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Economics Theme 1 > Unit 2: How Markets Work > Flashcards

Unit 2: How Markets Work Flashcards

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1
Q

What is the main objective of consumers when making economic decisions?

A

Maximizing utility

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2
Q

What is the main objective of producers when making economic decisions?

A

Maximising profit

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3
Q

What is meant by effective demand?

A

** Demand backed up by an ability to pay

i.e not just desiring the product

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4
Q

What are the 5 main determinants of demand?

A

Price, Income, other goods, brand reputation, tastes and preferences

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5
Q

What does a point on a demand curve show?

A

How much of a good will be demanded at a price level

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6
Q

What would cause an extension/contraction in the demand curve?

A

Change in price

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7
Q

What would cause a shift in the demand curve?

A

Any change in conditions of demand

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8
Q

Give an example of something that would shift the demand curve for potatoes to the right

A

Potatoes are revealed to be more healthy/prevent disease

demand changes

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9
Q

Give an example of something that would shift the demand curve for potatoes to the left

A

Potatoes revealed to cause cancer

demand decreases

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10
Q

Define demand

A

The quantity of a good or service that consumers choose to buy at any possible price in a given period

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11
Q

Define market demand

A

Total demand in a market for a good, the sum of all individuals’ demand, at each given price.

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12
Q

Define diminishing marginal utility

A

When an individual gains less additional utility from consuming a product, the more of it is consumed

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13
Q

Define contractions in demand

A

A movement along a demand curve to the left, showing there is a fall in the quantity demanded caused by an increase in price.
A move

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14
Q

Define extensions in demand

A

A movement along a demand curve to the right, showing there is an increase in the quantity demanded caused by a decrease in price.

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15
Q

Define the law of demand

A

there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus

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16
Q

Define the demand curve

A

A graph showing how much of a good will be demanded by consumers at any given price

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17
Q

Define a shift in demand

A

where the whole demand curve shifts to the right or left

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18
Q

Define a normal good

A

A good where the quantity demanded increases in response to an increase in income

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19
Q

Define an inferior good and give an example

A

A good where the quantity demanded decreases in response to an increase in income, e.g Asda smartprice baked beans

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20
Q

Define substitutes

A

When the demand for one good is likely to rise if the price of the other good rises (directly proportional)

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21
Q

Define complements

A

if an increase in the price of one good causes the demand for the other good to fall (inverse)

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22
Q

Define derived demand and give an example

A

When the demand for one good or service comes from the demand for another good or service. e.g cars and steel

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23
Q

Define joint supply and give an example

A

A good which is the by-product of another good, and so are produced together e.g.beef and leather, wool and sheepskin

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24
Q

Define composite demand and give an example

A

One good which is demanded for 2 different purposes e.g milk, for yoghurt and butter

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25
Define elasticity
A measure of the sensitivity of one variable to changes in another variable
26
Define relatively elastic in terms of PED range of values
1 < PED < infinity
27
Define relatively inelastic in terms of PED range of values
0 < PED < 1
28
Define unitary elasticity in terms of PED range of values
PED = 1
29
Define income elasticity of demand in words
A measure of the sensitivity of quantity demanded to a change in consumers incomes
30
Define luxury good in terms of income elasticity
One for which the income elasticity of demand is positive, and greater than 1, such that as income rises, consumers spend proportionally more on the good
31
Define a necessity good in terms of income elasticity
A good for which the income elasticity is positive, and less than 1, such that as income rises, consumers spend proportionally less on the good
32
Define cross-price elasticity of demand (XED)
A measure of the sensitivity of quantity demanded of a good or service to a change in the price of some other good or service
33
Define supply
The quantity of a good or service that firms choose to sell at any given period
34
Define a firm
An organisation that brings together factors of production in order to produce output
35
Define a competitive market
A market in which individual firms cannot influence the price of the good they are selling, because of competition from other firms
36
Define a supply curve
A graph showing the quantity supplied at any given price
37
Define a cartel
An agreement between firms in a market on price and output with the intention of maximising their joint profits
38
Define price elasticity of supply (PES)
A measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service
39
Define market equilibrium
A situation in a market where Qd = Qs
40
Define comparative static analysis
Examines the effect on equilibrium of a change in the external conditions affecting a market
41
Define consumer surplus
The value that consumers gain from consuming a good or service over and above the price paid
42
Define marginal social benefit (MSB)
The additional benefit that society gains from consuming an extra unit of a good
43
Define producer surplus
The difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service
44
Define marginal cost
The cost of producing an additional unit of output
45
Define indirect tax
A tax levied on expenditure on goods and services, where the liability can be passed onto someone else e.g VAT
46
Define direct tax
a tax charged directly to an individual based on a component of income e.g income tax
47
Define the incidence of a tax
The way in which the burden of paying a sales tax is divided between buyers and sellers
48
Define a subsidy
A grant given by the government to producers to encourage production of a good or service.
49
What do we assume is the main objective of governments?
Improve economic and social welfare of citizens
50
Name 4 factors affecting demand
Income taste/preferences/trends Weather/seasons Other goods (substitutes, complements)
51
PED formula
PED = % change in Qd / % change in P
52
At what values is PED perfectly inelastic and perfectly elastic?
perfectly inelastic: 0 perfectly elastic: minus infinity
53
Formula for YED (income elasticity of demand)
YED = % change in Qd / % change in Y (income)
54
XED formula
% change in Qd of good A / % change in P of good B
55
If a good is price elastic and price falls, what will happen to revenue ceterus paribus?
Increase
56
If a good is price inelastic and price falls, what will happen to revenue ceterus paribus?
Decrease
57
Revenue formula, and how to find revenue on a demand curve
Qd x P Revenue = area under demand curve
58
Name 4 factors affecting elasticity for consumers
PANT | Proportion of income spent on product, Availability of close substitutes, Necessity of luxury, Time
59
At what values is YED perfectly elastic/perfectly inelastic (and which goods represent these for elastic)?
Perfectly inelastic: zero Perfectly elastic: infinity, luxury goods and minus infinity, inferior goods
60
At what values of XED are subtitutes and complements
Substitutes: greater than 0 to infinity Complements: less than 0 to negative infinity
61
What causes a movement in the supply curve?
Change in price
62
What causes a shift in the supply curve?
Change in conditions of supply
63
What is the relationship between Qs and price and why?
direct - higher P, higher Qs as there is a greater incentive to produce
64
Name 5 causes of a shift in the market supply curve
Change in production cost per unit Advance in production technology More producers Better weather (e.g farming) Taxes (in), subsidies (out), and gov regulations
65
Define the short-run
At least one factor of production is fixed
66
Define the long-run
All factors of production are variable
67
What type of elasticity is supply if you cannot increase at least one factor of production in the short run and why?
Supply must be inelastic as it cannot quickly respond to a change in demand.
68
PES formula
PES = % change in Qs / % change in P
69
At what values is PES perfectly inelastic, unitary, and perfectly elastic?
Perfectly inelastic: 0 Unitary: 1 Perfectly elastic: infinity
70
Name 4 factors affecting PES
TASA Time, Availability of PRODUCER substitutes, Spare capacity, Availability of stocks (e.g can product be stored - if so then it is elastic as can respond to P change)
71
Define excess supply, and what will happen to prices
Too much output and not enough supply Prices go down until they reach equilibrium
72
Define excess demand, and what will happen to prices
Quantity producers are willing to supply is less than the quantity consumers want to purchase Prices rise until they reach equilibrium
73
Name 3 functions of the price mechanism
Rationing (prices ration scarce resources when D > S) Signalling (Change in P provides information about change in market conditions and change to act on the signal) Incentives (change in P provides incentive to increase/decrease production)
74
How is consumer surplus found on a demand curve?
Area below demand curve but above market price
75
How is producer surplus found on a supply curve?
Area above supply curve but below market price
76
Define producer surplus
Difference between price a producer would have accepted and the price the producer received
77
How does a price increase affect consumer / producer surplus?
Consumer: surplus decreases Producer: Surplus increase
78
How do indirect taxes affect the supply curve?
Shifts left as they cause an increase in supply cost.
79
Name the 2 types of indirect tax, define, and give an example for each
Ad valorem tax: based on value of product e.g VAT Specific tax: set amount per unit of product e.g excise duty
80
How do ad-valorem taxes affect the supply curve, and why?
Skewed shift inwards - as P increases, willingness to supply decreases as cost has increased per unit of output
81
How are consumers and producers benefitted by subsidies?
Consumers: lower price Producers: cost of supply is cheaper
82
What effect does a subsidy have on the equilibrium price if there is inelastic demand?
Larger (than if it were elastic)
83
What effect does a subsidy have on the equilibrium quantity if there is elastic demand?
Larger (than if it were inelastic)
84
Name 4 ways of assessing the effectiveness of a subsidy
Meeting aims Changing productivity Cost of subsidy compared to benefit Correcting market failure
85
Name 2 ways consumers act irrationally
Influenced by behaviour of others Emotional factors
86
Name 3 ways consumers don't act perfectly rationally
Abiding to social norms Habits Availability bias (attaching an emotional connection to an event)
87
Name 3 reasons why consumers cannot act perfectly rationally
Lack of available information Limits on time for decision making Computational weakness

Economics Theme 1 (4 decks)

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