micro theme 1 1.2 Flashcards
(131 cards)
1
Q
what is utility
A
is the amount of satisfaction obtained from consuming a good or service
2
Q
what is a rational consumer
A
consumers will allocate their income to maximise their utility or satisfaction from the goods and services they purchase.
3
Q
what is a rational producer
A
firms will use their resources to maximise their profits for the goods and services produced
4
Q
what is rational decision making based on consumers and producers having (4)
A
- perfect market information
- computational skills and judgemental skills
- the ability to take decisions free from influence and others behaviour
- sufficient time to make decisions
5
Q
what is marginal
A
is the change in a variable caused by an increase of one unit of another variable
eg the marginal cost of an ice cream is the additional cost of making one additional ice cream. ie the cost of the final ice cream produced
6
Q
what is marginal utility
A
is the satisfaction gained by a consumer consuming an additional unit of good or service
for each additional unit of a good its how much the satisfaction increases for each unit that’s consumed
7
Q
what is diminishing marginal utility
A
that for each additional unit of good that’s consumed, the marginal utility gained decreases
8
Q
what is demand
A
the willingness and ability to purchase a good and a service at the given price in a given time period
for most products as the price of a good or service falls, the quantity demanded increases
9
Q
what is the law of demand
A
for most products as the price of a good or service falls, the quantity demanded increases
10
Q
if prices changes on the demand graph will it shift or move along the demand curve
A
moves
anything else changes there’ll be a shift in the demand curve
11
Q
examples of what could cause a shift in demand (5)
A
- income
- price of other goods
- intoduction of a new product
- increase/decrease in population
- weather
12
Q
what is substitute goods?
A
are goods which are alternative to each other, eg beef and lamb
13
Q
what are complementary goods?
A
goods often used together eg strawberries and cream
14
Q
what is derived demand?
A
demand for a good or factor of production used in making another good or service eg demand for fencing will affect demand for wood
15
Q
what is composite demand
A
goods with more than one use such as oil eg demand for oil can lead in changes of demand curve for plastics
16
Q
what are normal goods
A
are those that people demand more of it if their real income increases
17
Q
what are inferior goods
A
are those that people demand less or it if their real income increases (cheap clothing)
18
Q
what is speculative demand?
A
if the price of a good such as housing or shares start to rise people may speculate that it may rise further (eg first time house buyers may scramble to buy houses fearing if they wait prices could rise again)
19
Q
what is a veblen good?
A
some firms try to sell their goods based on the fact that they cost more than those of their competitors eg ferrari cars as a sign of wealth
20
Q
what is a giffen good?
A
is a low-income, non-luxury product.
demand for giffen goods rises when the price rises, and falls when the price falls eg bread, rice
21
Q
what is price elasticity of demand
A
this looks at the sensitivity of the quantity demanded for a good or service when there is a change in its price
22
Q
for PED products can be either what? (2)
A
elastic or inelastic
23
Q
what is elastic in demand? and an eg
A
a product that is highly price sensitive (will be a significant change in demand for any price change) price elasticity beyond -1. eg a holiday
24
Q
what is inelastic in demand? and an eg
A
a product that is not very price sensitive (won’t be a significant change in demand for a price change) price elasticity between 0 and 1. eg cigarettes
25
PED formula
%change in demand / % change in price
% change in QD/ % change in P
26
what’s % change formula
new amount - original amount / original amount x100
27
does an elastic demand diagram have a steep or shallow gradient?
shallow
28
does an inelastic demand diagram have a steep or shallow gradient?
steep
29
whats a perfectly elastic diagram in demand
had a PED of infinity
any increase price means that the demand will fall to 0
is perfectly horizontal
30
what’s a perfectly inelastic diagram in demand
has a PED of 0
any change in price won’t have an effect on the quantity demand
is perfectly vertical
31
what is unitary elasticity of demand
if the size of the % change in price is equal to the size of the % change in quantity demanded
32
what does unitary elasticity of demand look like on diagram
curved
33
what is revenue definition
is the money made from sales
34
what is revenue formula
revenue = price x quantity
35
what is supply
is the amount of goods or service producers offer for sale to the market at each price level
36
what is planned supply
is the amount that producers intend to produce at each given price
37
what do firms take into consideration when deciding the quantity to supply
the cost to produce the good (land, labour, capital)
38
what’s the law of supply
as price increase the quantity supplied will increase
39
what would cause a shift in the supply curve (5)
* changes in raw material prices
* wage rates
* objectives of firms
* subsidies (gov give people money)
* expectations about future prices
40
what is joint supply
where production of one good or service involves or interrelates to the production of another (or several)
41
if the price of a product increases what does the supply do
the supply of it and any joint products will also increase
42
what is price elasticity of supply (PES)
is the measurement of how the quantity supplied of a good responds to a change in its price
43
what is the formula for price elasticity of supply (PES)
PES= %change in quantity supplied / %change in price
44
is the gradient steep or shallow in an elastic supply diagram
shallow
PES >1
45
what’s a perfectly elastic diagram in supply
has a PES of infinity
any fall in price means that the quantity supplied will be reduced to 0
perfectly horizontal line
46
is a inelastic PES shallow or steep
steep
PES <1= % change in price will cause smaller % change in quantity supplied
47
what’s a perfectly inelastic diagram in supply
has a PES of 0
any change in price will have no effect on quantity supplied
perfectly vertical line
48
unit elasticity of supply
% change in price is equal to % change in quantity supplied
49
supply could be elastic because (4)
1. if there is space capacity in the factory
2. if there are stocks available
3. in the long run, supply will be more elastic because capital can be varied
4. if it is easy to employ more factors of production
50
supply could be inelastic because (5)
1. firms operate close to ful capacity
2. firms have low levels of stock, therefore there are no surplus goods to sell
3. the the short term, capital is fixed eg firms do not have time to build a bigger factory
4. if it is difficult to employ factors of production eg is highly skilled labour is needed
5. with agricultural products, supply is inelastic in the short run, because it takes at least 6 months to grow crops; in sept the farmer cannot suddenly produce more potatos if the price goes up.
51
factors affecting price elasticity of supply (5)
* time- more elastic the longer the time period
* available of stock and stockpiling- if stocks are high then they are able to increase supply
* ease of switching between alternative production- can new firms easily switch production to that product?
* availability of spare capacity- can increase production quickly
* number of firms in the market and ease of entering the market
52
what is price mechanisms
changes to demand and supply leads to changes in price and to the quantity brought and sold
53
what are the functions of price (price mechanism) (4)
* the signalling function
* the incentive function
* the rationing function
* the allocation function
54
what is the signal function of money
* price provide information to buyers and sellers. It acts as a signalling device
* eg- price increases is a signal to producers that demand is high, so it will encourage to increase production
55
what is the incentive function of price
* it acts as an incentive to firms
* higher prices allows firms to produce more goods/services and encourages increased production and sales by providing higher profits
56
what is the rationing function
* it acts to ration scarce resources
* eg if there's a high demand for a good or service and its supply is limited, then the price will be high
* therefore supply of the good will be restricted to consumers that can afford to pay the high price
* opposite will happen for goods that are in low demand but in high supply, ie low price, many be sold
57
what is the allocation function
the price mechanism is also used to allocate the resources used to produce goods and services
58
what is market equilibrium
when the quantity demanded equals the quantity supplied in a market for a particular product, the market is in a state of equilibrium
59
what is equilibrium
when supply met demand
60
what is equilibrium price (the market clearing price)
the price that balances quantity supplied and quantity demanded
61
what is equilibrium quantity (market clearing quantity)
the quantity supplied and quantity demanded at the equilibrium price
62
what is disequilibrium
a situation within the market where supply does not equal demand
63
what does cross elasticity of demand (XED) measure
XED measures of how the quantity demanded of one good responds to a change in the price of another good
## Footnote
useful in analysing the relationships between substitute and complementary goods
64
the formula for cross elasticity of demand
XED= %change in quantity demanded for good A / %change in price of good B
65
will a substitute goods XED be posititve or negative
there XEDs will be positive
66
will a complementary goods XED be posititve or negative
their XED will be negative
67
the higher the value of the coefficient the _ the two products are as substitutes
closer
68
inelastic is
a result between 0 and 1 (or 0 and -1), showing less correlation between goods
69
elastic is
a result greater than 1 (or below -1), and shows a higher level of correlation between the goods
70
a strong substitute relationship in a diagram is
a shallow positive gradient (elastic)
71
a weak substitute relationship is
a steep positive gradient (inelastic)
72
strong complementary relationship is
a shallow negative gradient (elastic)
73
a weak complementary relationship is
a steep negative gradient (inelastic)
74
what does income elasticity of demand (YED/IED) measure
measures how much the demand for a good changes with the change of real income
75
income elasticity of demand contains what goods
normal goods
luxury goods
necessity goods
inferior goods
76
what's a normal goods elasticity
have a positive income elasticity
77
what is a luxury goods elasticity
the income elasticity > +1
78
what is necessities good elasticity
the income elasticity >0 and <+1
79
what is a inferior products elasticity
negative income elasticity
80
what is the income elasticity of demand formula
YED= %change in quantity demanded / % change in income
81
what is a normal necessities
income inelastic-
when incomes are falling, demand for normal and necessary goods to a lesser extent, will fall
they have a low but positive income elasticity
0 to 1= inelastic
## Footnote
eg milk +fruit
82
what is a normal luxury and the issue
have a high- and positive- income elasticity >1 = elastic
what is considered a necessity and a luxury is contextual
83
what is an inferior good
have a negative YED, <0
increase in real incomes, loss of the good is purchased
84
the gradient of an income that is elastic in a diagram
shallow positive gradient
85
the gradient of an income that is inelastic in a diagram
steep positive gradient
86
the gradient of an inferior product in a diagram
steep negative gradient
87
What are influences of PED
What are determinants of PED
Availability of substitutes
Time
Normal/ inferior goods
Luxury or necessity
Habitat forming goods
Demand for products with several uses
% of income required to buy good
Brand loyalty
88
what is a consumer surplus
is the difference between the price that a consumer is willing to pay for a good and service and the price that they actually pay (equillibrium price)
## Footnote
eg consumer prepared to pay £150 for shoes but bought for £100 consumer surplus is £50
89
where is consumer surplus on the demand curve
and the effect of increase in price
below the demand curve and above the equilibrium price
as price increases the size of the consumer surplus will decrease
90
what is producer surplus
if a producer receives more for a good and service than the price they are willing to accept. the extra earnings is producer surplus
91
where is producer surplus on a supply diagram
what is the effect of an increase in price
it is above the supply curve and belo w the equilibrium price
price increases so does producer surplus
92
A shift left in supply would cause producer and consumer surplus to ...
a price increase
so producer surplus would increases and consumer surplus decreases
93
A shift left in demand would cause producer and consumer surplus to ...
decrease in price
so consumer surplus increases as producer surplus decrease
94
in an elastic diagram would consumer or producer surplus be greater
producer surplus
95
in an inelastic diagram would consumer or producer surplus be greater
consumer surplus
96
what is the combined sum of surpluses represent
the net welfare that society as a whole gains from the production and consumption of this good or service
97
what is a subsidy
and how would they help
a sum of money given by the government or a public body to encourage the production of a good or service
an industry or business keep the price of a commodity or service low and affordable for consumers
98
what area of the diagram is the total subsidy
the new price to the new supply equilibrium point then directily up to the old supply line then to the price.
99
what is the impact of subsidies on consumers producers and the government
c- products are cheaper as supply increases so price decreases
p- they can gain more materials with money gained.
g-????
100
What is direct tax
Are levied on individuals or entities directly by the government eg income tax, corporate tax
The burden falls directly on the taxpayers
101
What is indirect tax
Are those collected by an intermediary (eg marketplaces, manufacturers, platform owners) from the end consumer
Are imposed on producers (suppliers) by the government and is paid by the seller
Impacts the supply curve for the products
102
How would firms react to indirect tax
The supplier may pass on some or all of this tax onto the consumer through a higher price= shifting the burden
It depends on the price elasticity of demand and supply for the ability of the business
103
Tax on price elastic goods goes to who
If the demand is elastic so the producer must absorb most of the tax and accept a lower profit margin on each unit sold
When demand is elastic the effect of tax is to raise the price- would see a bigger fall in quantity
104
Tax on price inelastic goods goes to who
The producer is able to pass on most of the tax to the consumer by raising price without losing much in the way of sales
105
What is the total burden of the tax that is shared out referred to as
Incidence of taxation
106
What’s the top half of incidence of taxation on diagram
What Consumers pay
107
What’s the bottom half of incidence of taxation on diagram
What the producer pays
108
When will the producer pay more of the indirect tax
When the good is elastic
109
When will the consumer pay more of the indirect tax
When the good is inelastic
110
What are the types of taxes (2)
specific taxes and ad valorem taxes
111
what is specific taxes
where the tax per unit is a fixed amount
112
what is Ad Valorem tax
where the tax is a percentage of the cost of supply eg VAT
113
what is the assumption that traditional economics makes (3)
economic agents are utility 'maximisers' and economic agents are rational
however behavioural economist challenge these assumptions
behavioural economics recognises that humans are unlikely to always act rationally in the face of every decision that they make
114
why do consumers not act rational in every decision that they make (6)
1. the time available to make decisions is limited
2. imperfect information where economic agents may have too little or too much information
3. available information may be incorrect
4. information can be presented in a way that excludes some people and meaningful to others eg legal jargon (difficult to understand words)
5. there may be cost involved in acquiring information that defer people from doing so
6. unable to calculate the cost of alternatives
115
what are the 3 aspects of behavioural economic theory
1. bounded rationality
2. bounded self-control
3. behaviour biases
116
what is bound rationality
is the idea that people may try to behave rationally, but their ability to do so is severely restricted for 3 main reasons:
1. the human mind has limited ability to process and evaluate information
2. the available information is incomplete and often unreliable (and rapidly out of date)
3. time available to make decisions is limited
therefore even with the best intentions, individuals end up 'satisficing' or accepting sub-optimal outcomes
117
what is satisficing
pursue a course of action that will satisfy a minimum requirements to achieve a goal
118
what is bounded self-control
when individuals have good intentions but lack the self-discipline to see them through eg gym attendence, losing weight
119
what is behaviour biases
behavioural economist believe individuals are influenced by biases which affect decision making
120
what are the examples of behaviour biases (6)
rule of thumb
anchoring
availability bias
social norms
herd mentality
the bases of 'altruism and fairness'
choice architecture
121
what is the rule of thumb
are 'thinking shortcuts' individuals use to make decisions, given the problems of bounded rationality (eg choose the same drink as they know they like it)
122
what is anchoring
placing too much emphasis on one piece of information (eg a consumer choosing between car insurance online may focus on price)
123
what is availability bias
is when people make judgements about the probability of events by recalling recent instances. It comes to mind easily (eg recalling a family member who lost their retirement savings in the last recession, discourage personal savings)
124
what is social norms
an individuals behaviours can be influenced by the behaviour of their social group (eg encouraging passengers to put pressure on drivers not to drive too fast or under the influence of alcohol)
125
what is herd mentality
many consumer decisions are influenced by what other people are doing. Whether is it the fear of missing out or whether others want to be part of a larger collective
126
what is the bases of 'Altruism and fairness'
mean that people are motivated to 'do the right thing' eg giving to charity may be seen as irrational in traditional economic theory or would argue people are doing it to gain utility as it makes them feel good
127
what can behaviour economic theory help do
help governments and other agencies devise policies
this enables them to better influence the decisions of individuals and firms
128
what is choice architecture
refers to how choices may be influences by the way they are presented to the decision maker
depending on how a choice is presented or structured can have a massive influence on a decision made
129
what are the examples of choice architecture (5)
1. framing- influences choices by the way words and numbers are used
2. nudges- aims to influence consumer behaviour via the use of gentle suggestions and positive reinforcements (5 a day)
3. default choices- sets socially desirable choices as the default option, making it an effort to choose otherwise
4. mandated choice- where people are required by law to make a choice
5. restricted choice- this occurs when people's choices are restricted
130
What are advantages of subsidies (4)
* Lower costs for consumers-beneficial where significant portion of income goes to basic needs
* Support for emerging industries- with the capital they need to grow
* Encourage research and development- incentive for advancement in technology increase efficiency and and quality
* Protecting domestic industries- can help local industries from international competition by lowering production cost, encourage growth of domestic businesses
131
Disadvantage of subsidies (4)
* Significant cost to the government= higher taxes or reduced spending in other areas
* inefficient allocation of resources might lead to the overproduction of subsidised goods + services, result in waste or environmental damage
* overdependence on subsidies cause firms to be complacent, remove incentive to become more efficient or self-sustaining- reduce quality
* can disproportionately benefit larger businesses or wealthy individuals rather than the intended target group, exacerbating inequality
