How Markets Work 1.2

Front 1

Rational

Back 1

Economic agents are able to consider the outcome of their choices and recognise the net benefits of each one. Rational agents will select the choice which presents the highest benefits.

Front 2

Demand

Back 2

The amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

Front 3

Effective Demand

Back 3

If a consumer is willing to purchase a good, but cannot afford to.

Front 4

Factors that shift Demand Curves

Back 4

Changes in real incomes, changes in taste/fashion, advertising, changes in the price of a subsitute, changes in the prices of complmentary goods.

Front 5

Marginal Utility

Back 5

The additional utility (satisfaction) gained from the consumption of an additional product

Front 6

The Law of Diminishing Marginal Utility

Back 6

As additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit.

Front 7

Price Elasticity of Demand (PED)

Back 7

Determines how responsive the change in quantity demanded is to a change in price.

Front 8

Calculation of PED

Back 8

Front 9

Interpreting PED Values

Back 9

Front 10

Factors that influence the PED

Back 10

Availability of subsitutes, addictiveness of the product, % of income, time period,

Front 11

Calculation of YED

Back 11

Front 12

Interpreting YED Values

Back 12

Front 13

Calculation of PES

Back 13

Front 14

Interpreting PES Values

Back 14

Front 15

Factors that influence the PES

Back 15

Mobility of the factors of production, availability of raw materials, ability to store goods, spare capacity, time period

Front 16

Disequilibrium - Excess Demand Graph

Back 16

Front 17

Disequilibrium - Excess Supply Graph

Back 17

Front 18

The Price Mechanism

Back 18

The interaction of demand and supply in a free market, this interaction determines prices which are the means by which scarce resources are allocated between competing wants/needs.

Front 19

Rationing (Price Mechanism)

Back 19

Prices allocate (ration) scarce resources. When resources become scarcer the price will rise further. Only those who can afford to pay for them will receive them.

Front 20

Signalling (Price Mechanism)

Back 20

Prices provide information to producers & consumers where resources are required (in markets where prices increase).

Front 21

Incentive (Price Mechanism)

Back 21

When prices for a good/service rise, it incentivises producers to reallocate resources from a less profitable market to this market in order to maximise their profits.

Front 22

Consumer Surplus

Back 22

The difference between the amount the consumer is willing to pay for a product and the price they have actually paid.

Front 23

Producer Surplus

Back 23

The difference between the amount that the producer is willing to sell a product for and the price they actually do.

Front 24

Consumer/Producer Surplus Graph

Back 24

Front 25

Indirect Tax

Back 25

Paid on the consumption of goods/services, it is only paid if consumers make a purchase.

Front 26

Specific (Indirect Tax)

Back 26

A fixed tax per unit of output (specific amount)

Front 27

Ad Valorem (Indirect Tax)

Back 27

A tax that is a percentage of the purchase price e.g VAT

Front 28

The Incidence of a Specific Tax

Back 28

Front 29

Subsidies

Back 29

A per unit amount of money given to a firm by the government to increase production

Front 30

The Incidence of Subsidies

Back 30

Front 31

Factors that influence YED

Back 31

Recession, minimum wage legislation, taxation, increased international trade

Front 32

Cross Price Elasticity of Demand (XED)

Back 32

Reveals how responsive the change in quantity demanded for good A is to a change in price of good B.

Front 33

Calculation of XED

Back 33

Front 34

Interpreting XED Values

Back 34

Front 35

The Revenue Rule of PED

Back 35

The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand and decrease prices on products that are elastic in demand

Front 36

Supply

Back 36

The amount of a good/service that a producer is willing and able to supply at a given price in a given time period

Front 37

Factors that shift Supply Curves

Back 37

Cost of production, indirect taxes, subsidies, new technology.

Front 38

Price Elasticity of Supply (PES)

Back 38

Reveals how responsive the change in quantity supplied is to a change in price

Front 39

Factors that affect a Consumers Rational Behaviour

Back 39

Influence of others behaviour (peer pressure, Advertisement), Habitual nature( Consumer inertia, Addictive products), Consumer weakness at computation (too much choice, time period and even shelving placement).

Front 40

Consumer Inertia

Back 40

The tendency for consumers to continue buying a product despite superior options exisisting e.g Broadband account.