1.2

Question 1

what are the assumptions of rational economic decision making

Answer 1

consumers aim to maximise utility - satisfaction gained from receiving a product

firms aim to maximise proft

governments aim to maximise social welfare

Question 2

define demand

Answer 2

demand is the ability and willingness to buy a particular good at a given price at a given time

Question 3

what does a movement along a demand curve represent compared to a shift in the demand curve

Answer 3

movement along a curve is a change in price of a good

short of demand curve is a change in the factors that affect demand

Question 4

what does it mean if there is the shift to the right on demand curve compared to a shift to the left

Answer 4

increase In demand if shifts to the right

decrease in demand if shifts to the left

Question 5

what does it mean if there is movement to the right along the demand curve compared to a movement to the left

Answer 5

extension in demand if to the right, quantity demand rises as prices fall

contraction in demand if to the left, quantity demanded decreases as prices rise

Question 6

what are the conditions of demand

Answer 6

PIRATES

Population
Income
Related goods
Advertising
Taste
Expectations
Seasons

Question 7

what is diminishing marginal utility

Answer 7

the satisfaction derived from the consumption of an additional unit will decrease as more of a good is consumed

Question 8

what is PED

Answer 8

price elasticity of demand

responsiveness of demand to a change in the price of a good

Question 9

what is the formula of PED

Answer 9

% change in quantity demanded divided by % change in price

Question 10

what are the numerical values of PED

Answer 10

unitary elastic = 1 - quantity demanded changes by how much price changes

relatively elastic = PED>1

Relatively inelastic = PED<1

perfectly elastic = PED = infinity

perfectly inelastic = PED = 0

Question 11

factors influencing PED

Answer 11

availability of substitutes

time

necessity

size of total expenditure

addictive

Question 12

significance of PED

Answer 12

if demand is inelastic, the imposition of tax will be ineffective as quantity demanded will not fall

Question 13

PED and revenue

Answer 13

for elastic demand curve, prices decrease increase revenue as there is a higher quantity demanded

for inelastic demand curve, prices decrease, decrease revenue as

for unitary elastic curve - change in price does not effect revenue

Question 14

income elasticity of demand equation

Answer 14

%chnage in quantity demanded divided by % change in income

Question 14

what is income elasticity of demand

Answer 14

responsiveness of demand to a change in income

Question 15

numerical values for income elasticity of demand

Answer 15

YED<0- inferior good

YED>0- normal good

YED>1 - luxury good

Question 16

significance of YED

Answer 16

during times of high income, businesses may produce more luxury goods, likely increasing sales

Question 17

what is cross elasticity of demand

Answer 17

responsiveness of demand for one product to the change of price of another product

Question 18

equation of cross elasticity of demand

Answer 18

%change of quantity demanded for A divided by %chnage in price of B

Question 19

numerical values for XED

Answer 19

XED> 0 is substitutes

XED < 0 is complimentary goods

XED -0 is unrelated goods

Question 20

significance of XED

Answer 20

firms need to be aware of their competition and those producing complementary goods, need to know how price changes by other firms will impact them

Question 21

what is supply

Answer 21

ability and willingness to provide a good or service at a particular price and a given moment in time

Question 22

what does a movement along the supply curve signify compared to a shift

Answer 22

movement means change in price

shift due to change in factors of supply

Question 23

What are the conditions of supply

Answer 23

Cost of production

Price of other goods (joint supply, competitive supply)

Weather

Technology

Goals of supplier

Government legislation

Taxes and subsidies

Question 24

What is the elasticity of supply

Answer 24

Responsiveness of a Change of supply to a change in price of a good

Question 25

What is the equation for PES

Answer 25

% change in quantity supplied divided by % change in price

Question 26

What are factors influencing PES

Answer 26

Time Stock Efficiency Availability of factors of production Substitutes availability Ease of entry into market

Question 27

what does it mean if a point on the supply curve moves to the left compared to a move to the right

Answer 27

to the left is a contraction in supply, quantity supplied falls due to a decrease in price to the right is extension in supply, quantity supplied rises due to an increase in price.

Question 28

what are the conditions of supply

Answer 28

cost of production price of other goods weather technology government legislation taxes and subsidies

Question 29

what is the price elasticity of supply

Answer 29

responsiveness of supply to a change in the price of the good

Question 30

price elasticity of supply equation

Answer 30

% change in quantity supplied divided by % change in price

Question 31

factors affecting PES

Answer 31

time stocks working below full capacity availability of factors of production ease of entry into the market availability of substitutes

Question 32

what does the price equilibrium mean

Answer 32

supply is equal to demand, no more forces bringing about change.

Question 33

what is the price mechanism

Answer 33

allocates resources and price is determined by the interactions of demand and supply

Question 34

what are the price mechanism functions

Answer 34

rationing function- limited resources can be rationed and allocated to those who value them the most signalling function- acts as a signal of where resources should be used incentive function- incentive to work harder

Question 35

what is consumer and producer surplus

Answer 35

consumer - difference between price consumers willling Pay and the price they actually pay producer- difference between the price the supplier is willing to produce and how much they actually produce for

Question 36

what is an indirect tax

Answer 36

where the person who pays for the product is not responsible for the tax but they are charged tax which the business is required to pay

Question 37

what are the two type off indirect taxes

Answer 37

ad valorem- tax increases based on in proportion to the value of goods. specific tax- an amount added to the price of the product

Question 38

how does tax affect the supply curve

Answer 38

shift to the left since cost of production increases

Question 39

what is the incidence of tax and how does the demand or supply elasticity affect it

Answer 39

tax burden on the taxpayer if perfectly elastic, consumer will pay all tax if demand curve perfectly inelastic, consumer will pay all tax if demand curve is elastic, suppliers will pay all the tax

Question 40

what is a subsidy

Answer 40

subsidy is a grant given by the government.