1.2 - How markets work Flashcards

Question

Value of PES (perfectly and relatively elastic, and perfectly and relatively inelastic)

Answer 1

Elastic - greater than 1 Perfectly elastic - infinity Relatively elastic - greater than 1 Inelastic - below 1 Perfectly inelastic - 0 Relatively inelastic - between 0 and 1

Answer 2

When the demand meets the supply It can also be called the market clearing price

Answer 3

1. Rationing 2. Incentivising 3. Signalling

Answer 4

It allocates scarce resources among competing uses When demand exceeds supply, prices rise, discouraging some consumers from buying It ensures that goods are allocated to those consumers who are willing to pay the highest price E.g. natural disaster - those in most urgent need are willing to pay more - resources are effectively allocated to those who need it the most

Answer 5

It provides incentive for producers to allocate scarce resources effectively Higher prices = higher demand therefore motivating producers to produce more goods / services Lower prices = lower demand therefore encouraging producers to reallocate resources E.g. if the price of crude oil rises significantly, oil-producing countries have a greater incentive to increase production as they can earn higher revenue (leads to an increase in supply of the market)

Answer 6

Prices convey information about changing market conditions - allows consumers and producers to make informed decisions Higher prices may signal potential shortage -> consumers conserve consumption and producers to increase supply Lower prices may signal potential surplus -> consumers are prompted to buy more and producers to cut back on production e.g. the fluctuations of gasoline prices can signal changes in global oil markets - if prices rise, then consumers may resort to public transport and producers to invest more in exploration and production

Answer 7

Local - supply and demand is determined within a specific geographic area National - supply and demand is determined covers a country Global - involves international trade of other economies

Answer 8

Local factors: 1. Weather 2. Local preferences E.g. the price of fresh produce at a local farm market may vary from seasonal changes and local supply

Answer 9

National policies and regulation 1. Taxes 2. Trade policies E.g. the national housing market can be influence by government policies related to interest rates and mortgage regulation

Answer 10

1. Currency exchange rates 2. Global supply chains 3. Geopolitical events E.g. the price of oil in global market affects fuel prices around the world (impacting consumers and industries)

Answer 11

The difference between what a consumer wants to pay for a good / service and how much they actually pay for it

Answer 12

The difference between what a producer wants to sell a good / service and how much they actually sell it for

Answer 13

Consumer surplus increases as more people are willing to buy the good at a higher price Producer surplus increases as they are able to charge at a higher price

Answer 14

Specific indirect tax - a tax on production of every unit per output Ad valorem - a tax on production

Answer 15

A tax imposed by the government to increase the supply cost of producers

Answer 16

A grant by the government to boost production by reducing supply cost

Answer 17

1. Herd behaviour - consumers are influenced by the actions and behaviour of others (e.g. social norms, peer pressure - play significant role in decision making) - this is seen in fashion trends 2. Habitual behaviour - consumers rely on habits and routines in decision making - this leads to suboptimal choices if they don't re-evaluate their options - e.g. same brand of toothpaste, may not be the best 3. Weak at computation - consumers struggle at complex calculations / lack access to information needed to make perfectly rational decision - limited cognitive abilities / information leads to suboptimal choices - e.g. comparing the cost per unit of different sized products

1.2 - How markets work Flashcards

(43 cards)