1.2 How Markets Work Flashcards
(26 cards)
What shifts demand (D)?
PASIFIC:
Population
Advertising
Substitutes (competition)
Income
Fashion/ taste
Interest rates (cheaper to borrow when low)
Complement price (something similar with it)
What shifts supply (S)?
PINTSWC:
Productivity
Indirect tax
Number of firms
Technology
Subsidy
Weather (for agriculture etc.)
Costs of production - transport, raw materials, labour, regulation, utilities etc.
What are the 4 elasticities?
Price of demand (PED) Price elasticity of supply (PES) Income elasticity of demand (YED) Cross elasticity of demand (XED)
Price of demand (PED)
the responsiveness of demand compared to how prices change PED = %△Q demanded/%△price
Price elasticity of supply (PES)
the responsiveness of Q supplied compared to how prices change PES = %△Q supplied/%△price
Income elasticity of demand (YED)
the responsiveness of Q demanded compared to how income changes
YED = %△Q demanded/%△income
What would YED be for a luxury good vs a necessity?
Positive and ELASTIC for a luxury
Positive and INELASTIC for a necessity
Cross elasticity of demand (XED)
the responsiveness of Q demanded compared to how price of another good changes
XED = %△Q demanded of X/%△price in Y
What will XED be for substitutes?
Demand for substitutes will increase if price of product increases So XED is positive
What will XED be for complements?
Demand for complements will decrease if price of product increases So XED is negative
Normal goods
goods that increase in demand when income increases
YED is positive
Inferior goods
goods that decrease in demand when income rises
YED is negative
What affects PED?
SPLAT:
Substitution
Percentage of income
Luxury/ necessity
Addictive/ Habit forming
Time period
What affects YED?
Availability of substitutes for the producer
Time period - shorter time, harder to switch
short run
long run
How do taxes effect supply?
Supply shifts up to the left
the tax revenue is the box from the new equilibrium down to the old curve
Consumers pay the price difference, producers pay the rest
producers at bottom, consumers on top
How do subsidies affect supply?
Supply shifts down to the right
Total subsidy is from the new equilibrium up to the old curve
Consumers pay the price difference
consumers at bottom, producers at top
Rationing function
How prices allocate scarce resources when demand exceeds supply
As supply decreases, prices rise, so demand is ‘is rationed off’ meaning demand decreases
So rationing function is all about DEMAND decreasing
Incentive function
A change that create incentivises (motivates) a change in their behaviour
Incentives are typically linked to changes in price, rewards, or penalties that influence the behaviour of producers and consumers in the market.
Signalling function
Refers to how prices SIGNAL information about the state of supply and demand
Rising prices SIGNAL increased demand or decreased supply
Could lead to firms supplying more to settle for a decrease in supply, possibly leading to a lower price
What’s a consumer surplus?
The difference between what consumers are willing to pay for a good and what they actually pay.
(Area under the demand curve above market price)
What’s a producer surplus?
The difference between the price producers receive and the minimum they’re willing to accept to supply the good.
(Area above the supply curve below market price)
What’s a society surplus?
The sum of consumer surplus and producer surplus — represents the total net benefit to society from market transactions.
(Maximised in allocative efficiency where P = MC)
What’s deadweight welfare loss?
The lost total surplus (consumer + producer) that occurs when a market is not allocatively efficient, such as with monopoly, taxes, or price controls — it benefits no one.
Society surplus at allocatively efficient - society surplus elsewhere
What is rational behaviour?
Where individuals make decisions that increase or maximise their utility
- Utility = the satisfaction or benefit a consumer gains from consuming a good or service
E.gs.
A consumer compares phone contracts and chooses the one with the best value for money.
A shopper switches supermarkets to get lower prices on the same products.
A firm cuts costs by investing in more efficient machinery to increase profit.
A person saves money in a high-interest account instead of spending it on non-essential items.
A student chooses a university course with better long-term career prospects, even if it’s harder.
