How Markets Work (1.2)

Question 1

Assumptions of Rational Economic Decision Making

Answer 1

• consumers aim to maximise utility
• firms aim to maximise profits
• governments aim to maximise social welfare

Question 2

Conditions of Demand

Answer 2

• population
• income
• related goods
• advertising
• taste
• expectations
• seasons

Question 3

Law of diminishing marginal utility

Answer 3

The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed

Question 4

Price elasticity of demand

Answer 4

The responsiveness of demand to a change in the price of a good

Question 5

Unitary Elastic PED

Answer 5

PED = 1

Question 6

Relatively Elastic PED

Answer 6

PED > 1

Question 7

Relatively inelastic PED

Answer 7

PED < 1

Question 8

Perfectly elastic PED

Answer 8

PED = infinity

Question 9

Perfectly inelastic PED

Answer 9

PED = 0

Question 10

Factors influencing PED

Answer 10

• availibility of substitutes
• time
• necessity
• how large of a percentage of total expenditure
• addictive

Question 11

Income Elasticity of Demand (YED)

Answer 11

The responsiveness of demand to a change in income

Question 12

Inferior Good

Answer 12

YED < 0

Question 13

Normal Good

Answer 13

YED > 0

Question 14

Luxury Good

Answer 14

YED > 1

Question 15

Significance of YED

Answer 15

• sales will be affected by changes in the income of the population
  -may have an impact on the type of goods that a firm produces

Question 16

Cross Elasticity of Demand (XED)

Answer 16

The responsiveness of demand for one product to the change in price of another product

Question 17

Substitutes

Answer 17

XED > 0

Question 18

Complimentary Goods

Answer 18

XED < 0

Question 19

Unrelated Goods

Answer 19

XED = 0

Question 20

Significance of XED

Answer 20

• firms need to know how price changes by other firms will impact them so they can take appropriate action

Question 21

Demand

Answer 21

The ability to and willingness to buy a particular good at a given price and at a given moment in time

Question 22

Supply

Answer 22

The ability and willingness to provide a good or service at a particular price at a given moment in time

Question 23

The conditions of supply

Answer 23

• costs of production
• price of other goods
• weather
• thechnology
• goals of the supplier
• government legislation
• taxes and subsidies
• producer cartels

Question 24

Price Elasticity of Supply (PES)

Answer 24

The responsiveness of supply to a change in price of the good

Question 25

Unitary Elastic PES

Answer 25

PES = 1

Question 26

Relatively Elastic PES

Answer 26

PES > 1

Question 27

Relatively Inelastic PES

Answer 27

PES < 1

Question 28

Perfectly Elastic PES

Answer 28

PES = infinity

Question 29

Perfectly Inelastic PES

Answer 29

PES = 0

Question 30

Factors affecting PES

Answer 30

- time - stocks - working below full capacity - availability of factors of production - ease of entry into the market - availibility of substitutes

Question 31

Excess Demand

Answer 31

When price is set below equilibrium

Question 32

Excess Supply

Answer 32

If price is set higher than the equilibrium

Question 33

The Signalling Function

Answer 33

The price mechanism acts as a signal where resources should be used

Question 34

The incentive function

Answer 34

It acts as an incentive for people to work hard

Question 35

The rationing function

Answer 35

The price system is a way of rationing goods because when price increases some people will no longer be able to afford the product or want the product

Question 36

Consumer Surplus

Answer 36

The difference between the price the consumer is willing to pay and the price they actually pay set by the price mechanism

Question 37

Producer Surplus

Answer 37

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

Question 38

Total Welfare to Society

Answer 38

Consumer surplus + Producer surplus

Question 39

Indirect Tax

Answer 39

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

Question 40

Ad Valorem Tax

Answer 40

Where the tax payable increases in proportion to the value of the good. The tax is a percentage of the cost of the good

Question 41

Specific Tax

Answer 41

Where an amount is added to the price. The tax increase with the amount bought rather than the value of goods

Question 42

Incidence of tax

Answer 42

The tax burden on the taxpayer

Question 43

Subsidies

Answer 43

A subsidy is a grant given by the government, an extra payment to encourage production/consumption of a good or service

Question 44

People do not always behave rationally

Answer 44

- influences of other people - influence of habitual behaviour - consumer weakness at computation