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Economics (Micro) > 1.2: How Markets Work > Flashcards

1.2: How Markets Work Flashcards

1.2 Includes: -1.2.1 Rational Decision Making -1.2.2 Demand -1.2.3 Price, Income And Cross Elasticities Of Demand -1.2.4 Supply -1.2.5 Elasticity Of Supply -1.2.6 Price Determination -1.2.7 Price Mechanism -1.2.8 Consumer And Producer Surplus -1.2.9 Indirect Taxes And Subsidies -1.2.10 Alternative Views Of Consumer Behaviour (66 cards)

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1
Q

A graph with PED = ∞ is perfectly price __________

A

Elastic

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2
Q

An inelastic demand curve has a PED of ?

A

< 1

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3
Q

A graph with PED > 1 is price __________

A

Elastic

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4
Q

A perfectly inelastic curve has a PED of ?

A

0

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5
Q

A movement along the demand/supply curve is caused by what?

A

A change in price

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6
Q

State:

Factors that cause a shift in demand

A

Non-price factors like PASIFIC:
Population
Advertising
Substitutes
Income
Fashion & Trends
Interest Rates & Gov Policies
Compliments

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7
Q

State:

Factors that cause a shift in supply

A

Non-price factors like PINTS WEC:
Productivity
Indirect Taxes
Number of firms entering the market
Technology
Subsidies
Weather/Climate
E
Costs of Production

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8
Q

Explain:

Difference between an extension and contraction of demand

A

Contraction is a movement up the demand curve (to the left); extension is a movement down the demand curve (to the right). Caused by a change in price.

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9
Q

Explain:

Difference between an extension and contraction of supply

A

Contraction is a movement down the supply curve (to the left); extension is a movement up the supply curve (to the right). Caused by a change in price.

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10
Q

Explain:

What is Diminishing Marginal Utility?

A

A principle that states that as a person consumes more of a particular good or service, the additional utility (satisfaction) that they derive from each additional unit will eventually decline.

For example, if a person eats one slice of pizza, they will experience a certain level of satisfaction. If they eat a second slice, they may experience a slightly lower level of satisfaction, and if they eat a third slice, they may experience even less satisfaction

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11
Q

Define:

Price Elasticity of Demand

A

A measurement of the responsiveness of the quantity demanded of a good or service to a change in price.

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12
Q

Define:

Price Elasticity of Supply

A

A measurement of the responsiveness of the quantity supplied of a good or service to a change in price.

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13
Q

PED Calculation

A

%ΔQD / %ΔP

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14
Q

PES Calculation

A

%ΔQS / %ΔP

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15
Q

A graph with PED = 1 is ?

A

Unitary Price Elastic

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16
Q

What is income elasticity of demand?

A

A measure to show how responsive the demand for a product is to change in (real) income.

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17
Q

What is the formula for YED?

A

%ΔQD / %Δreal income

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18
Q

Which type of goods have a positive YED?

A

Normal Goods

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19
Q

Which types of goods have a negative YED?

A

Inferior goods

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20
Q

Goods where YED is >+1

A

Luxury Goods

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21
Q

Goods where YED is >0 and <+1

A

Necessities

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22
Q

What are counter-cyclical goods?

A

Products whose demand varies inversely to the macroeconomic cycle; demand rises in a downturn. Inferior goods are counter-cyclical.

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23
Q

Real Household Disposable Income (RHDI)

A

Income after taxes and benefits and adjusted for inflation

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24
Q

During times of recession, which type of goods are likely to experience increased demand?

A

Inferior goods

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25
Which producers may benefit from economic hard times?
Those that sell inferior goods. For example, Greggs and stores like Lidl and Aldi experienced growth during the 2008/2009 financial crisis.
26
What is cross price elasticity?
A measure of the responsiveness of demand for good x following a change in the price of related good y.
27
The formula for Xed
(%ΔQD for good x) / (%ΔP of good y)
28
Which types of products are in competitive demand?
Substitutes
29
Which type of products are in joint demand?
Compliments
30
Products with a positive Xed
Substitutes, with the stronger the Xed signalling the stronger the relationship between the two products is
31
Products with negative Xed
Compliments, with the lower the Xed showing how close they are
32
What are the 4 main functions of the price mechanism?
-Allocate -Rationing -Signalling -Incentives
33
What is Rationing?
Prices serve to ration scarce resources when market demand outstrips supply
34
What is signalling?
When prices adjust to demonstrate where resources are required, and where they aren’t.
35
What is meant by Allocation?
Allocating scarce resources among competing uses
36
What is meant by incentives?
E.g. when the price of a product rises, quantity supplied increases as businesses respond!
37
What is the rationing function?
When there is a shortage of a product, price will rise and deter some consumers from buying the product
38
What is the signalling function?
Changes in price provides information to both producers and consumers about changes in market conditions
39
What is consumer surplus?
A measure of the welfare that people gain from consuming goods and services. -The difference between the total amount consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually do pay (I.e. the market price)
40
What is consumer surplus indicated by on a demand curve?
It is indicated by the area under the demand curve and above the market price.
41
Consumer surplus when demand is inelastic
There is a greater consumer surplus because some buyers are willing to pay a very high price to continue consuming the product
42
Consumer surplus when demand is elastic
Elastic demand means a relatively low consumer surplus as consumers aren’t willing to pay a very high price to continue consuming the product
43
What is Producer Surplus?
The difference between 2 price levels -it is the difference between the price producers are willing and able to supply a good or service for and the price they actually receive.
44
What is producer surplus shown by on a supply curve?
Shown by the area above the supply curve and below the current market price.
45
What are indirect taxes?
A tax imposed by the government that increases the supply costs faced by producers
46
What is specific tax?
A tax set per unit. E.g. £5 tax per unit sold
47
What is ad valorem tax?
A percentage tax. E.g. 20% on the unit price. The main UK indirect tax is VAT, which generates ~£110bn annual tax
48
What are subsidies?
Any form of government support- financial or otherwise- offered to producers and (occasionally) consumers
49
Justifications for subsidies for producers
For a number of economic, social and political reasons -help poorer families -encourage output and investment in fledgling sectors -protect jobs in loss-making industries -Make some healthcare treatments more affordable
50
Choice architecture
Describes how the decisions we make are affected by the layout/sequencing/range of choices that are available
51
Often seen in financial markets as we often make decisions based in part on who is around us and the choices they make
Herd behaviour
52
Habitual behaviour
The idea that people prefer to carry on behaving as they have always done; repeat choices/purchases often becoming automatic because default choices don’t involve cognitive effort
53
Anchoring
Value is often set by anchors or imprints in our minds which we use as mental reference points
54
Priming
Our behaviour by cues that work subconsciously and prime us to behave/choose in certain ways
55
Framing
Framing a question or offering in a different way often generates a new response by changing the comparison set it is viewed in
56
Asymmetric framing
Includes involving an obvious inferior 3rd choice or a hyper-expensive 3rd option rather than a simple expensive/cheap option can guide consumers to more expensively-priced items
57
# Define: Externalities | Externalities
Spill-over effects from production and consumption for which no appropriate consumption is paid/received. ## Footnote They are a major cause of market failure and are likely in every market.
58
# Define: Private Costs | Externalities
Costs faced by the producer or consumer directly involved in a transaction.
59
# Define: Private Benefits | Externalities
Benefits for producers and/or consumers directly involved in an economic transaction.
60
Social costs and benefits | Externalities
Social Costs = Private Cost + External Cost Social Benefits = Private Benefit + External Benefit
61
Exists when Social Costs > Private Costs | Externalities
Negative Externalities
62
Exists when Social Benefits > Private Benefits | Externalities
Positive Externalities
63
# List: How do Economists value externalities? | Externalities
- Shadow Pricing - Compensation - Revealed Preference
64
# Define: Compensation | Externalities
The estimated cost of 'putting right' an externality
65
# Define: Revealed Preference | Externalities
How much people are willing to pay to avoid an externality
66
# Define: Negative Externalities | Externalities
Occur when production and/or consumption impose external costs on 3rd parties outside of the market for which no compensation is paid.

Economics (Micro) (4 decks)

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