1.2

Question 1

what factors affect demand?

Answer 1

.Real Income,
.Size or age of the population,
.Tastes, fashions or preferences,
.Prices of substitutes or compliments,
.The amount of advertisement or
promotion
.Interest Rates

Question 2

Explain a decrease in marginal utility.

Answer 2

This is where the increase of consumption of a good/service results in a fall in marginal utility

Question 3

What are the Factors that influence the Price elasticity of demand?

Answer 3

1- Availability of substitutes
2- Proportion of income spent on a product. (High proportion = elastic) (Low proportion = in elastic)
3- Nature of the product: If the product is addictive then demand tends to be inelastic
4- Durability of the product: (long lasting = elastic, it is possible to delay purchases) (non durable = inelastic, because they must be replaced regularly)
5- Length of time under consideration: demand is usually more price elastic in the long run.
6- Breadth of definition of a product: if a product is vaguely defined demand is likely to be price inelastic, and if it is defined it is likely to be price elastic

Question 4

Define Price Elastic

Answer 4

When a change in price results in a proportionally larger change in quantity demanded

Question 5

Define Price Inelastic

Answer 5

When a change in price results in a proportionally smaller change in quantity demanded.

Question 6

What does it mean when a good is unit elastic?

Answer 6

Unit elasticity of demand refers to a situation in which the percentage change in the quantity demanded of a good or service is equal to the percentage change in the price of the good or service.

Question 7

Define Cross elasticity of demand

Answer 7

The measure of the responsiveness of quantity demanded of one product to a change in price of another product

Question 8

When XED is positive, what does this indicate?

Answer 8

That the products are Substitutes

Question 9

When XED is negative, what does this indicate?

Answer 9

That the products are complements

Question 10

Define YED

Answer 10

The measure of the responsiveness of quantity demanded to a change in real income.

Question 11

When YED is Positive, What does this indicate?

Answer 11

That it is a Normal good

Question 12

When YED is negative, What does this indicate?

Answer 12

That the good is inferior

Question 13

What factors influence Income Elasticity of Demand?

Answer 13

1- Availability of substitute goods.
2- The necessity of the good or service.
3- The proportion of income spent on the good or service.

Question 14

Define supply.

Answer 14

The amount supplied by producers at given prices over a period of time.

Question 15

Why does the Supply curve slope upwards?

Answer 15

As there is a proportional relationship with price and quantity supplied. When price increases quantity supplied will also increase. Producers are willing to supply more at higher prices

Question 16

What factors shift supply?

Answer 16

1- Costs of production
2- Productivity of workforce
3- Indirect Taxes
4- Subsidies
5- Technology improvements.
6- Discoveries of new reserves of a raw material.

Question 17

Define Price Elasticity of supply

Answer 17

It is a measure of the responsiveness of the change in supply due to a change in price.

Question 18

State the formula for Price Elasticity of Supply.

Answer 18

Percentage change of quantity supplied / percentage change in price.

Question 19

What is the numerical value for a price elastic good or service?

Answer 19

PES > 1

Question 20

What is the numerical value for a price inelastic good or service?

Answer 20

0 - 1

Question 21

What factors influence Price Elasticity of Supply?

Answer 21

1- Level of Stock: If stock is available then supply will be relatively elastic.
2- Spare capacity: If a firm has underutilised machinery and underemployed workers, then supply is likely to be elastic.
3- Availability and cost of switching resources from use to another.
4- Time: Supply may be inelastic in the short run and elastic in the long run

Question 22

Define short run

Answer 22

A time period in which there is at least one fixed factor of production.

Question 23

Define long run

Answer 23

A time period in which factors of production are variable.

Question 24

Describe what an Inelastic supply curve looks like

Answer 24

A steeper supply curve. (perfectly inelastic is vertical)

Question 25

Describe what an elastic supply curve looks like?

Answer 25

A shallow supply curve. (Perfectly elastic is horizontal)

Question 26

What is the numerical value of PES that is Perfectly inelastic.

Answer 26

PES = 0

Question 27

What is the numerical value of PES that is perfectly elastic?

Answer 27

PES = infinity

Question 28

Why are firms more price elastic in the long run?

Answer 28

As in the long run all resources are variable .firms can buy new machinery, train workers, or switch raw materials, making it easier to respond to price changes.

Question 29

What is Excess supply?

Answer 29

Excess supply implies that the quantity supplied is greater than the quantity demanded at the existing price.

Question 30

What is Excess demand ?

Answer 30

Excess demand implies that the quantity demanded is greater than the quantity supplied at the existing price.

Question 31

What are the 3 functions of the price mechanism?

Answer 31

1- As a rationing device: market forces will ensure that the amount demanded is exactly equal to the amount supplied. 2- As an incentive: the prospect of making a profit acts as an incentive to firms to produce goods and services. 3- Signalling Function: If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand. If there is excess supply in a market, the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.

Question 32

Define consumer surplus

Answer 32

Consumer surplus is the additional benefit that consumers receive. It is measured by the difference between the price consumers are willing to pay and the price they actually pay. A consumer surplus happens when the price consumers pay for a product or service is less than the price they're willing to pay

Question 33

Define producer surplus.

Answer 33

Producer surplus is the difference between the price the producers receive and the costs of supply

Question 34

Where is consumer surplus on a supply and demand graph?

Answer 34

It is the area under the demand curve and above the market price. (it is the higher triangle)

Question 35

Where is producer surplus on a supply and demand graph?

Answer 35

It is the area between the supply curve and the market price. (it is the lower triangle)

Question 36

What factors affect consumer surplus?

Answer 36

1- The gradient of the demand curve: the steeper it is the greater the consumer surplus will be. 2- An increase in demand will impact the amount of consumer surplus.

Question 37

What factors affect the producer surplus?

Answer 37

1- The gradient of the supply curve: the steeper it is, the greater the producer surplus will be. 2- Changes in conditions of supply: An increase in supply will increase amount of producers surplus.

Question 38

What is an indirect tax.

Answer 38

Indirect taxes are taxes on expenditure.

Question 39

What is an example of an indirect tax?

Answer 39

VAT

Question 40

What are the 2 types of indirect tax?

Answer 40

1- Ad valorem tax 2- Specific tax

Question 41

What is an ad valorem tax?

Answer 41

It is a tax that is a percentage of the price of the product. It causes a left shift in the supply curve and a steeper gradient of the supply curve.

Question 42

What is a specific tax? (what is the impact on the supply curve?)

Answer 42

It is a set amount of tax on each unit consumed. Supply cure shifts to the left parallel to the original supply curve.

Question 43

What is the incidence of tax?

Answer 43

It is how the burden of a tax is distributed between different groups.

Question 44

What is a Subsidy?

Answer 44

It is a government grant that reduces the costs of production for the firm.

Question 45

What is the impact of a Subsidy on the supply and demand curve?

Answer 45

The supply curve shifts to the right.

Question 46

Why may consumers not act rationally?

Answer 46

1- Hearding: This is where the behaviour of one person is influenced by others. 2- Habitual behaviour: Consumers may rely on habits. 3- Consumer weakness at consumption: Limited information or limited cognitive abilities.