1.2 How Markets Work

Question 1

What are the 3 main assumptions of rational economic decision making?

Answer 1

1. Consumers aim to maximise utility.

2.Firms aim to maximise profit (Profit Motive).

3. Governments aim to maximise social welfare.

Question 2

What are some factors that could cause the demand curve to shift?

Answer 2

• Population
• Income
• Related Goods
• Advertising
• Taste / fashion
• Seasons
• Expectations

Question 3

What is Diminishing Marginal Utility?

Answer 3

The Law of Diminishing Marginal Utility states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.

Question 4

What is the formula for Price Elasticity of Demand (PED)?

Answer 4

% change in quantity demanded / % change in price

Question 5

What is the PED value for unitary elastic PED?

Answer 5

PED = 1

Question 6

What is the PED value for relatively elastic PED?

Answer 6

PED > 1

Question 7

What is the PED value for relatively inelastic PED?

Answer 7

PED < 1

Question 8

What is the PED value for perfectly elastic PED?

Answer 8

PED = infinity

Question 9

What is the PED value for perfectly inelastic PED?

Answer 9

PED = 0

Question 10

What are factors influencing PED?

Answer 10

• Availability of substitutes
• Time
• Necessity
• Addictive
• % of income

Question 11

What is the formula for Income Elasticity of Demand (YED)?

Answer 11

% change in quantity demanded / % change in income

Question 12

What is the YED value for an inferior good?

Answer 12

YED < 0

Question 13

What is the YED value for a normal good?

Answer 13

YED > 0

Question 14

What is the YED value for a luxury good?

Answer 14

YED > 1

Question 15

What is the formula for Cross Elasticity of Demand (XED)?

Answer 15

% change in quantity demanded of A / % change in price of B

Question 16

What is the XED value for substitute goods?

Answer 16

XED > 0

Question 17

What is the XED for complementary goods?

Answer 17

XED < 0

Question 18

What is the XED value for unrelated goods?

Answer 18

XED = 0

Question 19

What are some of the factors influencing supply?

Answer 19

• Costs of Production
• Price of other goods
• Weather

-Technology

• Legislation
• Taxes and subsidies
• Producer cartels

Question 20

What is the formula for Price Elasticity of Supply (PES)?

Answer 20

% change in quantity supplied / % change in price

Question 21

What is the PES values for unitary elastic PES?

Answer 21

PES = 1

Question 22

What is the PES value for relatively elastic PES?

Answer 22

PES > 1

Question 23

What is the PES value for relatively inelastic PES?

Answer 23

PES < 1

Question 24

What is the PES value for perfectly elastic PES?

Answer 24

PES = infinity

Question 25

What is the PES value for perfectly inelastic PES?

Answer 25

PES = 0

Question 26

What are some of the factors affecting PES?

Answer 26

- Time - Stocks - Working below full capacity - Availability of factors of production - Availability of substitutes

Question 27

What is Consumer Surplus?

Answer 27

The difference between the price the consumer is willing to pay and the price they actually pay.

Question 28

What is Producer Surplus

Answer 28

The difference between the price the supplier is willing to produce their product at and the price they actually produce at.

Question 29

What is an Indirect Tax?

Answer 29

A tax on expenditure where the person is ultimately charged the tax is not the person responsible for paying the sum to the government. E.g. VAT.

Question 30

What is the Incidence of Tax?

Answer 30

The tax burden on the taxpayer.