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Microeconomics (UPLEARN) > How Markets Work > Flashcards

How Markets Work Flashcards

1
Q

Demand

A

A quantity of a good that consumers are willing and able to buy at a given price in a given time period.

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2
Q

What relationship does price and quantity have on a demand curve?

A

Inverse relationship and so slope downwards.

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3
Q

Contraction in Demand

A

When demand decreases as price goes up. Movement along the curve.

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4
Q

Extension in Demand

A

When demand increases as price decreases. Movement along the curve.

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5
Q

When is it movement along demand/supply curve?

A

Change in price.

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6
Q

PED

A

Measures how much quantity demanded will change in response to a change in price.

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7
Q

PED Equation

A

% change in Q.D. over % change in price.

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8
Q

Why are PEDs always negative?

A

When price goes up (+ve), demand goes down (-ve) so when you divide a -ve by a +ve, you get a -ve PED. When price goes down (-ve), demand goes up (+ve) so when you divide a +ve by a -ve, you get a -ve PED. So when calculating, we always look at number after sign.

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9
Q

When PED is between 1 and infinity?

A

Elastic. % change in price will lead to a bigger change in % change in Q.D.. Consumers are very responsive to changes in price.

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10
Q

When PED is between 0 and 1?

A

Inelastic. % change in price will lead to a smaller change in Q.D.. Consumers are unresponsive to changes in price.

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11
Q

When PED is 1?

A

Unitary elastic. % change in price will lead to the same % change in Q.D..

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12
Q

Elastic Demand Curve

A

Flatter slope.

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13
Q

Inelastic Demand Curve

A

Steep slope.

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14
Q

When PED is equal to 0?

A

Perfectly inelastic. No response in Q.D. to change in price. Change in price has no effect on Q.D.. As price % change increases more and more, Q.D. % change would decrease until there is no response: perfectly inelastic.

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15
Q

Perfectly Inelastic Demand/Supply Curve

A

Vertical.

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16
Q

Examples of Perfectly Inelastic?

A

Medicine. If price goes up, Q.D. would stay the same as you still need it no matter what.

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17
Q

When PED is equal to infinity?

A

Perfectly elastic. A small % change in P would lead to a larger % change in Q.D.. As price % change decreases more and more Q.D. % change would increase more and more and consumers respond more and more until it gets to Q.D=0.

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18
Q

Perfectly Elastic Demand/Supply Curve

A

Horizontal

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19
Q

Unitary Elastic Demand Curve

A

Curve. Shaped like the beginning of the letter U.

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20
Q

Factors That Influence PED

A

Necessity, Addiction, Substitutes, Brand, Income, Time

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21
Q

(PED) Necessity

A

Necessary things are inelastic as whatever the % change in price, we still need it so consumers are unresponsive to change in price. Luxury things are elastic as we don’t actually need the things but consumers would respond massively.

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22
Q

(PED) Addiction & Habit

A

When someone is addicted to something (cigarettes), demand is inelastic as no matter the % change in price, they still want it as they are addicted. When someone uses something due to habit, it is also inelastic.

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23
Q

(PED) Substitutes Availability

A

Few substitutes means demand is inelastic and consumers are unresponsive to % change in price. More substitutes means demand is elastic as they can switch to other goods making consumers responsive to % change in price.

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24
Q

(PED) Brand

A

When brand is appealing and strong, inelastic demand as they don’t care about price changes and so are unresponsive to % change in price.

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25
Q

(PED) Income Proportion

A

Large proportion of income is elastic demand as it has a large impact on your income so Q.D. will change a lot in response so it is fairly responsive to change in price.

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26
Q

(PED) Time

A

Short run = inelastic. This is because no time to look for other substitutes so no matter the change in price they will demand it so consumers are unresponsive to change in price. Long run = elastic

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27
Q

Profit equals what?

A

Total revenue - total cost

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28
Q

Total revenue equals what?

A

P x Q. How much money a company receives from its sales in total.

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29
Q

What does a firm need to know in order to maximise their profits?

A

Total revenue and total cost.

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30
Q

What happens to total revenue when price elastic and price increasing?

A

Lowers Q.D. by a large amount, which lowers total revenue.

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31
Q

What happens to total revenue when price elastic and price decreasing?

A

Increases Q.D. by a large amount, which increases total revenue.

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32
Q

What happens to total revenue when price inelastic and price increasing?

A

Decreases Q.D. by a small amount so would increase total revenue.

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33
Q

What happens to total revenue when price inelastic and price decreasing?

A

Increases Q.D. by a small amount so would decrease total revenue.

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34
Q

What happens to total revenue when unitary elastic?

A

Total revenue doesn’t change.

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35
Q

Conditions of Demand

A

Population, Income, Related Goods, Advertising, Taste, Expectations, Seasons

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36
Q

(Demand) Population

A

If population increases, demand increases and so shifts demand curve to the right.

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37
Q

(Demand) Income

A

Normal goods: designer clothing, phones: demand increases when income increases and so demand curve shifts to the right. Inferior goods: basic items, charity clothing: demand decreases when income increases as they would want to buy other expensive stuff so demand curve shifts to the left.

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38
Q

(Demand) Related Goods

A

Substitute goods: when you buy one good instead of another one. When price of one good rises, this would contract demand but would increase demand for the other good so shifting curve to the right.

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39
Q

(Demand) Related Goods

A

Complementary goods: when you buy one good to go with the other. When price of one thing rises, the demand for that would contract and so would decrease demand for the other thing so demand curve for that thing would shift to the left.

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40
Q

(Demand) Advertising

A

Good advertising would increase the demand so shifts demand curve to the right.

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41
Q

(Demand) Taste

A

If out of trend, then consumers are less willing to buy them and so demand decreases and shifts demand curve to the left.

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42
Q

(Demand) Expectations

A

When you expect product shortages in the future, demand would increase at that current moment, so shifts demand curve to the right.

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43
Q

(Demand) Seasons

A

When seasons change, demand for a particular good changes. In winter, demand for skis rises and so demand curve shifts to the right. In summer the demand for them would decrease and so demand curve would shift to the left.

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44
Q

Income Elasticity of Demand (YED)

A

Measures how much quantity demanded will respond to a change in income.

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45
Q

YED Equation

A

% change in Q.D. over % change in income.

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46
Q

YED for Inferior Goods

A

Always be negative. If income increases, demand would decrease for that inferior good because they can afford something better elsewhere as they have more money. So a -ve/+ve=-ve. If income decreases, demand would increase as they can’t afford anything else as they have less money. So a +ve/-ve=-ve.

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47
Q

YED for Normal Goods

A

Always be positive. If income increases, demand would increase for that normal good because they can afford it (phones). So a +ve/+ve=+ve. If income decreases, demand would decrease for that normal good because they can’t afford it. So a -ve/-ve=+ve.

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48
Q

Income Inelastic for Normal Goods

A

Between 0 & 1. When income changes, Q.D. changes by a smaller %. Applies to stuff like necessary goods. If income changes, it doesn’t matter as they still need it so consumers are unresponsive to change in income.

49
Q

Income Elastic for Normal Goods

A

Between 1 & infinity. When income changes, Q.D. changes by a larger %. Applies to luxury goods.

50
Q

Cross Elasticity of Demand (XED)

A

Measures how much Q.D. of good A will respond to a change in price of good B.

51
Q

XED Equation

A

% change in Q.D. of good A divided by % change in P of good B

52
Q

XED for Complements

A

XED is negative. If price of one good goes up then the Q.D. of another would decrease. So -ve/+ve=-ve. And vice versa: +ve/-ve=-ve.

53
Q

XED for Substitutes

A

XED is positive. If price of one good goes up, then Q.D. of the other good would increase. So +ve/+ve=+ve. And vice versa: -ve/-ve=+ve.

54
Q

XED for Unrelated Goods

A

XED is 0. One good is totally unrelated to another good.

55
Q

Supply

A

A quantity of a good that producers are willing and able to sell at a given price in a given time period.

56
Q

Why does Quantity Supplied Increase at Higher Prices?

A

Producers see that they can make profit by selling their goods at higher prices, so they have more incentive to supply when prices are higher, increasing Q.S..

57
Q

What relationship does price and quantity have on a supply curve?

A

One increases as the other does. Slopes upwards.

58
Q

PES

A

Measures how much quantity supplied will change in response to a change in price.

59
Q

PES Equation

A

% change in Q.S. over % change in price.

60
Q

Why is PES always Positive?

A

Because when price decreases, Q.S. decreases. So -ve/-ve=+ve. Vice versa: +ve/+ve=+ve.

61
Q

Elastic Supply

A

Between 1 & infinity. % change in Q.S. is bigger than % change in price. Producers are responsive to change in price.

62
Q

Inelastic Supply

A

Between 0 & 1. % change in Q.S. is smaller than % change in price. Producers are unresponsive to change in price.

63
Q

Unitary Elastic Supply

A

Equals 1. When % change in P will lead to the same % change in Q.S..

64
Q

Elastic Supply Curve

A

Flatter slope

65
Q

Inelastic Supply Curve

A

Steeper slope

66
Q

Factors that Influence PES

A

Time, Economy state, Availability of factors of production, Stockpiles & perishability, Spare capacity

67
Q

(PES) Time

A

Short run = fixed factors of production = hard to change Q.S. = inelastic. Long run = producers would respond more because they can change factors of production = elastic. For example, if price rises for coconuts they would want to produce more but in the short run they cant because they have to grow more trees which can take 10 years so its inelastic.

68
Q

(PES) Economy State

A

Bad economy (unemployed workers or recession) = factors are available and easy to find = producers would respond to change in price = elastic. If good economy, factors of production are already in use and therefore harder to find= inelastic.

69
Q

(PES) Availability of Factors of Production

A

If factors of production are available i.e. it is easy to find the resources, if they increase price, it is easy to increase supply so it’s elastic: price change will lead to a bigger Q.S..

70
Q

(PES) Stockpiles & Perishability

A

Stockpiles means stock of goods held in reserve. If prices rise, they can immediately respond due to large stockpiles = elastic. Perishable (goes off or rots) is inelastic as they cant keep those items in stock for too long so producers wont respond to change in price.

71
Q

(PES) Spare Capacity

A

Means space/capacity that they aren’t using. Lots of spare capacity=elastic. This is because if they increase P, then they would increase Q.S. and they can do that by using the spare capacity that weren’t used to produce more.

72
Q

Perfectly Inelastic Supply

A

Equals 0. As PES gets closer to 0, producers respond less and less to changes in price. When equal to 0, no response in Q.S. to change in price. Price has no effect towards Q.S.. For example, even if price went up, producers of agricultural goods won’t be able to increase Q.S. because it takes long to grow new crops.

73
Q

Perfectly Elastic Supply

A

Equals infinity. As PES gets closer to infinity, producers respond more and more when price change gets smaller and smaller

74
Q

Unitary Elastic Supply Curve

A

x=y graph. Starts from origin.

75
Q

Conditions of Supply

A

Technology, Weather, Costs of Production, No.s of suppliers & productivity

76
Q

Technology

A

Advanced technology means more supply meaning supply curve would shift to the right.

77
Q

Weather

A

Bad weather reduces supply so supply curve would shift to the left. For example if a tornado wipes out all the carrots on a farm = less supply.

78
Q

Costs of Production

A

If costs of producing a good are high, then it would be less supplying i.e. supply curve would shift to the left.

79
Q

Excess Supply

A

Aka surplus. This happens when price is above equilibrium. More being supplied than demanded. On a graph, excess supply is the gap between supply and demand curve at the given price.

80
Q

Excess Demand

A

Aka shortage. This happens when price is below equilibrium. More being demanded than supplied. On a graph, excess demand is the gap between supply and demand curve at the given price.

81
Q

How to Get Rid of Excess Supply?

A

Reduce the price until it gets to equilibrium.

82
Q

Price Mechanism

A

Interaction of S & D to determine prices.

83
Q

Disequilibrium

A

When not in equilibrium

84
Q

Functions of Price Mechanism

A

Signalling, Incentivising, Rationing

85
Q

Signalling

A

When price is above equilibrium, producers will reduce price to eliminate surplus. Falling price signals to producers that consumers dont want as much of that good so reduce production. So production would decrease = contraction in supply. Higher prices signal to producers that consumers wamt more goods. Lower prices signal to producers that consumers want less.

86
Q

Incentivizing

A

When price is above equilibrium, producers will reduce price to eliminate surplus. The falling price will reduce incentive for producers to supply as less profit is made. So production would decrease = contraction is supply. Higher prices means more profit, increasing incentive to sell more. Lower prices means less profit, reducing incentive to sell.

87
Q

Rationing

A

Rising price means fewer consumers are willing to demand at higher prices so decreases Q.D.. Higher prices limit or ration the Q.D.. Happens when excess demand.

88
Q

There is currently shortage. How would price adjust to bring it back to equilibrium?

A

When shortage, consumers will bid up the price. Signals to and incentivizes producers to supply more leading to an extension in supply. It also rations how much consumers demand, leading to a contraction in demand. Brings to new equilibrium at higher price

89
Q

Price Mechanism: Increase in Demand

A

Increased demand leads to higher equilibrium prices and higher equilibrium quantity.

90
Q

There is currently surplus. How would price adjust to bring it back to equilibrium?

A

When surplus, producers will reduce price to sell of surplus. The decreasing price signals to producers to supply less and reduces incentives to supply leading to a contraction in supply. Also increases Q.D. because consumers would more goods as price decreases. New equilibrium at lower price.

91
Q

Price Mechanism: Decrease in Demand

A

Decreased demand leads to lower equilibrium prices and lower equilibrium quantity.

92
Q

Price Mechanism: Increase in Supply

A

Increased supply leads to a lower equilibrium price and higher equilibrium quantity.

93
Q

Price Mechanism: Decrease in Supply

A

Decreased supply leads to a higher equilibrium price and a lower equilibrium quantity.

94
Q

Marginal Utility Curve

A

= Demand Curve. Most someone is willing to pay at quantity of 1 = marginal utility: extra utility consumers get from consuming an extra unit of a good. (At every price on demand curve shows marginal utility at every Q.D.)

95
Q

Diminishing Marginal Utility

A

Decreasing additional benefit. Law states that as you consume more of a good, marginal utility you get from an extra unit would decrease.

96
Q

Consumer Surplus

A

Difference between what consumers are willing to pay and what they actually pay. Top left triangle of supply & demand graph. What they actually pay is the equilibrium point.

97
Q

Marginal Cost Curve

A

= Supply Curve. Lowest someone is willing to sell for at quantity of 1 = marginal cost: cost of producing each extra unit. (At every price on supply curve shows marginal cost at every Q.S.)

98
Q

Producer Surplus

A

Difference between what producers are willing to sell for and what they actually sell for. Bottom left triangle of supply & demand graph. What they actually pay for is the equilibrium point.

99
Q

What would Consumer Surplus be affected by?

A

Shifts in supply

100
Q

What would Producer Surplus be affected by?

A

Shifts in Demand

101
Q

Direct Tax

A

Tax paid directly to gov.

102
Q

Types of Direct Tax

A

Income tax: some of income is used to pay tax to gov.

Corporation tax: % of your profits.

103
Q

Indirect Tax

A

Tax paid to gov on goods and services. Stuff you pay for is given to producer which they pay gov as indirect tax. Only part of it, not whole payment. VAT is an example of indirect tax.

104
Q

Types of Indirect Tax

A

Specific Tax & Ad Valorem Tax

105
Q

Specific Tax

A

Fixed amount of tax paid on each unit sold. When drawn on graph, it only affects supply graph. You move it up by the amount of specific tax: vertically up. This is because they require higher prices to make up for the tax.

106
Q

Incidence of Tax

A

On producers: how much producers have to pay: bottom. On bottom as although consumers are paying higher prices, they get paid less due to the specific tax.

On consumers: how much consumers have to pay: top box. On top as consumers pay higher prices due to tax.

107
Q

Tax Revenue for Specific Tax

A

Size of specific tax times by quantity sold. A rectangle which is split into incidence taxes by the old equilibrium line if we draw it. To draw tax revenue we drop down from new equilibrium point to other line and draw to the left.

108
Q

Tax Revenue Equals

A

Consumer Burden + Producer Burden. Total of the two rectangles on graph.

109
Q

Specific Tax: When Demand is More Elastic than Supply, Why is Consumer Burden Smaller Than Producer Burden?

A

When demand is more elastic than supply, consumers are responsive to change in price. So after the tax, producers will take on most of the tax themselves and only pass a small amount of tax to consumers due to higher prices otherwise they risk losing all of their consumers.

110
Q

Specific Tax: When Demand is More Inelastic than Supply, Why is Consumer Burden Bigger Than Producer Burden?

A

Consumers are unresponsive to changes in prices so producers are taking advantage of it by passing on most of the tax to consumers due to higher prices, without worrying about losing sales

111
Q

Ad Valorem Tax

A

VAT is an example of this. Ad valorem tax is a tax charged as a % of the price of a good. As price of a good increases, VAT increases. At low price = low tax. To draw it, it is the supply curve rotated inwards.

112
Q

Tax Revenue for Ad Valorem Tax

A

Size of tax per unit times quantity sold. Similar to specific tax. With same rectangles but different graph shape.

113
Q

Reasons why tax are being used

A

Discourage harmful goods and raise tax revenue.

114
Q

How does Gov use Tax Revenue

A

To provide subsidies, which encourage consumption and productions of goods that are good for society.

115
Q

Subsidy

A

Grant from gov to a firm to increase supply. More subsidies means more supply but means more tax to pay.

116
Q

Subsidy Graph

A

Draw vertically downwards. Supply graph minus subsidy. This is because when you lower the price, you would still get the subsidy from gov which all adds up to the actual original price, so it is fine for the producer.

117
Q

Total Cost of Subsidy to Gov

A

Size of subsidy times the quantity sold. Subsidy rectangle drawn from old equilibrium point. When drawing a line from new equilibrium point, it’s split into 2 rectangles

118
Q

2 Rectangles

A

Consumer benefit is bottom rectangle because consumers are paying less than normal price. Producer benefit is the top because firstly prices went down but then get subsidy so it rises.

Microeconomics (UPLEARN) (4 decks)

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