How Markets Work

Question 1

What is a market?

Answer 1

A market is where consumers and producers come into contact with one another to exchange goods and services.

Question 2

What is rational decision making?

Answer 2

Consumers allocate their income to maximise their utility from the goods and services they purchase. Firms use their resources to maximise profits from the goods and services they produce.

Question 3

What is utility?

Answer 3

Utility is the amount of satisfaction obtained from consuming a good or service.

Question 4

What is demand?

Answer 4

Demand is the amount of a good or service demanded at each price over a given period of time.

Question 5

What is total utility?

Answer 5

Total utility is the amount of satisfaction a person derives from the total amount of a product consumed.

Question 6

What is marginal utility?

Answer 6

Marginal utility is the satisfaction obtained from consuming one extra unit of a good or service.

Question 7

What is diminishing marginal utility?

Answer 7

Diminishing marginal utility states that as successive units of a good or service are consumed, the utility gained from each extra unit will fall.

Question 8

What is price elasticity of demand?

Answer 8

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.

Question 9

What is income elasticity of demand?

Answer 9

Income elasticity of demand measures the responsiveness of quantity demanded to a change in income.

Question 10

What is cross elasticity of demand?

Answer 10

Cross elasticity of demand measures the responsiveness of quantity demanded of Product A to a change in price in Product B.

Question 11

What is perfectly inelastic demand?

Answer 11

Perfectly inelastic demand means demand remains unchanged in response to the other variable (e.g. price change).

Question 12

What is inelastic demand?

Answer 12

Inelastic demand means demand changes by a smaller percentage than the change in the other variable.

Question 13

What is unitary elasticity?

Answer 13

Unitary elasticity means demand changes by the same percentage as the change in the other variable.

Question 14

What is elastic demand?

Answer 14

Elastic demand means demand changes by a greater percentage than the change in the other variable.

Question 15

What is perfectly elastic demand?

Answer 15

Perfectly elastic demand means demand is infinite at one price but none will be bought if there is a change in the other variable.

Question 16

What is a normal good?

Answer 16

A normal good is where demand increases as income increases, e.g., books.

Question 17

What is an inferior good?

Answer 17

An inferior good is where demand decreases as income increases, e.g., value pasta.

Question 18

What are substitute goods?

Answer 18

Substitute goods are in competition with another good and may see demand increase if the price of a rival good increases. XED is positive for substitute goods, e.g., Sky and Virgin Media.

Question 19

What are complementary goods?

Answer 19

Complementary goods are bought alongside another good and may see demand increase if the price of the complementary good decreases. XED is negative for complementary goods, e.g., consoles and computer games.

Question 20

What is indirect taxation?

Answer 20

Indirect taxation is a tax imposed on expenditure that increases businesses costs and reduces supply (supply shifts left).

Question 21

What are subsidies?

Answer 21

Subsidies are payments from the government to a producer, often given per unit produced. This reduces businesses costs and increases supply (supply shifts right).

Question 22

What is total revenue?

Answer 22

Total revenue is the total amount of money a firm gains through the sale of their goods. TR = Price x Quantity.

Question 23

What is supply?

Answer 23

Supply is the amount of a good or service supplied at each price over a certain period of time.

Question 24

What is elasticity of supply?

Answer 24

Elasticity of supply measures the responsiveness of quantity supplied to a change in price.

Question 25

What is the short run in economics?

Answer 25

The short run is a period of time when at least one factor of production is fixed, therefore supply is likely to be inelastic.

Question 26

What is the long run in economics?

Answer 26

The long run is a period of time when all factors of production are variable, therefore supply is likely to be more elastic.

Question 27

What determines equilibrium in a market?

Answer 27

Equilibrium is determined by the interaction of the supply and demand curves. The equilibrium price and quantity will not change unless there is a change in the conditions of demand and/or supply.

Question 28

What is excess supply?

Answer 28

Excess supply occurs when the quantity supplied is greater than the quantity demanded at the existing price.

Question 29

What is excess demand?

Answer 29

Excess demand occurs when the quantity demanded is greater than the quantity supplied at the existing price.

Question 30

What is rationing in economics?

Answer 30

Rationing is when market forces of demand and supply ensure that the amount demanded is exactly the same as the amount supplied.

Question 31

What is the incentive for firms regarding price?

Answer 31

A higher price motivates firms to supply more of a good to gain more profit.

Question 32

What does signalling refer to in economics?

Answer 32

Signalling refers to a change in price that provides a message to consumers and producers to change their behaviour.

Question 33

What is consumer surplus?

Answer 33

Consumer surplus is the difference between how much consumers are willing to pay and what they actually pay for a product.

Question 34

What is producer surplus?

Answer 34

Producer surplus is the difference between the cost of supply and the price received by the producer for the product.

Question 35

What are indirect taxes?

Answer 35

Indirect taxes are taxes imposed on expenditure which increase costs and shift supply left.

Question 36

What is ad valorem taxation?

Answer 36

Ad valorem taxation refers to taxes imposed as a percentage of the price of the product or service.

Question 37

What are specific taxes?

Answer 37

Specific taxes are taxes imposed as a set amount per unit of the product/service.

Question 38

What does incidence of tax refer to?

Answer 38

Incidence of tax relates to how the burden of a tax is distributed between different groups, i.e., producers and consumers.

Question 39

What is a subsidy?

Answer 39

A subsidy is a grant from the government that reduces costs of production and shifts supply right.

Question 40

What is behavioral economics?

Answer 40

Behavioral economics is a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.

Question 41

What is habitual behaviour?

Answer 41

Habitual behaviour is when the frequency of past behaviour influences consumers' current behaviour.

Question 42

What is inertia in consumer behaviour?

Answer 42

Inertia refers to consumers not making an active effort to change their behaviour for many reasons, such as too much choice or complex information.

Question 43

What is weakness at computation in consumer decision-making?

Answer 43

Weakness at computation refers to consumers showing weakness in decision-making as they may be influenced by recent events and unable to calculate probability.