Booklet 2 - Micro

Question 1

Definition - demand

Answer 1

The quantity of a good or service that people are willing to buy at a given price

Question 2

Definition - Effective demand

Answer 2

the willingness and ability to buy a good or service

Question 3

Definition - Diminishing marginal utility

Answer 3

Utility will decline with each subsequent unit

Question 4

Definition - contraction in demand
- how that effects a graph

Answer 4

an increase in price will cause the quantity demanded to be lower
- moves up the demand curve

Question 5

Definition - extension in demand
- how that effects a graph

Answer 5

A reduction in price will cause the quantity demanded to be higher
- moves down the demand curve

Question 6

Definition - supply

Answer 6

the quantity of a good or service that sellers are prepared to sell at a given price in a given time period

Question 7

Definition - law of supply

Answer 7

as price rises, quantity supplied increases
- as price rises sellers have a greater incentive to sell as they will make a higher return

Question 8

Definition - contraction of supply
- how that effects a graph

Answer 8

A reduction in price will cause the quantity supplied to be lower
- moves down the supply curve

Question 9

Definition - extension of supply
- how that effects a graph

Answer 9

An increase in price will cause the quantity supplied to be higher
- moves up the supply curve

Question 10

Definition - market

Answer 10

where buyers and sellers come to together

Question 11

Definition - market equilibrium

Answer 11

the point at which the supply and demand curves cross

Question 12

Definition - market clearing price

Answer 12

the price at which quantity supplied exactly equals quantity demanded

Question 13

market forces

Answer 13

.

Question 14

what are the factors affecting demand

Answer 14

• income
• price of other goods
• tastes and preferences
• expectations of the future
• change in population

Question 15

What would happen to demand if income increased on a demand and supply graph

Answer 15

Shifts demand to the right and the equilibrium price rises

Question 16

Definition - normal good

Answer 16

a good for when income is higher

Question 17

Definition - inferior good

Answer 17

a good for when incomes are lower

Question 18

Definition - substitutes

Answer 18

a good that can used for the same purpose as another

Question 19

Definition - complementary good

Answer 19

goods that are bought and consumed together

Question 20

Definition - competitive demand

Answer 20

the relationship between two goods that are substitutes

Question 21

Definition - joint demand

Answer 21

the relationship between two goods that are complementary

Question 22

Definition - tastes and preferences

Answer 22

what is fashion forward then more people will want to buy it

Question 23

what would happen to demand curve if the expectation of the future was for the price to rise

Answer 23

there is more incentive to buy it now as they will get a greater return so demand shifts to the right

Question 24

Factors that might shift the supply curve

Answer 24

• cost of production
• taxes
• availability of technology
• productivity
• expectations of the future
• government legislation

Question 25

Definition - derived demand

Answer 25

the demand for one good is made from the demand for another good. E.g. used in production of something else

Question 26

Definition - composite demand

Answer 26

a good is demanded for two or more uses

Question 27

Definition - joint supply

Answer 27

an increase in the supply of one good leads to an increase in the supply of another

Question 28

Definition - consumer surplus

Answer 28

the welfare gained by a consumer who pays less for a good or service than the maximum they would have been prepared to pay

Question 29

Definition - producer surplus

Answer 29

The welfare gained by a seller who receives more for a good than the minimum they would have been prepared to accept

Question 30

Definition- price elasticity of demand

Answer 30

A measure of the responsiveness of the quantity demanded of a good or service is to a change in price

Question 31

Definition - price elasticity of supply

Answer 31

A measure of the responsiveness of quantity supplied to a change in price

Question 32

What determines PED

Answer 32

- brand loyalty - necessity vs luxury - availability of substitutes - habit and addiction - expected duration of price change - proportion of income

Question 33

Why might supply be price inelastic

Answer 33

- lack of resources - could be operating at full capacity - expansion could take time - could be only short-term