1.2 HOW MARKETS WORK

Question 1

i. What is utility?

Answer 1

-The satisfaction or benefit derived from consuming a good or set of goods

Question 2

ii. What do consumers seek to maximise?

Answer 2

-economic welfare (satisfaction from consuming goods)

Question 3

iii. What do firms seek to maximise?

Answer 3

-rewards from ownerships (maximising profits)

Question 4

iv. What is irrational behaviour?

Answer 4

-When people make choices and decisions that go against the assumption of rational utility

Question 5

vi. What is bounded rationality?

Answer 5

rationality is limited when individuals make decisions, they therefore make decisions that are sitisfactory rather than optimal

Question 6

vii. What do workers seek to maximise?

Answer 6

-Maximise welfare at work

Question 7

viii. What do governments seek to maximise?

Answer 7

-The welfare of the citizens

Question 8

ix. What is rational behaviour?

Answer 8

-the fact that economic agents are able to rank the order of different outcomes from an action in terms of their net benefits to them. They then act in a way to maximise their net benefits.

Question 9

i. What is demand?

Answer 9

-The quantity of goods and services that will be bought at any given price over a given time period

Question 10

ii. Explain 3 reasons the demand curve is downward sloping

Answer 10

-Income and demand have a directly proportional relationship

-When peoples income increases they purchase more goods and vice-versa

Question 11

vii. What are the 7 conditions of demand?

Answer 11

-Population

-Advertising

-Substitutes price

-Income

-Fashion

-Interest Rates

-Components price

Question 12

viii. What is the law of diminishing marginal utility?

Answer 12

-the value or utility that individual consumers gain from the last product consumed falls the greater number consumed.

Question 13

ix. Why do governments need to know the various elasticities of demand for various products?

Answer 13

-It is important for formulating government policies, including taxes

Question 14

i. What is supply?

Answer 14

-The quantity of goods that sellers are prepared to sell at any given price over a period of time

Question 15

ii. Explain 3 reasons why supply curves are upward sloping

Answer 15

-Product price and quantity supplied are directly related

Question 16

vii. What are the conditions of supply?

Answer 16

-Productivity

-Indirect Tax

-No of firms

-Technology

-Subsidy

-Weather

-Costs of production

Question 17

i. What is equilibrium price?

Answer 17

The price at which supply and demand are equal

Question 18

ii. What is equilibrium quantity?

Answer 18

-when there is no shortage or surplus of a product in the market

Question 19

iv. What is a shortage?

Answer 19

-When demand for a product exceeds its supply

Question 20

vii. What is a surplus?

Answer 20

-The amount of an asset or resource that exceeds the portion that is utilized

Question 21

x. Explain the 3 functions of the price mechanism

Answer 21

-Rationing: to discourage demand, conserve resources, and spread out their use over time

-Signalling: price adjusts to demonstrate where resources are required

-Incentive: producers to supply more because they provide the possibility or more revenue and increased profits

Question 22

i. What is consumer surplus?

Answer 22

-when the price that consumers pay for a product or service is less than the price they’re willing to pay

Question 23

iii. What is producer surplus?

Answer 23

the difference between the price a producer gets and its marginal cost

Question 24

v. What is total economic welfare?

Answer 24

-the total extra benefit or happiness enjoyed by producers and consumers who feel they got a good price for the product being exchanged

Question 25

i. What is the definition of price elasticity of demand?

Answer 25

-The proportionate response of changes in quantity demanded to a proportionate change in price

Question 26

ii. Give the formula for PED

Answer 26

-PED = percentage change in quantity demanded / a percentage change in price

Question 27

iii. What is meant by ‘price elastic demand’?

Answer 27

-When a price change causes a substantial change in demand

Question 28

iv. What values would constitute ‘price elastic demand’?

Answer 28

-Between 1 and infinity

Question 29

xii. What is meant by ‘unit elastic demand’?

Answer 29

-the economic theory that assumes a change in product price causes an equal and proportional change in the quantity demanded

Question 30

xiii. What value would constitute ‘unit elastic demand’?

Answer 30

-1

Question 31

xv. Give 4 factors which influence the PED of a product

Answer 31

1) availability of substitutes, 2) if the good is a luxury or a necessity, 3) the proportion of income spent on the good, 4) how much time has elapsed since the time the price changed

Question 32

i. What is the definition of cross price elasticity of demand?

Answer 32

-Cross Price Elasticity of Demand (XED) measures the relationship between two goods when the price of one changes

Question 33

ii. Give the formula for XED

Answer 33

-XED = percentage change in quantity demanded of good A/ percentage change in price of good B

Question 34

iii. What is the definition of substitute goods?

Answer 34

-two goods are substitutes if the products could be used for the same purpose by the consumer

Question 35

iv. What values of XED would constitute a substitute?

Answer 35

-positive

Question 36

v. What is the definition of complementary goods?

Answer 36

-A complementary good is a product or service that provides value to another product or service

Question 37

vi. What values of XED would constitute complementary goods?

Answer 37

-negative

Question 38

vii. What would an XED of 0 indicate?

Answer 38

-Demand between the goods are perfectly price inelastic

Question 39

i. What is the definition of income elasticity of demand?

Answer 39

-a measure of the responsiveness of quantity demanded given a change in income

Question 40

ii. Give the formula for YED

Answer 40

-YED= percentage change in quantity demanded/percentage change in income

Question 41

iii. What is the definition of an inferior good?

Answer 41

-An inferior good is one whose demand drops when people's incomes rise

Question 42

iv.What values of YED would constitute an inferior good?

Answer 42

-negative

Question 43

v. What is a normal good?

Answer 43

-A normal good is a good that experiences an increase in its demand due to a rise in consumers' income

Question 44

vi. What values of YED would constitute a normal good?

Answer 44

-positive

Question 45

vii. What is the definition of a luxury good?

Answer 45

-a good for which demand increases more than what is proportional as income rises

Question 46

viii. What values of YED would constitute a luxury good?

Answer 46

0<1

Question 47

x. What is the term for a normal good which is not a luxury good?

Answer 47

-normal necessity

Question 48

i. Why do firms need to know the price elasticity of demand for their products?

Answer 48

-Price Elasticity helps businesses understand how much they can stretch the price (hence the term elasticity) of any product before it impacts -Helps influence stocks, employment and output

Question 49

i. What is the definition of price elasticity of supply?

Answer 49

-Price elasticity of supply measures the responsiveness to the supply of a good or service after a change in its market price

Question 50

ii. Give the formula for PES

Answer 50

-PES = Percentage change in quantity supplied/ percentage change in price

Question 51

iii. What is meant by ‘price elastic supply’?

Answer 51

-A good or service has an elastic supply when the percentage change in the quantity supplied exceeds the percentage change in price

Question 52

iv. What values would constitute ‘price elastic supply’?

Answer 52

1<

Question 53

vii. What values would constitute ‘perfectly elastic supply’?

Answer 53

-infinity

Question 54

ix. What is meant by ‘price inelastic supply’?

Answer 54

-a change in price will only have a smaller percentage change in quantity supplied

Question 55

x. What values would constitute ‘price inelastic supply’?

Answer 55

-0

Question 56

xii. Give 3 factors which influence the PES of a product

Answer 56

-Production lag -Stocks -Spare capacity -Time -Substitutability of factors of production

Question 57

Why is PES more elastic in the long run?

Answer 57

-in the long run all factors of production can be utilized to increase supply