1.2

Question 1

Margin

Answer 1

The margin is the change in a variable caused by an increase of one unit of another variable

Question 2

Marginal cost

Answer 2

The additional cost of making one additional good

Question 3

How do you calculate the marginal cost

Answer 3

Difference between the total cost at the new output level and the total cost at one unit less than that e.g
£102-£100=£2

Question 4

Utility

Answer 4

Happiness, satisfaction

Question 5

How consumers act rationally

Answer 5

Decisions will be made solely on trying to gain the maximum utility possible

Question 6

Marginal utility

Answer 6

Benefit gained from consuming one additional unit of a good

Question 7

Total utility

Answer 7

Overall benefit gained from consuming a good

Question 8

The law of diminishing marginal utility

Answer 8

For each additional unit of a good that’s consumed, the marginal utility gained decreases.

Each additional biscuit gives a consumer less satisfaction

Question 9

A rational consumer will pay at what price?

Answer 9

Marginal utility = price

10p happiness = 10p biscuit

Question 10

What’ll happen to the demand curve in line with diminishing marginal utility

Answer 10

The demand curve slopes downwards

Question 11

Assumptions made about producers, and what producers may care about

Answer 11

Firms are assumed to want to maximise profit - this could be for various reasons

Profit allows for survival, greater rewards to shareholders and staff, or reinvestment

Some firms may care about sales or market share, to become larger gain monopoly power and attract the best employees, and charge higher prices

Ethical objectives - support local economy

Question 12

Assumptions made about consumers

Answer 12

To live within their means

To maximise their utility

Question 13

Assumptions about the Government

Answer 13

Assume that governments try to maximise the public interest
Economic growth
Full employment
Equilibrium in the balance of payments
Low inflation

Question 14

The key assumptions used in traditional economic theory?

Answer 14

Economic agents are utility maximisers

Economic agents are rational

Question 15

Asymmetric information

Answer 15

When one party has more information than the other.

Sellers often have more information than buyers as a seller will know how much a product actually costs to make and it’s true value

Question 16

Symmetric information

Answer 16

Perfect knowledge of information

Question 17

Behavioural economists on rationality alone

Answer 17

Cannot be used to predict customer behaviour

Question 18

Bounded rationality

Answer 18

People tend to make a satisfactory decision rather than spend ages trying to make a rational decision which maximises utility

Question 19

Bounded self-control

Answer 19

Limited ability to stop or discipline themselves

Question 20

Social norms

Answer 20

Influenced by the behaviour of their social group

Question 21

Habitual behaviour

Answer 21

Same thing over and over again, shopping at the same place regardless of any rational reason

Question 22

Why consumers may not act rationally

Answer 22

Time is limited

Not all information is available

People might not be very good at calculating the costs of alternatives (this is known as computation weakness)

Question 23

Demand

Answer 23

The quantity of goods/service that consumers are willing and able to buy at a given price, at a particular price

Question 24

Contraction and Extension in demand

Answer 24

Contraction- decrease in demand caused by changes in price

Extension - increase in demand caused by changes in price

Question 25

Shifts in the demand curve

Answer 25

A demand curve moves left when there is a decrease in the amount demanded at every price A demand curve shifts to the right when there is an increase in the amount demanded at every price

Question 26

Factors causing shifts in the demand curve

Answer 26

Tastes and fashion (right = popular, left = out of fashion) Changes in peoples real income

Question 27

Normal goods

Answer 27

An increase in income, leads to an increase in demand DVDs

Question 28

Inferior goods

Answer 28

An increase in real income causes a decrease in demand Cheap clothes

Question 29

Equal distributions effects on demand curve

Answer 29

Luxury goods shift to the left Demand curve for other items shift to the right

Question 30

Interrelated markets

Answer 30

Where changes in one market can affect a related market

Question 31

Substitute goods

Answer 31

Beef and lamb Competitive demand, an increase in price for one will lead to a decrease in demand for it and an increase in demand for another

Question 32

Complementary goods

Answer 32

Joint demand, often used together. Price increase of strawberries leads to decrease in demand for strawberries and cream Strawberries and cream

Question 33

New product

Answer 33

Shift to the left for substitute goods Shift to the right for complementary products

Question 34

Derived demand

Answer 34

Demand for a good or factor of production used in making another good or service

Question 35

Composite demand

Answer 35

Goods with more than one use. Oil can be used to make plastic or fuel Changes in demand curve for fuel leads to changes in the supply curve for plastics

Question 36

Supply

Answer 36

The quantity of a good or service that producers supply to the market at a given price at a particular time

Question 37

A contraction and extension in supply

Answer 37

Contraction - a decrease in price leads to a contraction in supply Extension - an increase in price leads to an extension in supply

Question 38

Shift in the supply curve

Answer 38

Left - decrease in the amount supplied at every price Right - an increase in the amount supplied at every price

Question 39

Causes for shift in the supply curve

Answer 39

Increase/Decrease cost of production Improvements in technology Changes to the productivity or factors of production Indirect taxes and subsidies Changes to the price of other goods (producers may produce more of A than B) Number of suppliers

Question 40

Equilibrium

Answer 40

Price and output are stable, there’s a balance in the market and supply is equal to demand Where S and D meet

Question 41

Disequilibrium

Answer 41

When supply and demand aren’t equal

Question 42

Excess supply

Answer 42

The quantity supplied to a market is greater than the quantity demanded

Question 43

Excess demand

Answer 43

The demand for a good or service is greater than its supply

Question 44

How market forces act to remove excess supply and demand

Answer 44

Supply - price to be forced down supply to contract and demand to extend Demand - price to be forced up, demand to contact and supply to extend

Question 45

PES

Answer 45

Price elasticity of supply is a measure of how the quantity supplied of a good responds to a change in its price

Question 46

How is PES calculated

Answer 46

Percentage change in quantity supplied/ percentage change in price

Question 47

How to work out the percentage change in quantity supplied

Answer 47

Change in supply/original supply x 100 = …/… x 100 = …%

Question 48

How to work out percentage change in price

Answer 48

Change in price/original price x 100 = …/… x 100 = …%

Question 49

Elastic supply =

Answer 49

If the value of PES is greater than 1, the supply of the good is elastic This means a percentage change in price will cause a larger percentage change in quantity supplied

Question 50

Inelastic supply =

Answer 50

The value of PES for an inelastic goof is between 0 and 1. This means a percentage change in price will cause a smaller percentage change in quantity supplied

Question 51

What PES do firms want

Answer 51

Elastic supply, to respond quickly to changes in price and demand To do this, spare production capacity, modern technology flexible working patterns