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economics micro > 1.2.1 - 1.2.10 how markets work > Flashcards

1.2.1 - 1.2.10 how markets work Flashcards

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1
Q

law of diminishing marginal utility states

A

that for each additional unit of good that’s consumed the marginal utility gained decreases

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2
Q

margin def

A

the change in a variable caused by an increase of one unit of another variable

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3
Q

traditional economic theory assumes

A

that economic agents want to maximise their utility

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4
Q

marginal utility def

A

the benefit gained from consuming one additional unit of good

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5
Q

total utility def

A

the overall benefit gained from consuming a good

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6
Q

markets are

A

wheee goods/services are bought and sold

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7
Q

assumptions of rational economic decision making
cons/prod

A

consumers- aim to maximise utility
producers- aim to maximise profits

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8
Q

demand def

A

is the quantity of a good/service that consumers are willing and able to buy at a given price at a given time

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9
Q

demand curve shows relationship between

A

price and quantity demanded

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10
Q

factors that shift demand

A

population
income
related goods
advertising
trends
expectations
seasons

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11
Q

ped def + formula

A

ped=%change in quantity/%change in price

measures the responsiveness of the change in quantity due to the change in price

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12
Q

YED def + formula

A

YED= %change in quantity/%change in income

measures the responsiveness of the percentage change in quantity demanded to a change in income

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13
Q

xed def + formula

A

XED= %change in quantity demanded of good a/%change in price of good b

measures the responsiveness of the change in quantity demanded of good a due to a change in price of good b

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14
Q

inferior goods/normal goods- if real income increases

A

normal good-demand increases
inferior goods- demand decreases

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15
Q

what happens if more equal distribution of income

A

causes demand curve for luxury goods shifts to the left
fewer rich people

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16
Q

substitute/complementary goods def

A

substitute-alternatives to each other
complementary- goods used together

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17
Q

substitute and complementary demand

A

substitute- increase in price of sub demand increases
complementary- increase in price demands decreases

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18
Q

derived demand
composite demand

A

derived- demand for a good/factor of production used in making another good/service
composite-goods have more than one use

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19
Q

ped elastic and in elastic no + perfectly inelastic

A

elastic 1<PED -1>PED
inelastic -1<PED<1
perfectly inelastic PED =0

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20
Q

substitutes and complements xed

A

substitutes pos xed
complement neg xed

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21
Q

types of goods/services

A

essential items
habit forming
goods that can’t be postponed
products w diff uses

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22
Q

factors that influence ped

A

substitutes (more subs more price elastic)
types of goods/services
% of income spent on good (higher % more price elastic)
time(long run price elastic short run inelastic)

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23
Q

good w elastic demand
decrease price + increase price

A

decrease price- increase firm rev
increase price- decrease firm rev

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24
Q

goods w inelastic demand
decrease/increase price

A

decrease price- decrease firm rev
increase price- increase firm rev

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25
supply def
quantity of a good/service that producers supply to the market at a given price at a particular time
26
supply curve shows
the relationship between price and quantity supplied
27
subsidies + taxes affect on demand + production
subsidies encourage demand and production taxes reduce demand and production
28
demand for products that need large portion of consumers income is more
price elastic
29
rational consumer will choose to consume a good at point where
marginal utility = price
30
perfectly inelastic
any change in price will have no effect on quantity demanded
31
market is equilibrium when
supply = demand
32
factors that cause shift in supply curve
change to cost of productions improved technology changes to the productivity of factors of production indirect taxes and subsidies changes to the price of other goods number of suppliers
33
when supply and demand aren’t equal
the market is in disequilibrium
34
producers firms profit why would they max profit
total rev- total costs to survive greater profit = better reward reinvest profit to expand
35
more price inelastic demand the greater the tax burden for more price elastic demand the greater the tax burden for
consumers producers
36
PES def + formula
PES= %change in quantity supplied/%change in price measures the responsiveness in a change in quantity supplied due to a change in price
37
why in high pes important to firms
firms aim to repost quickly to changes in price and demand they need to make supply elastic
38
short run pes
time period where firms capacity fixed difficult to increase production in short run so supply is inelastic
39
long run pes
factors of production are variable from able to increase its capacity supply is more elastic firms have longer to react to changes in price and demand
40
several other factors that affect pes
periods of unemployment-more elastic perishable goods-have inelastic supply high stock level-elastic supply able to increase supply mobile factors of production- more elastic supply
41
market is in equilibrium when
supply equals demand
42
excess supply
when quantity supplied to a market is greater than the quantity demanded
43
excess demand
when the demand for a good or service is greater than its supply
44
elasticity of ped/pes- price inelastic supply or demand shifts in curve has an impact on
price
45
elasticity of ped/pes- price inelastic supply or demand shifts in curve has an impact on
price
46
elasticity of ped/pes- price elastic supply or demand shifts in curve has an impact on
quantity
47
demand and supply models involves several assumptions
-supply/demand are independent of each other -all markets perfectly competitive -ceteris paribus
48
competitive markets exist under certain conditions
- large no of buyers and sellers - no single consumer or producers can influence allocation - cons/prod act rationally- cons maximise welfare prod aim to provide cons what they want at lowest possible price to max profits
49
price mechanism follows 3 functions
incentive signalling rationing
50
explain price mechanisms three functions
-incentive to firms: higher prices encourage production of more goods and sales inc profits -signalling- changes in price shows change in supply/demand as a signal to prod/cons -rationing- ration resources. high demand means supply limited then price will be high to restrict those who can’t buy
51
price mechanism advantages
-resources allocated efficiently to satisfy wants/needs -operates w out cost of employing people to regulate it -consumers decide what to produce -prices kept at their minimum to allocate resources as efficiently as possible
52
disadvantages of price mechanisms
-inequality of wealth and income is likely -overprovison of demerit goods -people w limited skills suffer unemployment - public goods not produced
53
consumer surplus definition
difference between price that consumers are willing to pay for a goodservice and the price that they actually pay (area below demand curve)
54
producer surplus definition
the difference between the price that producers are willing to supply a good at and the price that they actually receive for it (area above supply curve)
55
subsidies do what to demand
encourage demand
56
tax do what to demand
tax reduce demand
57
the changes in price lead to
extension/ contraction in demand
58
subsidies
encourage increased production + fall in price + increased demand
59
inelastic demand subsidies affect prod/ cons gain
prod gain smaller than consumer gain
60
elastics demand and subsides prod/cons
producer gain higher than consumer gain
61
consumer gain
they gain by paying less for the good than they would have
62
producer gain
they gain by receiving extra revenue from the government that they can keep
63
tax
increases price of a good
64
inelastic demand w tax cons prod burden
cons burden larger than prod burden
65
elastic demand tax cons prod burden
cons burden less than prod burden
66
cons burden
they lose out by paying more for the good
67
prod burden
they lose out by paying some of the revenue to the government
68
the more price inelastic the demand curve the
greater the tax burden for the consumer
69
the more price elastic the demand curve the
the greater the tax burden for the producer
70
acting rationally means
making decisions that results in the most optimal level of utility or benefit for the consumer
71
what are the reasons for consumers not acting rationally
- influence of other people’s behaviours - the importance of habitual behaviour - consumer weakness at computation -time bilbo’s to make decision is limited - not all information available
72
bounded rationality definition
limits on decisions - people tend to satisfice ( make a satisfactory decision) rather than spend ages trying to make a rational decision to maximise utility
73
rule of thumb explained
choosing the middle priced option when faced with a range of different prices
74
anchoring explained
means placing too much emphasis on one piece of information
75
availability bias explained
this is where judgments are made about the probability of events occurring based on how easy it is to remember such events occurring
76
social norms explained
an individuals behaviours can be influenced by the behaviour of their social group
77
habitual behaviour explained
doing the same thing over and over again
78
biases that stop individuals acting in an economically rational way
- rule of thumb - anchoring - availability bias - social norms - habitual behaviours
79
asymmetric information prevents rationality how
when one party has more information than another
80
price def
value at which a good/ service is exchanged
81
the influence of other people’s behaviour
social pressure encourages consumers to do things they would not do otherwise. consumers unwilling to change even if it benefits them if it goes against norms of society
82
importance of habitual behaviours
consumers no longer have to consciously think about their actions. this limits consumers considering an alternative because they would have to refamilirise themselves
83
perfectly elastic supply
any fall in price quantity supplied will be reduced to zero
84
economic sustainability social sustainability environmental sustainability
-impact of economic choices on economic objectives - impact of economic choices on society - impact of economic choices on environment
85
limited resources leads to questions
what to produce how to produce it and who to produce it for
86
consumers weakness at computation
consumers are unable to exercise self control with some decisions
87
choice architecture definition
where an individuals choice is influenced by adapting the way the choice is presented
88
choice architecture done in number of ways
- default options - framing - nudges - restricted choice - mandates choices
89
default options framing nudges restricted choice mandates choice explained
-people may choose default option -the context in which information is presented influence a decision -some alternatives are easier to choose without removing freedom of choice -people’s choices are restricted -people have to make decisions

economics micro (11 decks)

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