How Markets Work 2

Question 1

What is disequilibrium?

Answer 1

Disequilibrium occurs whenever there is excess demand or excess supply in the market.

Question 2

What is excess demand?

Answer 2

Excess demand occurs when the demand is greater than the supply at a given time.

Question 3

How does the market respond to excess demand?

Answer 3

Sellers gradually raise prices, causing a contraction in quantity demanded and an extension in quantity supplied.

Question 4

What is excess supply?

Answer 4

Occurs when a supply is greater than the demand a given price.

Question 5

How does the market respond to excess supply?

Answer 5

Sellers gradually lower prices, causing an extension in quantity demanded and a contract in quantity supplied.

Question 6

What is the price mechanism?

Answer 6

The price mechanism is interaction of demand and supply in a free market that determines prices and allocate scarce resources.

Question 7

What are the four functions of the price mechanism?

Answer 7

Ration, allocate, signal and incentivise

Question 8

Define rationing function of the prize mechanism

Answer 8

Rationing function of the mechanism allocates scarce resources by setting prices that only those who can afford will pay

Question 9

What is the signalling function of the price mechanism?

Answer 9

The signalling function of the price mechanism provides information to producers and consumers about where the resources are required or not.

Question 10

Explain the incentive function of the price mechanism

Answer 10

The incentive function of the mechanism motivates producers to allocate resources to more profitable markets when prices rise.

Question 11

What does a shift in demand signal to producers?

Answer 11

A shift and demand signals to producers as a demand for a product is strong and they should consider entering the market.

Question 12

How does a lower price incentivise consumers?

Answer 12

Lower price incentivise consumers to purchase more of a product.

Question 13

What is consumer surplus?

Answer 13

Consumer surplus is the difference between the amount the consumers willing to pay for a product and the price they actually pay.

Question 14

What is producer surplus?

Answer 14

Produce surplus is the difference between the amount the producer is willing to sell a product for and the price they actually receive.

Question 15

How is consumer surplus represented on a market diagram?

Answer 15

Consumer surplus is represented by the area above the horizontal line formed by the equilibrium price and the area below a demand curve.

Question 16

Where is producer surplus represented on the market diagram?

Answer 16

Producer surplus is represented by the area below the horizontal line formed by the equilibrium price and the area above the supply curve.

Question 17

What is social surplus?

Answer 17

Social surplus is the sum of consumer surplus and producer surplus.

Question 18

How does an increase in supply affect consumer surplus?

Answer 18

Increases

Question 19

How does an increase and demand affect producers surplus?

Answer 19

Increases

Question 20

What is the incidence of a tax?

Answer 20

Is the incidence of tax is a share of the tax paid by producers and consumers.

Question 21

What determines how much of an incident tax is passed on to consumers?

Answer 21

PED determines how much of an indirect tax is passed onto the consumer. For products with elastic demand producers pass on a larger proportion of the tax.

Question 22

What is producer subsidy?

Answer 22

Producer subsidy is a per unit amount of money given to a firm by governments to increase production or provision of a merit good.

Question 23

What is the total cost to the government of a subsidy?

Answer 23

The total cost is the subsidy per unit multiplied by the new equilibrium quantity.

Question 24

What are the main factors that influence irrational consumer decision-making?

Answer 24

• Influence of other peoples behaviour
• Habitual behaviour
• Consumer weakness in computation

Question 25

How does peer pressure affect consumer decisions?

Answer 25

Peer pressure often prompts consumer to make purchases and decision that may go against a computation of net benefits.

Question 26

Define rule of thumb

Answer 26

Rule of thumb refers to shortcut it makes a quick estimation of benefits without gathering too much information.

Question 27

What is neuro branding?

Answer 27

Advanced behaviour psychology techniques used by producers to influence consumer choices e.g. supermarket shelves

Question 28

What is consumer inertia?

Answer 28

When consumers prioritise convenience and habitually purchase the same product.

Question 29

How do sellers exploit habitual patterns?

Answer 29

Sellers exploit habitual patterns by placing product strategically, such as checkout tills to benefits from impulse charging

Question 30

How do sellers influence consumer computation?

Answer 30

By placing products they want to sell at eye level, where computation is easy and less beneficial products where computations harder.

Question 31

What is the impact of advertising on consumer behaviour?

Answer 31

Advertising influences consumers to make emotional rather than rational decisions using various forms, including lifestyle, celebrity endorsement, and influential culture.

Question 32

What is the role of past information in consumer behaviour?

Answer 32

Consumers often use information from the past which may be outdated, as they habitually purchase the same product.

Question 33

Define subsidies.

Answer 33

Government grant designed to encourage production

Question 34

How does decrease in demand affect consumer surplus?

Answer 34

Reduce