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How Markets work

Sophie Knight Economics A level Inglés 24 fichas

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1What is the one thing that all markets have in common?They are places where buyers and sellers come in contact to exchange goods.
2What is the formula that shows maximising utility?Marginal utility of A = MU of B
Price of A Price of B
3What causes a movement ALONG the demand curve as opposed to a shift in the curve?A movement ALONG is when the price of the good changes and ONLY for that reason!
4what is the law of diminishing utility?As one consumes more of a good, the utility or satisfaction of the good will decrease
5Give 8 causes of the demand curve shifting1. Fall in the price of complementary goods
2. A rise in the price of substitutes
3. A change in fashion and tastes
4. Increased advertising
5. Increase in real incomes
6. Decrease in income tax
7.Increase in population
8. Increase in credit facilities
6What is the formula for price elasticity of demand?Percentage change in quantity demanded of good /
Percentage change of price of good
7What do these different PED values show? : PED > 1 PED < 1 PED = 1 PED = 0 PED = InfinityPED > 1 = relatively price ELASTIC
PED < 1 = relatively price INELASTIC
PED = 1 is ELASTIC
PED = 0 is PERFECTLY INELASTIC
PED = Infinity is PERFECTLY ELASTIC
8What are the 6 determinants of PED?1. Availability of substitutes
2. Luxury and Necessity of goods
3. Proportion of income spent on it
4. Addictive and habit forming goods
5. The time period
6. Brand Image
9What is the income elasticity of demand for.. - normal goods - inferior goodsNormal goods = positive YED meaning as income rises, so does demand
Inferior goods = Negative YED as people will demand less poor quality goods when their income rises
10Give the formula for cross elasticity of demand% change in demand for B
% change in price of A
11What is the cross elasticity of demand used to determine?Whether goods are compliments or substitutes for each other
12If there is a positive XED what does the relationship between the two goods is?SUBSTITUTES!
13Why is the supply curve upwards sloping?As Firms raise output in the short run they face higher production costs so pass them onto consumers, causing the price to rise
14What are the 8 reasons for a shift in the supply curve?1. Improvements in technology
2. Reduction in labour costs
3. Reduction in capital costs
4. Discovery of new resources
5. Reduction in transport costs
6. Increase in number of firms
7. Change in regulations
8. Changes in tax and subsidies
15What is the elasticity of the good when... : PES > 1 PES < 1 PES = 0 PES = 1 PES = InfinityPES > 1 Relatively elastic
PES < 1 Relatively inelastic
PES = 0 Perfectly inelastic
PES = 1 Elastic
PES = Infinity Perfectly elastic
16what are the 6 determinants of the PES of a good?1. Level of spare capacity
2. State of the economy
3. Level of stocks in a firm
4. Perishability of the good
5. Ease of entry into an industry
6. Time period under consideration
17What is price determined by?The interaction of demand and supply in a competitive market
18what are the 3 functions of the price mechanism?1. A rationing device - goods go to those who can afford them
2. An incentive device - encourages firms to produce more or less of a good depending on price
3. A signalling device - indicates changes in demand or supply
19How do you show consumer and producer surplus on a diagram?Consumer surplus is below demand but above equilibrium and producer surplus is above the supply curve but below equilibrium
20What will cause consumer and producer surplus to rise and what will cause them to fall?increase in demand (demand curve shift to the right) will cause them to rise
decrease in supply (shift to the left) will cause them to fall
21What are the two types of indirect tax and how do they differ?Ad valorem - charged as a percentage of the good
Specific - fixed amount per unit of good
22What would cause most the tax incidence to be on the consumer?Price inelastic demand and/or price elastic supply
23Give 3 alternative views of consumer behaviour1. Influence of people around them- the 'herd like' mentality
2. Importance of habitual behaviour
3. Consumer weakness at computation
24What are the underlying assumptions of rational decision making?Consumers aim to maximise utility
Producers aim to maximise profit