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economics paper 1 > how markets work > Flashcards

how markets work Flashcards

1
Q

objective of consumer

A

maximise their economic welfare (utility/ satisfaction) from consumption by correctly spending their income

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2
Q

objectives of firms

A

maximise profits by producing at the lowest cost
dividend are then played to the shareholders

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3
Q

objectives of the government

A

maximise social welfare of the citizen

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4
Q

demand meaning

A

the ability and willingness to buy a particular good at a given price over a given period of time

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5
Q

causes of shifts in the demand curve

A

change in price of substitute
change in price of complements
change in real incomes
changes in the distribution of income (equal distribution causes more demand as poorer people spend more)
effects of advertising and marketing
change in regulation
interest rates
demography changes
seasons
trends

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6
Q

law of diminishing marginal utility

A

the utility from consuming an additional unit of a good will decrease as more of a good is consumed

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7
Q

consumer surplus meaning

A

difference between what consumers are willing and able to pay and what they actually pay

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8
Q

derived demand meaning

A

demand for the FOP to produce another good or service

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9
Q

price elasticity of demand (PED) meaning

A

the responsiveness of demand to a change in price of the good/ service

%change in quantity demanded/ %change in price

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10
Q

relatively elastic PED

A

PED more than 1

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11
Q

relatively inelastic PED

A

PED less than one

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12
Q

factors affecting PED

A

number of close substitutes available
price of product relative to total income
cost of substituting between different products
brand loyalty and habits
necessity or luxury good
addiction
If u need it now or had time to think

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13
Q

why firms use PED

A

the effect of a change in price on total revenue
changes in tax and weather the firm can pass on the cost to the consumer
price discrimination- can charge higher prices for the good when its needed and less when its not

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14
Q

EV for PED

A

not complete data
consumer demand changes over time
PED varies by time and region
not all firms profit maximise
elasticity will vary with each product
substitutes will change market strategies

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15
Q

cross elasticity of demand (XED) meaning

A

responsiveness of demand for one product to the change in price of another product

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16
Q

income elasticity of demand (YED) meaning

A

responsiveness of demand to a change in income

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17
Q

inferior good number and explanation

A

YED less than 0
rise in income will lead to a fall in demand for the good

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18
Q

normal good number and explanation

A

YED more than 0
rise in income will lead to a rise in demand for the good

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19
Q

luxury good number

A

YED more than 1

20
Q

substitutes number and explanation

A

XED is larger than 0
increase in price of good B will increase demand of good A

21
Q

complementary goods number and explanation

A

XED is smaller than 0
increase in the price of good B will decrease demand for good A

22
Q

supply meaning

A

quantity of goods and services that a producer is willing and able to sell at a given price over a given time period

23
Q

movements along a supply curve

A

extension- price rises producers will produce more ass there are more profits to be made
contraction- fall in price causes less profits so there will be less supplied

24
Q

causes of shifts in the supply curve

A

change in the unit cost of production
better quality tech
depreciation in the exchange rate
cost of production
producers entering or leaving the market
weather conditions
speculation in the future (higher prices in future so stock the good)
taxes and subsides

25
Q

price elasticity of supply (PES) meaning

A

responsiveness of supply to a change in price of the good or service

26
Q

relatively elastic PES number

A

PES higher than 1

27
Q

relatively inelastic PES number

A

PES lower than 1

28
Q

factor affecting PES

A

spare production capacity - room to grow is more elastic
stocks of finished good - if high stocks and demand increases demand can be met
FOP mobility- if FOP are more mobile to shift to produce what is more in demand then its elastic
time to produce- short run inelastic as supply cannot meet demand. long run elastic as supply can meet demand

29
Q

excess demand meaning

A

when quantity demanded is higher than quantity supplied

30
Q

excess supply meaning

A

when quantity supplied is higher than quantity demanded

31
Q

price mechanisms meaning

A

decisions of consumers and businesses interact to determine the allocation of resources

32
Q

rationing function meaning

A

when there are scarce resources price increases cos of excess demand
the higher price causes some people not being able to afford the good or they lose interest
so the goods are rationed to the people who can afford it or desire it

33
Q

signalling function meaning

A

where resources should be used
when prices rise producers more resources into the manufacturing of the product
changes in price lead to a change in supply and demand

34
Q

incentive function meaning

A

change in behaviour of a consumer or producer
working harder leads to more benefits

35
Q

producer surplus meaning

A

difference between the price producers are willing and able to supply at and the actual price they supply at

36
Q

direct taxes meaning

A

levy on income wealth and profits
e.g. income tax, inheritance tax, national insurance, capital gains, corporation tax

37
Q

indirect taxes meaning

A

levy on expenditure
e.g. VAT, sugar tax, alcohol, tobacco

38
Q

specific/ unit tax meaning

A

set at a constant amount per unit of output

39
Q

ad valorem tax meaning

A

set at a percentage of the selling price

40
Q

indirect tax and PED effects on consumer and producer

A

if PED is inelastic burden can be passed onto the consumer
if PED is elastic burden is absorbed by the producer

41
Q

subsidies meaning

A

government giving out loans to firms which do not need to be paid back
they are used to lower cost of production

42
Q

effects of subsidies

A

increase output
lower prices
increase employment through parentships
reduce inequality
control inflation
increase demand during decline
encourage competition of merit goods

43
Q

causes of irrational consumer behaviour

A

influence of others
habitual behaviour
weakness at computation

44
Q

how does influence of others decrease utility

A

herb behaviour- make decisions based on people around you
social norms and trends

45
Q

how does habitual behaviour decrease utility

A

mental shortcuts- helps people make quick but not perfect decisions

46
Q

how does weakness at computation decrease utility

A

consumers are not willing or able to make comparisons between prices

economics paper 1 (9 decks)

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