How markets work Flashcards

Question

What does it mean if PES < 1?

Answer 1

Inelastic supply – quantity supplied is not very responsive to price changes.

Answer 2

• Spare production capacity • Stock levels (ability to store goods) • Time period (supply becomes more elastic over time) • Ease of entry into the market

Answer 3

The price at which quantity demanded equals quantity supplied — where the demand and supply curves intersect.

Answer 4

There is excess supply (a surplus), causing downward pressure on the price.

Answer 5

There is excess demand (a shortage), causing upward pressure on the price.

Answer 6

Shifts in demand or supply curves — e.g., an increase in demand raises both equilibrium price and quantity.

Answer 7

The system where price signals help allocate resources in markets based on supply and demand.

Answer 8

Signalling Incentivising Rationing

Answer 9

Rising or falling prices signal to producers where resources should be allocated.

Answer 10

Higher prices encourage firms to supply more because they can earn more profit; lower prices discourage production.

Answer 11

Prices limit demand for scarce goods by making them more expensive, ensuring those who value them most can buy them.

Answer 12

The difference between what a consumer is willing to pay for a good (their maximum price) and the market price they actually pay.

Answer 13

As the area below the demand curve and above the market price, up to the quantity traded.

Answer 14

The difference between the market price received by producers and the minimum price at which they would have been willing to supply (their marginal cost).

Answer 15

As the area above the supply curve and below the market price, up to the quantity traded.

Answer 16

An indirect tax is a tax levied on goods and services rather than on income or profits. It is typically paid by the consumer but collected by the producer or seller, who then passes it on to the government.

Answer 17

• Specific tax (per unit tax): A fixed amount is charged per unit of the good or service sold (e.g., £1 per pack of cigarettes). • Ad valorem tax (percentage tax): A tax based on a percentage of the price of the good or service (e.g., VAT at 20%).

Answer 18

Indirect taxes raise the price of goods and services, which reduces the quantity demanded. Consumers ultimately bear a portion of the tax burden in the form of higher prices.

Answer 19

Producers may bear part of the tax burden if they absorb some of the tax instead of passing it all on to consumers. This could reduce their profit margins or affect the quantity supplied.

Answer 20

A subsidy is a payment made by the government to producers or consumers to encourage certain economic activities, reduce prices for consumers, or support industries (e.g., agriculture, renewable energy).

Answer 21

That consumers are rational and aim to maximise utility from their choices.

Answer 22

• Herd behaviour • Habitual behaviour • Weakness at computation

Answer 23

Consumers may copy others or conform to social norms, even if it’s not the most rational choice (e.g. fashion, peer pressure).

Answer 24

When consumers make decisions automatically, repeating past actions out of habit rather than reevaluating what’s best. (e.g sky wifi)

Answer 25

Many consumers struggle to process complex pricing or calculate best value

How markets work Flashcards

(49 cards)