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Economics 2.0 > 1.2 How Markets Work > Flashcards

1.2 How Markets Work Flashcards

(60 cards)

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1
Q

What is demand in economic terms?

A

The quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time

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2
Q

What are the factors that can shift the demand curve, remembered by the mnemonic PASIFIC?

A

P - Population
A - Advertising
S - (the price of) Substitutes
I - Income
F - Fashion and Trends
I - Interest Rates
C - (the price of) Compliments

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3
Q

What is derived demand?

A

Demand for one good linked to the demand for a related good

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4
Q

What is composite demand?

A

Demand for a good that has more than one use

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5
Q

What does the law of diminishing marginal utility state?

A

As an extra unit of a good is consumed, the marginal utility falls

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6
Q

What is the price elasticity of demand (PED)?

A

The responsiveness of a change in demand to a change in price

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7
Q

What is the formula for price elasticity of demand?

A

PED = % Change in Quantity Demanded / % Change in Price

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8
Q

What characterizes a price-elastic good?

A

PED |PED| > 1

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9
Q

What characterizes a price inelastic good?

A

PED |PED| < 1

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10
Q

What characterizes a unitary elastic good?

A

PED = 1

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11
Q

What is a perfectly inelastic good?

A

PED = 0

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12
Q

What is a perfectly elastic good?

A

PED = infinity

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13
Q

What factors influence PED, remembered by the mnemonic SPLAT?

A

S - Substitutes
P - Proportion of Income
L - Luxury/Necessity
A - Addictiveness
T - Time period

Footnote ##
* More substitutes increase demand elasticity.
* A higher income percentage spent on a good leads to more elastic demand.
* Necessities have inelastic demand; luxuries are usually elastic.
* Addictive goods also show inelastic demand.
* Demand is typically more elastic in the long run as people can adjust their behaviour and find alternatives.

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14
Q

What is income elasticity of demand?

A

The responsiveness of a change in demand to a change in income

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15
Q

What are inferior goods?

A

Goods that see a fall in demand as income increases

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16
Q

What are normal goods?

A

Goods for which demand increases as income increases

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17
Q

What are luxury goods?

A

Goods for which demand increases more than proportionately as income increases

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18
Q

What is cross elasticity of demand?

A

The responsiveness of a change in demand of one good to a change in price of another good

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19
Q

What are complementary goods?

A

Goods that have a negative cross elasticity of demand (XED)

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20
Q

What indicates a positive cross elasticity of demand (XED)?

A

Substitutes.

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21
Q

What is the XED for unrelated goods?

A

Zero.

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22
Q

What is supply?

A

The quantity of a good or service that a producer is able and willing to supply at a given price during a given period of time.

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23
Q

Why are supply curves upward-sloping? (3)

A
  • Higher prices increase profitability for firms.
  • High prices encourage new firms to enter the market.
  • Larger outputs increase costs, necessitating higher prices.
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24
Q

What are the factors that can shift the supply curve, remembered by the mnemonic PINTSWC?

A

P - Productivity
I - Indirect taxes
N - Number of firms
T - Technology
S - Subsidies
W - Weather
C - Costs of production

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25
What is price elasticity of supply (PES)?
The responsiveness of a change in supply to a change in price.
26
What value indicates elastic supply?
>1.
27
What value indicates inelastic supply?
<1.
28
What is perfectly inelastic supply?
PES = 0.
29
What is perfectly elastic supply?
PES = infinity.
30
What factors influence PES, remembered by the mnemonic PSSST?
* Production Lag * Spare capcity * (level of) stocks. * Substitutability of FoPs * Time Footnote ## * Long production time = more inelastic * Running at 50% means elastic (can generate more rapidly) * Large inventory = elastic supply (short-term) * Easily switch inputs = elastic * Longer time period = more elastic supply
31
What is equilibrium price?
The price at which supply meets demand.
32
What happens at excess demand?
Price is below equilibrium, leading to a shortage.
33
What happens at excess supply?
Price is above equilibrium, leading to a surplus.
34
What are the functions of the price mechanism? (3)
* Rationing * Incentive * Signalling
35
What is the Rationing Function of the price mechanism?
The Rationing Function allocates scarce resources to those willing and able to pay. Higher prices = fewer people can afford = automatic rationing Footnote ## Example: When concert tickets are expensive, only those willing to pay high prices get them
36
What is the Incentive Function of the price mechanism?
The Incentive Function motivates producers and consumers to change their behaviour. Producers: Higher prices → incentive to increase production Consumers: Higher prices → incentive to reduce consumption Footnote ## Example: High smartphone prices incentivize tech companies to produce more models
37
What is the signalling function of the price mechanism?
The Signalling Function communicates information about market conditions to producers and consumers Signals help allocate resources toward their most valued use Footnote ## Example: High housing prices signal developers to build more homes
38
What is consumer surplus?
The difference between the price the consumer is willing to pay and the price they actually pay.
39
What is producer surplus?
The difference between the price the producer is willing to charge and the price they actually charge.
40
What is economic welfare?
The total benefit society receives from an economic transaction.
41
What are the types of indirect taxes?
* Ad valorem taxes. * Specific taxes.
42
What is a subsidy?
A payment from the government to a producer to lower their costs of production.
43
What is the effect of subsidies on supply?
Shifts the supply curve to the right, lowering market price.
44
What is the effect of subsidies on merit goods?
Subsidies could encourage the consumption of merit goods, which creates positive externalities.
45
How can LRAS be affected by subsidies?
Long-run aggregate supply could increase if the subsidy is aimed towards a capital project. Footnote ## Examples: Infrastructure development (roads, bridges, ports), Education and training programs
46
What is a potential downside of government subsidies?
There could be government failure if the government provides an inefficient subsidy or if the subsidy distorts the market price.
47
What should be considered regarding government revenue when providing subsidies?
The opportunity cost of the subsidy should be considered.
48
Who typically pays for subsidies, and what is a concern regarding their benefit?
It is usually the taxpayer who pays for the subsidy, and they might not receive any direct benefit from it.
49
What happens to equilibrium price if demand is price inelastic and a subsidy is applied?
The subsidy will have a large effect on equilibrium price, giving a greater consumer gain than when demand is elastic.
50
What is the impact of a subsidy when demand is price elastic?
The subsidy will have a large effect on quantity, and therefore benefit producers more.
51
What is a consumer subsidy?
A consumer subsidy encourages consumers to purchase more of a particular good or service, such as a direct grant or an interest-free loan.
52
What is a producer subsidy?
Producer subsidies lower the cost of production and shift the supply curve.
53
What does it mean for consumers to act rationally?
Acting rationally means making a decision that results in the most optimal level of utility or benefit for the consumer.
54
How can social pressure affect consumer behaviour?
Social pressure encourages consumers to do things they would not otherwise do, or that they know could be harmful.
55
What role do habits play in consumer decision-making?
Habits reduce the amount of time it takes to do something, creating a barrier to making alternative decisions.
56
Give an example of a habit affecting consumer behaviour.
A commuter familiar with one route to work is unlikely to consider an alternative route.
57
What is a challenge consumers face in changing habits?
Breaking a habit causes withdrawal symptoms, making consumers feel uncomfortable.
58
What is consumer weakness in computation?
Consumers struggle to make optimal decisions due to difficulty with complex calculations or price comparisons, even with full information.
59
What does the law of diminishing marginal utility suggest?
Every extra unit consumed provides a smaller benefit to the consumer.
60
How can short-term and long-term views affect consumer behaviour?
Consumers may procrastinate saving for the future due to fear of limiting their short-term spending.

Economics 2.0 (22 decks)

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