How Markets Work

Question 1

What is the main objective of consumers when making economic decisions?

Answer 1

to maximise utility

Question 2

What is the main objective of producers when making economic decisions?

Answer 2

to maximise profit

Question 3

What is meant by effective demand?

Answer 3

demand backed up by an ability to pay

Question 4

Main determinants of the demand function

Answer 4

price, income, tastes and preferences, prices of other goods

Question 5

What does a point on the demand curve show

Answer 5

the quantity of a good that will be bought at that price

Question 6

What would cause a movement along the demand curve?

Answer 6

a change in the price of a product itself is the only thing that causes movement along the curve

Question 7

What would cause a shift in the demand curve?

Answer 7

a change in the conditions of demand would cause a shift. this means more or less of a good is bought at every price level

Question 8

Define price elasticity of demand (PED)

Answer 8

PED measures the responsiveness of demand to a change in price —› % change in QD / % change in P

Question 9

Define income elasticity of demand (YED)

Answer 9

YED measures the responsiveness of demand to a change in income —› % change in QD / % change in Y

Question 10

Define cross-elasticity of demand (XED)

Answer 10

XED measures the responsiveness of demand to a change in the price of another good —› % change in QD of good A / % change in P of good B

Question 11

Define a normal good

Answer 11

a normal good is one where demand increases if income increases —› positive YED

Question 12

Define an inferior good

Answer 12

an inferior good is one where demand decreases if income increases —› negative YED

Question 13

Define substitute

Answer 13

a substitute is a good which is alternative to another good —› positive XED

Question 14

Define complement

Answer 14

a complement is a good which is used with, or purchased at the same time as another good —› negative XED

Question 15

How to calculate percentage change?

Answer 15

(new - old) / old x 100

Question 16

Range of values for price elasticity of demand

Answer 16

0= perfectly inelastic
0- -1= inelastic
-1- -infinity= elastic
-infinity= perfectly elastic

Question 17

Price elasticity of demand formula:

Answer 17

% change in QD / % change in P

Question 18

Income elasticity of demand formula:

Answer 18

% change in QD / % change in Y

Question 19

Cross-price elasticity of demand formula:

Answer 19

% change in QD of good A / % change in P of good B

Question 20

Factors affecting the price elasticity of demand for a good

Answer 20

1. Availability of substitutes— many close substitutes means PED will be more elastic as consumers can easily switch to an alternative if price rises
2. Necessity or luxury— PED is inelastic when a good is a necessity and is more elastic when it’s a luxury
3. Proportion of income— is the proportion of income sent is high then PED is more elastic as a price rise will have more of an affect on a persons budget
4. Time— the longer the time period, the more elastic PED will be as it takes consumers time to change buying habits

Question 21

Demand is inelastic and price increases, what is the affect on revenue?

Answer 21

revenue increases:
inelastic=> PED= 0 to -1
QD will fall by less (%) than the (%) price increase

Question 22

Demand is inelastic and price falls, what is the affect on revenue?

Answer 22

revenue decreases:
inelastic=> PED= 0 to -1
QD will rise by less (%) than the (%) price decrease

Question 23

Demand is elastic and price increases, what is the affect on revenue?

Answer 23

revenue decreases:
elastic=> PED= -1 to -infinity
QD will fall by more (%) than the (%) price increase

Question 24

Demand is elastic and price falls, what is the affect on revenue?

Answer 24

revenue increases:
elastic=> PED= -1 to -infinity
QD will rise by more (%) than the (%) price fall

Question 25

What are the determinants of supply (the supply function)?

Answer 25

``` Price Costs of production (land, labour, capital, enterprise) weather natural disasters technology ```

Question 26

What does a point on the supply curve show?

Answer 26

how much of a good will be produced at that price level

Question 27

What would cause a movement along a supply curve?

Answer 27

a change in the price of the good

Question 28

What would cause a shift in the supply curve?

Answer 28

a change in the conditions of supply | e.g. technology, natural disaster

Question 29

Define price elasticity of supply (PES)

Answer 29

PES measures the responsiveness of supply to a change in price

Question 30

Range of values for price elasticity of supply

Answer 30

0= perfectly inelastic supply 0 to 1= inelastic supply 1 to infinity= elastic supply infinity= perfectly elastic supply

Question 31

Formula for price elasticity of supply:

Answer 31

% change in QS / % change in P

Question 32

Factors affecting the price elasticity of supply for a good

Answer 32

1. Availability of producer substitutes— the more producer substitutes (what a producer could produce instead of what they're producing), the more elastic supply is 2. Spare capacity— measures the degree to which the factors of production employed are working at max output, the more spare capacity the more elastic supply is 3. Ability to store/stock pile— if a good can be stored without perishing then stock piles can be made and as price increases, stocks are released, storing means supply is more elastic 4. Time— the longer the time period, the more able supply is to respond to a change in price and so the more elastic supply is

Question 33

What is meant by 'equilibrium'?

Answer 33

where supply=demand it is a steady state where there is no tendency to change, unless there is an exogenous shock that pushes the market out of equilibrium

Question 34

What is meant by the market clearing price?

Answer 34

this is the price at which the quantity supplied equals the quantity demanded Adam Smith => called this the invisible hand of market forces: excess supply causes price to drop until market clearing price is reached excess demand causes price to rise^

Question 35

What affect does a new supplier entering the market have in a competitive market?

Answer 35

a new supplier would increase supply in a market and ma cause price to fall

Question 36

What is joint demand or complimentary goods?

Answer 36

goods which are consumed together | e.g. razors and shaving foam

Question 37

What is the impact on two complimentary goods if there is an increase in market price of one of the goods?

Answer 37

an increase in the market price of one good will cause a fall in its demand resulting in the demand for the other also falling