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2
Q

ii. What do consumers seek to maximise?

A

-economic welfare (satisfaction from consuming goods)

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3
Q

iii. What do firms seek to maximise?

A

-rewards from ownerships (maximising profits)

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4
Q

iv. What is irrational behaviour?

A

-When people make choices and decisions that go against the assumption of rational utility

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5
Q

vi. What is bounded rationality?

A

rationality is limited when individuals make decisions, they therefore make decisions that are sitisfactory rather than optimal

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6
Q

vii. What do workers seek to maximise?

A

-Maximise welfare at work

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7
Q

viii. What do governments seek to maximise?

A

-The welfare of the citizens

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8
Q

ix. What is rational behaviour?

A

-the fact that economic agents are able to rank the order of different outcomes from an action in terms of their net benefits to them. They then act in a way to maximise their net benefits.

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9
Q

i. What is demand?

A

-The quantity of goods and services that will be bought at any given price over a given time period

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10
Q

ii. Explain 3 reasons the demand curve is downward sloping

A

-Income and demand have a directly proportional relationship

-When peoples income increases they purchase more goods and vice-versa

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11
Q

vii. What are the 7 conditions of demand?

A

-Population

-Advertising

-Substitutes price

-Income

-Fashion

-Interest Rates

-Components price

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12
Q

viii. What is the law of diminishing marginal utility?

A

-the value or utility that individual consumers gain from the last product consumed falls the greater number consumed.

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13
Q

ix. Why do governments need to know the various elasticities of demand for various products?

A

-It is important for formulating government policies, including taxes

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14
Q

i. What is supply?

A

-The quantity of goods that sellers are prepared to sell at any given price over a period of time

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15
Q

ii. Explain 3 reasons why supply curves are upward sloping

A

-Product price and quantity supplied are directly related

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16
Q

vii. What are the conditions of supply?

A

-Productivity

-Indirect Tax

-No of firms

-Technology

-Subsidy

-Weather

-Costs of production

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17
Q

i. What is equilibrium price?

A

The price at which supply and demand are equal

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18
Q

ii. What is equilibrium quantity?

A

-when there is no shortage or surplus of a product in the market

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19
Q

iv. What is a shortage?

A

-When demand for a product exceeds its supply

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20
Q

vii. What is a surplus?

A

-The amount of an asset or resource that exceeds the portion that is utilized

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21
Q

x. Explain the 3 functions of the price mechanism

A

-Rationing: to discourage demand, conserve resources, and spread out their use over time

-Signalling: price adjusts to demonstrate where resources are required

-Incentive: producers to supply more because they provide the possibility or more revenue and increased profits

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22
Q

i. What is consumer surplus?

A

-when the price that consumers pay for a product or service is less than the price they’re willing to pay

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23
Q

iii. What is producer surplus?

A

the difference between the price a producer gets and its marginal cost

24
Q

v. What is total economic welfare?

A

-the total extra benefit or happiness enjoyed by producers and consumers who feel they got a good price for the product being exchanged

25
Q

i. What is the definition of price elasticity of demand?

A

-The proportionate response of changes in quantity demanded to a proportionate change in price

26
Q

ii. Give the formula for PED

A

-PED = percentage change in quantity demanded / a percentage change in price

27
Q

iii. What is meant by ‘price elastic demand’?

A

-When a price change causes a substantial change in demand

28
Q

iv. What values would constitute ‘price elastic demand’?

A

-Between 1 and infinity

29
Q

xii. What is meant by ‘unit elastic demand’?

A

-the economic theory that assumes a change in product price causes an equal and proportional change in the quantity demanded

30
Q

xiii. What value would constitute ‘unit elastic demand’?

A

-1

31
Q

xv. Give 4 factors which influence the PED of a product

A

1)availability of substitutes,

2) if the good is a luxury or a necessity,

3) the proportion of income spent on the good,

4) how much time has elapsed since the time the price changed

32
Q

i. What is the definition of cross price elasticity of demand?

A

-Cross Price Elasticity of Demand (XED)measures the relationship between two goods when the price of one changes

33
Q

ii. Give the formula for XED

A

-XED = percentage change in quantity demanded of good A/ percentage change in price of good B

34
Q

iii. What is the definition of substitute goods?

A

-twogoodsaresubstitutes if the products could be used for the same purpose by the consumer

35
Q

iv. What values of XED would constitute a substitute?

A

-positive

36
Q

v. What is the definition of complementary goods?

A

-A complementary good isa product or service that provides value to another product or service

37
Q

vi. What values of XED would constitute complementary goods?

A

-negative

38
Q

vii. What would an XED of 0 indicate?

A

-Demand between the goods are perfectly price inelastic

39
Q

i. What is the definition of income elasticity of demand?

A

-a measure of the responsiveness of quantity demanded given a change in income

40
Q

ii. Give the formula for YED

A

-YED= percentage change in quantity demanded/percentage change in income

41
Q

iii. What is the definition of an inferior good?

A

-An inferior good isone whose demand drops when people’s incomes rise

42
Q

iv.What values of YED would constitute an inferior good?

A

-negative

43
Q

v. What is a normal good?

A

-A normal good isa good that experiences an increase in its demand due to a rise in consumers’ income

44
Q

vi. What values of YED would constitute a normal good?

A

-positive

45
Q

vii. What is the definition of a luxury good?

A

-a good for which demand increases more than what is proportional as income rises

46
Q

viii. What values of YED would constitute a luxury good?

A

0<1

47
Q

x. What is the term for a normal good which is not a luxury good?

A

-normal necessity

48
Q

i. Why do firms need to know the price elasticity of demand for their products?

A

-Price Elasticityhelps businesses understand how much they can stretch the price (hence the term elasticity) of any product before it impacts

-Helps influence stocks, employment and output

49
Q

i. What is the definition of price elasticity of supply?

A

-Price elasticity of supplymeasures the responsiveness to the supply of a good or service after a change in its market price

50
Q

ii. Give the formula for PES

A

-PES = Percentage change in quantity supplied/ percentage change in price

51
Q

iii. What is meant by ‘price elastic supply’?

A

-A good or service has an elastic supplywhen the percentage change in the quantity supplied exceeds the percentage change in price

52
Q

iv. What values would constitute ‘price elastic supply’?

A

1<

53
Q

vii. What values would constitute ‘perfectly elastic supply’?

A

-infinity

54
Q

ix. What is meant by ‘price inelastic supply’?

A

-a change in price will only have a smaller percentage change in quantity supplied

55
Q

x. What values would constitute ‘price inelastic supply’?

A

-0

56
Q

xii. Give 3 factors which influence the PES of a product

A

-Production lag

-Stocks

-Spare capacity

-Time

-Substitutability of factors of production

57
Q

Why is PES more elastic in the long run?

A

-in the long run all factors of production can be utilized to increase supply

ECON FR (15 decks)

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