Chapter 3

Question 1

Market

Answer 1

A situation where buyers and sellers come together to engage in trade

Question 2

Competitive market

Answer 2

A situation where there are a large number of potential buyers and sellers with abundant information about the market

Question 3

Equilibrium price

Answer 3

Planned demand of consumers = planned supply of firms

Marginal benefit of consumers = marginal cost of firms

State of rest

Question 4

Demand

Answer 4

The quantity of a good or service that consumers are willing and able to buy at given prices in a particular time period

Question 5

Effective demand

Answer 5

Consumers desire to buy a good, backed up by the ability to pay

Question 6

Conditions of demand

Answer 6

Factors other than price of the hood that lead to a change in the position of the demand curve

Question 7

Taxation

Answer 7

A charge placed by the government on various forms of economic activity

Question 8

Substitute

Answer 8

A good that may be consumed as an alternative to another good

Question 9

Complement

Answer 9

A good that tends to be consumed together with another good

Question 10

Price elasticity of demand

Answer 10

The responsiveness of a quantity demanded of a good to a change in price

Question 11

Price inelastic demand

Answer 11

0-1
Change in price leads to a smaller percentage change in quantity demanded

Question 12

Price elastic demand

Answer 12

PED>1
Change in price has led to a larger percentage change in the quantity demanded

Question 13

Unitary elastic demand

Answer 13

1
The change in price has led to the same percentage change in quantity demanded

Question 14

Perfectly inelastic demand

Answer 14

0
Change in price has led to no change in quantity demanded

Question 15

Perfectly elastic demand

Answer 15

PED = infinity
The change in price has led to an infinitely large change in quantity demanded

Question 16

Price elasticity of demand and total revenue

Answer 16

If demand is price elastic:

• price fall - big increase in quantity demanded - TR goes up

• price rise - big drop in quantity demanded - TR goes down

If demand is price inelastic:

• price fall - small increase in QD - TR goes down

• price rise - small decrease in QD - TR goes up

Question 17

Determinants of price elasticity of demand

Answer 17

• Availability of close substitutes (the more substitutes the more price elastic)

• percentage of income spent on the product (the larger the more elastic)

• nature of the product (the more a product is a necessity the more it’s elastic)

• time period (Short run is more inelastic)

• Broad or specific market definition (broad market like food is likely to have price inelastic)

Question 18

Income elasticity of demand (YED)

Answer 18

The responsiveness of demand for a good to a change in consumers real income

Question 19

Income elastic demand

Answer 19

YED>1
Increase in real income had led to a greater percentage increase in demand
(Luxury goods)

Question 20

Income inelastic demand

Answer 20

0-1
Increase in real income has led to a smaller percentage increase in demand.
(Basic foods/necessities)

Question 21

Negative income elasticity

Answer 21

<0
Increase in income has led to a fall in demand
(Inferior goods)

Question 22

Cross elasticity of demand (XED)

Answer 22

The responsiveness of the demand for a product following a change in price of another product

Question 23

XED signs

Answer 23

XED>0 - substitutes

XED<0 - compliments

Question 24

Supply

Answer 24

The quantity of a good or service that firms plan to sell at given prices in a particular time period

Question 25

Conditions of supply

Answer 25

Factors other than price that leads to a change in position of the supply curve

Question 26

Shifts of the supply curve

Answer 26

• Production costs • productivity if labour (affected by amount of training and quality of capital equipment) • Taxes on businesses (VAT) • Production subsidies (Gov grants to firms to encourage greater production) • Technology

Question 27

Price elasticity of supply

Answer 27

The responsiveness of the quantity supplied of a good or service to a change in price

Question 28

Price inelastic supply

Answer 28

0-1 Change in price has led to a smaller percentage change in quantity supplied

Question 29

Price elastic supply

Answer 29

Change in price has led to a greater percentage change in quantity supplied

Question 30

Unitary elastic sippy

Answer 30

1 Change in price has led to the same change in quantity supplied

Question 31

Perfect inelastic supply

Answer 31

0 Change in price has led to 0 change in quantity supplied

Question 32

Perfect elastic supply

Answer 32

PES is infinity Increase in the price leads to an infinitely large increase in the quantity supplied

Question 33

Determinants of PES

Answer 33

• Time taken to expand supply (difficult or time consuming) • Size of spare capacity (Supply will be more elastic with bigger spare capacity) • Avaliable stocks (will be able to supply quicker with more avaliable, more elastic) • Ease of switching production (specialised equipment is more price inelastic)

Question 34

Market disequilibrium

Answer 34

Situation where the quantity demanded doesn’t equal quantity supplied

Question 35

Excess supply

Answer 35

Quantity supplied exceeds the quantity demanded. When the price is more that equilibrium price.

Question 36

Excess demand

Answer 36

When the quantity demanded exceeds the quantity supplied, when the price is less than the equilibrium price

Question 37

Market forces

Answer 37

(Market mechanism) Interaction of the forces of supply and demand (Invisible hand- Adam smith)

Question 38

Joint demand

Answer 38

Goods that tend to be demanded together (complementary goods)

Question 39

Joint supply

Answer 39

When the production of one good leads to production of another good

Question 40

Composite demand

Answer 40

When a good is demanded for more than one distinct use

Question 41

Derived demand

Answer 41

When a specific good or factor of production is necessary for the provision of another good or service