decision-making in markets

Question 1

model

Answer 1

simplified version of reality

Question 2

features of models

Answer 2

• clear
• predicts accurately/consistent with evidence
• points to salient phenomenon
• highlights aspects/intentionally omits other details
• draws conclusions

Question 3

absolute advantage

Answer 3

someone has if they can perform an activity with fewer resources (time, money) than someone else

Question 4

comparative advantage

Answer 4

someone has if their opportunity cost of performing an activity is lower than someone else’s

Question 5

specialisation

Answer 5

to focus on activities which someone has a comparative advantage is (total production of everything can increase)

Question 6

marginal principle

Answer 6

• answers ‘how many questions’
• businesses should do something if extra benefits > extra costs

Question 7

assumptions of demand model

Answer 7

• consumer is price taker
• consumer applies marginal, cost-benefit, and opportunity cost principle

Question 8

consumer reservation price

Answer 8

• maximum price they would pay for each quantity of goods (marginal benefit)
• actual price is marginal cost

Question 9

market demand

Answer 9

sum of all individual demand

Question 10

demand price elasticity

Answer 10

• how responsive quantity demanded is to price changes
• % change in Q ÷ % change in P

Question 11

law of demand

Answer 11

as price decreases, quantity demanded increases (elasticity is always negative)

Question 12

high elasticity

Answer 12

• large difference in quantity demanded based on price changes
• usually for unessential items that can be replaced
• demand curve is relatively flat

Question 13

low elasticity

Answer 13

• small change in quantity demanded based on price changes
• necessities that don’t have close substitutes
• demand curve is relatively steep

Question 14

measure of elasticity

Answer 14

<1 is elastic
= 1 is unit elastic
>1 is inelastic

Question 15

6 factors that shift demand curve inwards/outwards

Answer 15

• income
• preferences
• prices of related goods
• expectations
• congestion and network effects
• type and number of buyers

Question 16

normal goods

Answer 16

more demanded as income increases

Question 17

inferior goods

Answer 17

less demanded as income increases (consumers opt for luxurious goods)

Question 18

perfect competition (supply)

Answer 18

• firms sell homogenous (identical) goods
• firms are price takers (no market power)

Question 19

supplier reservation price

Answer 19

• minimum price they would accept for each quantity of goods (marginal cost)
• actual price is marginal benefit

Question 20

law of supply

Answer 20

firms will increase quantity supplied as the expected price received increases, to cover marginal costs

Question 21

high elasticity

Answer 21

• supply is very responsive to price changes
• curve is relatively flat

Question 22

low elasticity

Answer 22

• supply is not very responsive to price changes
• price increase prompts firms to supply close to what they were already supplying
• curve is relatively steep

Question 23

5 factors that shift supply curve inwards/outwards

Answer 23

• input prices
• productivity and technology
• prices of related outputs
• expectations
• type and number of sellers

Question 24

market equilibrium

Answer 24

consumer (demand) and producer (competitive supply) interact to give rise to market equilibrium

Question 25

equilibrium price

Answer 25

price at which quantity demanded = quantity supplied

Question 26

above this price

Answer 26

excess supply puts a downward pressure on price

Question 27

below this price

Answer 27

excess demand puts and upward pressure on price