1.2 How markets work

Question 1

Substitute good

Answer 1

If the price goes up, demand for original good will increase

Question 2

Complement good

Answer 2

If the price goes up, demand for original good will decrease

Question 3

Normal good

Answer 3

If incomes rise, demand will rise (v.v.)

Question 4

Inferior good

Answer 4

If incomes rise, the demand will fall

Question 5

Derived demand

Answer 5

Demand for a good or service not for its own sake, but for what it produces

Question 6

Composite demand

Answer 6

Where the demand for one good affects the supply of another

Question 7

Determinants of PED (5)

Answer 7

Substitutes, percentage of income, luxury/necessity, addictiveness, time (LR vs SR)

Question 8

Price elasticity of supply

Answer 8

The responsiveness of quantity supplied to a change of price

Question 9

PES formula

Answer 9

PES = %/\QS/%/\P

Question 10

PES values

Answer 10

Inelastic = <1
Perfectly inelastic = 0
Elastic > 1
Perfectly elastic = infinite
Unitary = 1

Question 11

PES determinants

Answer 11

Availability of factors of production
Time taken to produce
Government intervention
Spare capacity
Stocks of finished products
Ease and cost of factor substitutions/mobility
Perishable

Question 12

PED values

Answer 12

(all negative)
Perfectly inelastic = 0
Inelastic = 0-1
Perfectly elastic = infinite
Elastic = >1
Unitary = 1

Question 13

YED values

Answer 13

Normal goods = 0-1
Luxuries = >1
Inferior goods < 0

Question 14

XED explanation

Answer 14

The responsiveness of quantity demanded for good x following a change in price for good y

Question 15

Distinction Between Movements Along and Shifts of a Demand Curve

Answer 15

Movements Along a Demand Curve:
Movements along a demand curve occur when the quantity demanded changes due to a change in the price of the good or service, while other factors remain constant.
The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.
Shifts of a Demand Curve:
Shifts of a demand curve occur when factors other than price cause a change in the quantity demanded at every price level.
A shift indicates a change in overall demand, not just a response to price changes.

Question 16

Diminishing marginal utility

Answer 16

This states that as a consumer consumes more units of a good or service, the additional satisfaction (utility) derived from each additional unit decreases.
This reflects the idea that people value the first unit the most and subsequent units less.

Question 17

Influence of diminishing marginal utility on the demand curve

Answer 17

The law of diminishing marginal utility contributes to the downward-sloping shape of the demand curve.
As price decreases, consumers are willing to buy more because the marginal utility of each additional unit exceeds the price.

Question 18

XED values

Answer 18

Substitutes (XED > 0): An increase in the price of one good leads to an increase in the quantity demanded of the other (e.g., Coke and Pepsi)
Complementary Goods (XED < 0): An increase in the price of one good leads to a decrease in the quantity demanded of the other (e.g., cars and gasoline)
Unrelated Goods (XED = 0): The price change of one good has no effect on the other

Question 19

Significance of elasticity to firms + govs

Answer 19

Firms use elasticities to set prices and predict revenue changes
Elastic demand means price increases reduce total revenue, while inelastic demand means price increases raise total revenue
Government uses elasticities to make taxation and subsidy decisions.
Inelastic goods can bear higher taxes, while elastic goods may see reduced consumption due to taxes
Subsidies can encourage the consumption of essential goods

Question 20

Distinction Between Movements Along a Supply Curve and Shifts of a Supply Curve

Answer 20

Movements along a supply curve occur when the quantity supplied changes in response to a change in the price of the good or service, while other factors remain constant.
The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases, and vice versa.
Shifts of a supply curve occur when factors other than price cause a change in the quantity supplied at every price level.
A shift indicates a change in overall supply, not just a response to price changes.

Question 21

Factors That May Cause a Shift in the Supply Curve

Answer 21

• Production Costs:
  Changes in the cost of inputs such as labor, raw materials, and energy can affect supply.
  Example: A significant increase in the price of crude oil can increase production costs for many industries, affecting their supply.
• Technological Advancements:
  Technological improvements can lower production costs and increase supply.
  Example: Advancements in manufacturing technology have reduced the cost of producing consumer electronics, leading to increased supply and lower prices.
• Government Policies and Regulations:
  Government policies, such as taxes, subsidies, and regulations, can impact supply.
  Example: Subsidies to farmers may increase the supply of agricultural products, while strict environmental regulations may reduce the supply of certain industrial goods.
• Natural Disasters and Weather Conditions:
  Natural disasters, like hurricanes or droughts, can disrupt production and reduce supply.
  Example: A drought in a major wheat-producing region can reduce the supply of wheat, leading to higher prices.
• Changes in Expectations:
  Producers may adjust their supply based on their expectations of future prices or market conditions.
  Example: If farmers expect coffee prices to rise in the future, they may reduce current supply to take advantage of higher prices later.
• Government Intervention in International Trade:
  Trade policies, such as tariffs and quotas, can affect the supply of imported goods.
  Example: Imposing tariffs on steel imports can reduce the supply of foreign steel in the domestic market.
• Natural Resource Availability:
  The availability of natural resources, like minerals and fossil fuels, can impact supply.
  Example: Depletion of oil reserves can lead to a reduction in the supply of oil, affecting energy markets.

Question 22

PES long run + short run

Answer 22

Short Run: The short run refers to a period during which some factors of production, such as plant capacity or labour, are fixed and cannot be adjusted. Supply may be less elastic in the short run.
Long Run: The long run is a period during which all factors of production can be adjusted. Firms can expand or contract production capacity. Supply can be more elastic in the long run.

In the short run, supply may be less responsive to price changes due to limited flexibility in adjusting production levels.
In the long run, firms have more options to adjust production capacity, making supply more responsive to price changes

Question 23

Consumer surplus

Answer 23

The difference between the price that consumers are willing and able to pay for a good/service and the price they actually pay

Question 24

Producer surplus

Answer 24

The difference between the minimum price that producers are willing and able to supply a good/service at and the price they actually recieve

Question 25

Reasons why a consumer may not act rationally

Answer 25

Influence of Other People’s Behaviour
Importance of Habitual Behaviour
Consumer Weakness at Computation