1.2

Question 1

income effect definition

Answer 1

falling/rising prices allow consumers to buy more/less with a fixed income

Question 2

substitution effect definition

Answer 2

as a price of a good rises, consumers find substitute goods (inferior) preferable

Question 3

acronym for factors which shift demand curve

Answer 3

Population
Advertising
Substitute
Income
Fashion
Interest Rates
Complementary Goods
Speculation

Question 4

acronym for factors which shift supply curve

Answer 4

Productivity
Indirect Tax
No. of Firms
Technology
Subsidies
Weather
CoP

Question 5

profit incentive definition

Answer 5

firms will try to maximise profit

Question 6

crowding out of fixed factors

Answer 6

prices are set higher to cover expansion (marginal) costs

Question 7

law of diminishing marginal utility

Answer 7

for Qd to increase, prices must fall as buying the same good again gives less utility

Question 8

price mechanism acronym

Answer 8

Signalling function (signals info to consumers and producers)
Incentive function (encourages firms to produce more/less)
Rationing function (rations supply to those who can afford)

Question 9

consumer surplus definition

Answer 9

difference between price buyers are willing to pay vs. what they actually pay
area under demand and above market price

Question 10

producer surplus definition

Answer 10

difference between price producers are willing to sell at vs. the price they actually sell at
area above supply and under market price

Question 11

total surplus

Answer 11

cs + ps

Question 12

equilibrium price definition

Answer 12

price where planned purchases = planned sales

Question 13

supply definition

Answer 13

quantity of goods producers are willing to sell (direct relationship)

Question 14

demand definition

Answer 14

quantity of goods consumers are willing to buy (inverse relationship)

Question 15

PED definition and formulae

Answer 15

how Qd changes given a change in price, measures consumer reponsitivity
△Qd/ △P or Qd1/Y1 X Y2/Qd2
always negative

Question 16

YED definition and formulae

Answer 16

how Qd changes given a change in income
△Qd/ △Y or Qd1/Y1 X Y2/Qd2
both -ve and +ve

Question 17

XED definition and formulae

Answer 17

how Qd changes given a change of price in another good
△Qd2/ △P1
both -ve and +ve

Question 18

PED elastic

Answer 18

△Qd > △P
(perfect) -∞ < PED < -1 (unitary)
flat gradient
perfect when identical goods and infinite producers

Question 19

PED inelastic

Answer 19

△P > △Qd
(perfect) 0 > PED > -1 (unitary)
perfect when no substitutes
steep

Question 20

PED determinants acronym

Answer 20

Substitutes (availability of)
Proportion of income
Luxury or Necessity
Addictive
Time (short or long term)

Breadth of market (broad or narrow)

Question 21

YED elastic

Answer 21

△Qd > △Y
-∞ < YED < -1 (inferior)
1 < YED < ∞ (normal/ luxury)
perfectly at both ∞

Question 22

YED inelastic

Answer 22

△Y > △Qd
-1 < YED < 1
inferior - perfect - necessity

Question 23

positive YED means

Answer 23

normal good, consumption tracks income

Question 24

negative YED means…

Answer 24

inferior good

Question 25

XED elastic

Answer 25

△Qd1 > △P2 -∞ < XED < -1 (complementary) 1 < XED < ∞ (substitute) strong, perfect at both ∞

Question 26

XED inelastic

Answer 26

△P2 > △Qd1 -1 < XED < 1 weak - perfect/ unrelated - weak

Question 27

indirect taxes

Answer 27

on goods/ services (expenditure), are specific or ad valorem

Question 28

specific and ad valorem tax chain

Answer 28

CoP↑ π↓ supply shift, price increases

Question 29

indirect tax graph notes

Answer 29

CB + PB = gov. tax revenue E2 is allocatively inefficient as DWL specific S shifts by tax ad valorem S angle changes

Question 30

ad valorem tax summary

Answer 30

% based tax e.g. VAT

Question 31

specific tax summary

Answer 31

set p/u on goods with negative social impacts e.g. smoking

Question 32

PES definition and formulae

Answer 32

%ΔQs/ %ΔP or ΔQs/ ΔP x P/Qs responsiveness of quantity supplied given a change in price SR - at least one FoP is fixed LR - all FoP are variable always positive

Question 33

PES determinants acronym

Answer 33

Barriers to entry (permits) Raw materials Inventory Time Spare capacity Skilled labour

Question 34

PES inelastic

Answer 34

0 < PES < 1 ΔP > ΔQs perfectly when finite/ exclusive product (e.g. art) vertical gradient

Question 35

PES elastic

Answer 35

1 < PES < ∞ ΔQs > ΔP perfectly when producers can shift FoP easily, cost-free and infinite raw materials

Question 36

indirect vs direct subsidies

Answer 36

indirect - linked to number of units supplied to keep prices low direct - one off/ lump sum e.g. Help to Buy

Question 37

subsidy definition

Answer 37

government grant to lower price/ increase production

Question 38

causes of irrational behaviour (4)

Answer 38

human-ness (morals feelings and that stuff) habitual - routine/ addictive computational - cognitive limit or information gap herd - social norms/ peer effects

Question 39

law of diminishing marginal utility

Answer 39

as quantity consumed increases, marginal utility from each extra unit decreases

Question 40

direct taxes

Answer 40

tax on profit/ income/ wealth

Question 41

price mechanism definition

Answer 41

the interaction of supply and demand to allocate resources