How markets work

1.2.1
Rational Decision making
1. What is rational decision making?
2. How do consumers act in this theory?
3. How do firms act in this theory?
4. How do government's act in this theory?

1. The standard neoclassical theory which makes two very significant assumptions about the ways consumers and firms behave.
2. To maximise their utility
3. To maximise profits
4. To maximise welfare

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1.2.2
Demand
1. what is a market?
2. Give me 3 examples of markets?
3. What is demand?

1. Any place where a consumer and a supplier meets and a transaction occurs.
2. -Organized market- oil, gas(commodities)
- Financial market- Stock exchange e.g FTSE100
- Goods market- Supply and demand of goods e.g. clothing footwear
3. The quantity of go

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1.2.2
Demand
1. what does demand have?
2. When do we move along the demand curve?
3. when does the demand curve shift?

1. An inverse relationship i.e an increase in price will decrease the quantity.
2. When the price changes
3. When the level of demand changes (increases or decreases)

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1.2.2
Demand
1. What are the 6 factors of demand?

1. - change in a price of a substitute good
- change in price of a complementary
- change in consumers income
- change in taste and preferences
- change in interest rates
- population changes

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1.2.3
Price Elasticity of demand(PED)
1. what does price elasticity of demand measure?
2. What is the PED equation?
3. When is something elastic of inelastic?

1. The responsiveness of quantity demanded to a change in price
2. %change in quanitity demanded/%change in price
3. Elastic=1+
Inelastic=0-1

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1.2.3
Price Elasticity of demand(PED)
1. What are the 5 factors of elasticity of demand?

1. -Number of close substitute's in the market
- Essential goods
- percentage of income spent on a good
-Habit forming goods
- Time period(over time more people likely to break an addiction)

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1.2.3
Income elasticity of demand
1. What does income elasticity of demand(YED) measure?
2. What is the is the formula for YED?

1. The responsiveness of a change in the quantity demanded to a change in the level of consumer income.
2. %change in the quantity demanded/ percentage change in income

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1.2.3
Income elasticity of demand
1. What type of good has an elasticity of 0 to 1?
2. What type of good has an elasticity greater than 1?
3. What type of good has a negative elasticity?

1. Normal good
2. Luxury good
3. Inferior good

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1.2.3
Income elasticity of demand
1. What is a Inferior good?
2. What is a normal good?

1. Cheaper, poorer quality substitutes for some other good. E.g. Lidl and Aldi
2. Higher income consumers can switch for cheaper poorer quality goods to more expensive ones.

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1.2.3
Cross price elasticity of demand
1. What does cross price elasticity(XED) of demand measure?
2. what is the XED formula?
3. what does it mean if XED is 0?

1. Measures the responsiveness of demand for a product to a change in price of other related goods.
2. %change in quantity demanded/%change in price
3. The goods are not related

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1.2.3
Cross price elasticity of demand
1. What are substitutes goods XED?
2. What are complementary goods XED?

1. Positive because a increase in price of one good causes the demand for the substitute good to increase.
2. Negative because if the price of one product increases it will cause a decrease in the demand for another product.

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1.2.3
What are the significance of elasticities of Demand
1. Why is PED useful?

1. -Pricing policy- helps a firm decide whether to raise or lower price
-Planning profit sharing
-Price discrimination - Charging consumers different prices for the same products.
-Governments- If a tax was placed on a product how much revenue they could

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1.2.3
What are the significance of elasticities of Demand
1. Why is YED useful?
2. Why is XED useful?

1. -What to stock
- Employee decisions- when to produce a product depending on consumer income
-Coping with recessions- What to sell while incomes are dropping.
2. -How to react to competitors
- Impact on complements
- Loss leading- selling product's belo

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1.2.4
Supply
1. What is supply?
2. When will suppliers increase their supply onto the market?
3. What is the relationship of supply?
4. what is shown along the supply curve?

1. Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.
2. When the market price of commodity's rise.
3. Always a direct relationship between price and quantity.
4. a change

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1.2.4
Supply
1. What are the factors of supply which shift the supply curve?

1. -Cost of production
- changed in technology
-climatic conditions
-change in price of other goods(increase in beef will also increase market for leather).
-number of producers in the market
-government legislation

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1.2.5
Price elasticity of supply
1. what does price elasticity of supply(PES) measure?
2. What is the formula for (PES)?

1. The relationship between changes in quanitity supplied with a change in price
2. %change in quantity supplies/%change in price

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1.2.5
Price elasticity of supply
1. what are the factors of PES?

1. -Spare capacity- more spare capacity means businesses can respond to customers meaning its elastic.
-Stock piling- If businesses can stock pile products they can respond better to customers.
-Substitute goods(produced)-A businesses labour force can mak

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1.2.6
Price determination
1. What does equilibrium mean?
2. how does shifting the supply or demand curve effect the equilibrium?
3. What is the equilibrium point also called and why?

1. a sate of equality between supply and demand. There is no change in the market price.
2. It will cause a change in the equilibrium point. This then changes the price and quanitity in the market.
3. It is called the market clearing price. Called this be

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1.2.8
Producer and Consumer surplus
1. What is consumer surplus?
2. What is producer surplus?

1. The difference between how much consumers are willing to pay and what they actually pay for a product. (total satisfaction consumers recieve)
2. The difference between the cost of supply and the price received by the producer for the product.

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1.2.8
Producer and Consumer surplus
1. What are the factors affecting consumer surplus?

1. The gradient of the demand curve- the steeper the gradient the greater consumer surplus is.
Changed in the conditions of demand-e.g. increase in demand causes an increased amount of consumer surplus.

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1.2.8
Producer and Consumer surplus
1. What are the factors affecting Producer surplus?

1. - The gradient of the supply curve- the steeper the supply curve the greater the production surplus is.
- Changes in the conditions of supply- e.g. an increase in supply will increase the amount of producer surplus.

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1.2.9
Indirect taxes and Subsidies
1. What are indirect taxes?
2. Who can these taxes be passed onto?
3. What are the two types of indirect taxes?

1. Taxes imposed by the government on businesses.
2. Consumers depending on the PED of products.
Consumers end up paying most indirect taxes.
3. A specific Tax(unit tax) and Ad valorem

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1.2.9
Indirect taxes and Subsidies
1. What is a specific tax cause?
2. What does a ad valorem cause?
3. What happens when demand is inelastic?
4. What happens when demand is elastic?
5. Give 3 examples of Indirect taxes?

1. A parallel shift in supply
2. A tilt of pivot of the supply curve
3. Most of the tax is passed onto the consumer
4. Producer must carry most of the burden of the tax.
5. VAT, Air passenger duty and petrol tax

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1.2.9
Indirect taxes and Subsidies
1. What are subsidies?
2. Why would they be offered to producers?
3. What do they cause when they are introduced?
4. What is the disadvantage of a subsidy?

1. They are payments by the government which helps producers reduce costs of production and expand their output.
2. Producers who make merit goods (goods which are good for the economy)
3. -A shift in supply to the right
- An increase in amount of goods s

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1.2.10
Alternative views of consumers behaviour
1. What is this topics about?
2. What are the reasons why consumers may not behave rationally?

1. That the assumption that the aim to maximise utility is unrealistic. Proves neoclassical assumption is inaccurate.
2. -Consideration of the influence of other peoples behaviour
- The importance of habitual behaviour
-Inertia- consumers may not make an

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