deck_17011702 Flashcards
(81 cards)
1
Q
What is utility
A
Total amount of satisfaction experienced when a product or service is consumed
2
Q
What is the underlying assumption of rational economic
decision making for consumers
A
seek to maximize their overall utility
3
Q
What is the underlying assumption of rational economic
decision making for firms
A
Rational firms aim to maximize their profits to ensure business sustainability and growth
4
Q
What is demand
A
The quantity of goods or services that consumers are willing and able to buy at a given price
5
Q
What causes movement along the demand curve
A
A change in price
6
Q
What causes a movement along the demand curve
A
A change in price
7
Q
What is diminishing marginal utility
A
As a person consumes more of an item or product, the satisfaction (or the utility) they derive from it decreases
8
Q
What is price elasticity of demand
A
Measures the responsiveness of demand after a change in price
9
Q
What is the formula for PED
A
%∆ in quantity demanded / %∆ in price
10
Q
What does elastic mean
A
Very responsive to change in price
11
Q
What does inelastic mean
A
Not responsive to change in price
12
Q
If PED between 0 & 1…
A
Demand is relatively inelastic
13
Q
If PED > 1…
A
Demand is relatively elastic
14
Q
If PED = 0…
A
Demand is perfectly inelastic
15
Q
If PED = ∞
A
Demand is perfectly elastic
16
Q
If PED > 1
A
Demand is relatively elastic
17
Q
What factors determine PED (inelastic)
A
- Price of product in relation to total income
- Cost of substituting between different products
- Brand loyalty and habitual consumption
- Degree of necessity
18
Q
What factors determine PED (elastic)
A
- No* of close substitutes
- Degree of necessity - luxury
19
Q
How is PED useful for producers
A
If elastic - can maintain price to increase profitability
If inelastic - will increase price to increase profitability
20
Q
What is YED
A
Shows how responsive the demand for a product is based on change in real income
21
Q
What is the formula for YED
A
%∆ in quantity demand / %∆ in real income
22
Q
What is a normal good
A
As income increases, demand increases
23
Q
What is a inferior good
A
As income increases, demand decreases
24
Q
What is the YED of a luxury good
A
YED > 1
25
What is the YED of a necessity
0 < YED < 1
26
What is the YED of a inferior good
YED < 0
27
What is XED
Measures the responsiveness of demand for one good after a change in the price of another good
28
What is the formula for XED
(%∆ in Quantity Demanded of Good A) / (%∆ in Price of Good B)
29
What is a substitute good
a product or service that can be used in place of another product or service
30
What is a complimentary good
Two or more goods typically consumed or used together
31
Are substitute goods positive/negative
positive: If the price of Good A increases, demand for Good B increases therefore having a positive relationship
32
Are complementary goods positive/negative
negative: if the price of Good A increases, demand for Good B falls therefore having a negative relationship
33
What are unrelated goods
The price change of one good has no effect on the other
34
How does XED benefit firms
Substitutes: Firms will upgrade advertisement to ensure customers don't switch
Complimentary: Firms will produce goods that have to be purchased together
35
How does changes in supply affect consumer/producer surplus (decrease)
* Decreased supply raises prices, reducing consumer (Fewer consumers get the product, and those who do pay more) surplus but increasing producer surplus (fewer units are sold, the extra amount they get above the minimum price)
36
What is elastic demand
Quantity demanded is highly responsive to price changes
37
What is inelastic demand
Quantity demanded is not responsive to change in price
38
How are elasticities significant to government
* Used to make taxation decisions.
* Subsidies can encourage the consumption of essential goods
* Can implement price controls and regulations
* Show where to direct funding in times of recession/growth
39
What is supply
The quantity of a good or service that producers are willing and able to supply onto the market
40
What causes a movement across a supply curve
A change in price
41
What causes a shift across a supply curve
* Production cost
* Weather conditions
* Technological Advancements
* Government Policies and Regulations (i.e taxes, subsidies)
42
What is PES
measures the responsiveness of the quantity supplied of a good to changes in its price.
43
How do taxes differ based off of it's elasticity
Elastic goods = see reduced consumption due to tax
Inelastic goods = can bear higher taxes
44
What is the formula for PES
(%∆ in Quantity Supplied) / (%∆ in Price)
45
How are elasticities significant to firms
* use Elasticities to set prices
* Helps with marketing and promotions
46
If PES is perfectly elastic
PES = ∞
47
If PES is perfectly Inelastic
PES = 0
48
If PES is relatively Elastic
PES > 1
49
If PES is relatively Inelastic
0 < PES < 1
50
What factor affect PES
* Time period and production speed
* Ease and cost of substitution to produce other goods
* Spare capacity (raw material available)
51
What is equilibrium and what does it mean for buyers and sellers
Price at which demand is equal to supply
* Allows for buyers to purchase everything they want
* Allows for producers to sell produced goods at a price that covers costs and earns profit
52
What is the affects of excess demand
* Price is below equilibrium price
* Puts upwards pressure on price to reduce demand
* Leads to shortages
53
How does excess demand affect firms and consumers
* Firms increase pricing to improve profitability -> increased incentive to product more
* Consumers have to pay more
54
What is the affect of excess supply
* Price is above equilibrium
* Puts downwards pressure on price
* Potential for wastage
55
How does excess supply affect firms and consumers
* Firms will lower price to be able to sell
* Consumers have to pay less
56
What are the functions of the price mechanism
* Rationing
* Incentive
* Signalling
57
How does rationing work
Through the price mechanism the price increases to reduce demand and ensure that the limited supply is allocated to those willing to pay the highest price
58
How does incentive work
In the price mechanism, higher prices incentivize producers to supply more to maximise profit, while lower prices discourages producers to supply
59
How does signalling work
* Rising prices signal increased demand or a shortage, -> producers to supply more.
* Falling prices signal decreased demand or surplus -> producers to reduce supply
60
How does price mechanisms work in local markets
* Signal – Prices show what’s in demand or scarce
* Incentive – Higher prices encourage producers to supply more
* Rationing – Higher prices reduce demand
* Allocation – Resources move to most profitable uses
61
How does price mechanisms work in national markets
* Signal – Prices show what’s scarce or in demand across the country
* Incentive – High prices encourage firms to enter the market or increase production
* Rationing – Higher prices reduce demand nationwide less people are willing and able to buy
* Allocation – Resources shift to industries/products with higher profit potential
62
How does price mechanisms work for global markets
* Signal – Prices tell global producers and consumers what is in demand
* Incentive – High prices encourage countries and firms to produce/export more
* Rationing – High prices reduce global demand
* Allocation – Resources flow to the most profitable global markets
63
What is consumer surplus
The difference between the price a consumer is willing to pay for a good and the price they actually pay.
64
What is producer surplus
The difference between the price a producer is willing to accept for a good and the price they actually receive
65
How does changes in demand affect consumer/producer surplus (increased demand)
* Increased demand -> raises prices and quantity sold- > reduces consumer surplus (difference between what they were willing to pay and what they now pay is smaller) but increasing producer surplus. (Since the gap between their minimum price and the market price widens)
66
How does changes in supply affect consumer/producer surplus (increase)
* Increased supply lowers prices, increasing consumer surplus (More consumers get the good for less than they were willing to pay) but decreasing producer surplus. ( though they sell more units, the lower price can reduce the extra benefit)
67
How do indirect taxes impact consumers surplus
Higher taxes raise the price of goods, reducing consumer surplus and lowering demand.
68
How does higher indirect taxes impact producer surplus
Increases production costs, reduces the price producers receive, and decrease producer surplus due to lower demand.
69
How does changes in demand affect consumer/producer surplus (decreased demand)
* Decreased demand -> lowers prices and quantity sold increasing consumer surplus (More consumers get the good for below what they were willing to pay) but reducing producer surplus. (Less total revenue)
70
How does indirect tax impact Governments
Government: Receives tax revenue that can be used for public spending.
71
What is tax incidence
refers to who bears the burden of the tax (consumers or producers). If demand is more inelastic, consumers bear a larger portion of the tax burden. If supply is more inelastic, producers bear a larger portion.
72
What is the impact of subsidies on consumer surplus
Consumers: Subsidies lower the price of goods, increasing consumer surplus and encouraging more consumption
73
How does subsidies impact producer surplus
Producers: Receive higher prices or support from the government, increasing producer surplus.
74
How does subsidies affect the government
Government: Pays for the subsidy, which can lead to budgetary pressure
75
Why may consumers act irrationaly
* Influence
* Haitual behavour
* Consumer weakness at computation
76
How does influence cause irrationality
Consumers may follow trends or peer behavior, often making irrational choices based on social influence rather than rational decision-making.
77
How does habitual spending impact rationality
Consumers often make decisions based on habit rather than careful thought, continuing to purchase goods or services they've always bought without evaluating whether it’s the best choice.
78
How does anchoring impact rationality
People rely on the first piece of information (i.e was £300 now £150) and therefore feel like they are getting a good deal when the product is instread overvalued
79
How does framing impact rationality
Information is presented in a way that makes something look better than it actually is: i.e 90% fat free vs 10% fat
80
How does imperfect information impact rationally
Consumers or producers lack full knowledge about prices, quality, risks, or alternatives and then think they are acting logically but aren't
81
How does computational weakness impact rationally
People struggle to process complex information, even if they have it and therefore make bad decision
