HOW MARKETS WORK SHEET QUESTIONS Flashcards
1
Q
What is the main objective of consumers when making economic decisions?
A
It is assumed that the main objective of consumers is to maximise utility./ Demand backed by an ability to pay.
2
Q
What is the main objective of producers when making economic decisions?
A
It Is assumed that producers want to maximise profit.
3
Q
What is meant by effective demand?
A
Effective demand, is the level of demand at the current price level.
4
Q
What are the main determinants of demand?
(4 reasons)
A
Income, tastes and preferences, seasons, prices of substitute and complement goods, advertising.
5
Q
Draw a demand curve.
A
see notes
6
Q
What does a point on the demand curve the show?
A
A point shows the quantity demanded at that given price level.
7
Q
What would cause a shift in the demand curve?
What would cause both shifts?
A
A change in demand will cause a shift on the demand curve.
An increase in demand will cause an outward shift.
A decrease in demand would cause an inward shift.
8
Q
What would cause a movement on a demand curve.
What would cause movements.
A
A change in price at the given quantity will cause a movement.
An increase in price will cause a contraction in demand.
A decrease in price will cause an extension in demand .
9
Q
Give an example of something that would shift the demand curve for potatoes to the right?
A
A shift to the right would mean an increase in demand. If the media announces that potatoes have a positive health effect the demand of potatoes would increase as a result.
10
Q
Give an example of something that would shift the demand curve for potatoes to the left?
A
A shift of the demand curve to the left would mean a decrease in demand. This could be caused by it being found that harmful pesticides were being used on potatoes. This would decrease demand.
11
Q
What is the definition of PED?
A
Price elasticity of demand
The responsiveness of demand to a change in price.
Formula change in quantity demanded(%)/ change in price (%).
12
Q
What is YED?
A
Income elasticity of demand.
The responsiveness of demand to a change in disposable income.
Change in QD (%)/ Change in Y (%).
13
Q
What is XED?
A
Cross elasticity of demand
The responsiveness of demand to a change in price of another good.
Change in QD (%)/ Change in price of good b (%)
14
Q
Define normal good and link this to income elasticity?
A
A normal good is one that demand increases if income increases (positive YED).
15
Q
Define an inferior good with income elasticity?
A
An inferior good is one where demand decreases if income increases.
16
Q
Define a substitute good and link this to cross-price elasticity?
A
A substitute good is an alternative good. A substitute has a positive (XED).
17
Q
Define a complement and link this to cross price elasticity?
A
A complimentary good is one that is used with or purchased at the same time as another good. Complement good has a negative (XED)
18
Q
How do you calculate percentage change?
A
New-old/old x 100
19
Q
What range of value is perfectly inelastic?
A
0
20
Q
What range of value is inelastic?
A
0 to -1
21
Q
What is the range of values for elastic?
A
-1 to -infinity
22
Q
What is the range of values for perfect elasticity?
A
-infinity
23
Q
What is the formula for calculating price elasticity of demand?
A
(%) change in quantity demanded/(%) change in price x 100
24
Q
What is the formula for price elasticity of income?
A
(%) change in quantity demanded/ (%) change in income (y).
25
What is the formula for cross price elasticity of demand?
(%) change in quantity demanded/ (%) change in price of good b
26
What are the 4 factors that can affect price elasticity of demand?
Availability of substitutes.
Necessity of luxury.
Proportion of income spent on product.
Time.
27
How do availability of substitutes change PED?
If there are many close substitute goods then PED will be more elastic as consumers have another similar product they can purchase instead.
If there are not many substitute goods PED will be less elastic as consumers cannot switch.
28
How does the fact if it is necessity or luxury impact PED?
If it is a necessity PED tends to be less elastic because there are little substitutes or alternative choice.
If it is a luxury, PED tends to be more elastic as there are many substitutes.
29
How can proportion of income spent be a factor of PED?)
If proportion of income spent is high, PED is more elastic, as a rise in price will have a bigger impact on the person’s overall budget.
If proportion of income spent is low, PED is less elastic as the rise in price will have less of an impact on overall budget.
30
How can time be a factor of PED?
The longer the time period in question the more elastic PED will be. This is because it takes time for consumers to change buying habits and identify different substitute goods. If none are available then new products that Are substitutes will be released, reducing PED over time.
31
Draw a diagram to show inelastic demand?
see notes.
32
Draw a diagram to show elastic demand?
see notes.
33
Draw a diagram to show unitary elasticity?
see notes.
34
If demand is inelastic and price increases, what affect will it have on total revenue?
Total revenue = p x qd and PED= (%) change in qd/ (%) change in price.
Inelastic is when PED is between 0 and -1.
If price increases by (10)% then quantity demanded will fall by less than 10%.
This means revenue will increase overall.
35
If demand is inelastic and price falls, what affect will it have on the firm's revenue.
If price falls by 10% then quantity demanded will fall by more than 10%.
This means that total revenue will fall.
36
If demand is elastic and price increases how will this affect revenue?
Elastic is between -1 and -infinity
if price increases by 10% then quantity demanded will fall by more than 10%
so total revenue will decrease.
37
If demand is elastic and price falls how will this affect revenue?
Elastic is between -1 and -infinity.
If price decreases by 10% then quantity demanded will increase by more than 10%
This means total revenue will rise.
38
What are the main determinants of supply?
| What else can these be called?
(the supply function)
- Price.
- the cost of production (each factor of production, Land, Labour, Capital, Enterprise.)
- The weather (natural disasters).
- rate of technology.
39
Draw a supply curve:
| What are the features of it?
see notes.
Quantity x axis.
Price Y axis.
upward sloping curve labelled s.
40
What does a point of the supply curve show?
A single point shows how much of that good is produced at that price level.
41
What would cause a movement along the supply curve?
A change in price would cause movement.
An increase in price would cause an extension in supply.
A decrease in price would cause a contraction in supply.
42
What would cause a shift in the supply curve?
A change in the conditions of supply.
43
Give something that would shift the supply curve for oil to the right?
An increase in the supply of oil.
| A new method of extracting oil being found.
44
Give something that would shift the supply curve to the left?
A decrease in the supply of oil
| An oil spill.
45
Define price elasticity of supply?
The responsiveness of supply to a change in price.
46
What range of values is there for price elasticity and what does each value mean?
1-0- Perfectly supply inelastic
2-Between 0-1 supply inelastic
3-Between 1 and infinity supply elastic.
4- infinity perfect elastic.
47
What is the formula for calculating price elasticity of supply?
% change in supply/ % change in price.
48
Draw a diagram to show a good which has inelastic/elastic/unitary price elasticity of supply..
see notes attached.
Inelastic supply steep gradient.
Elastic shallow gradient.
Gradient of 1 unitary.
49
What is meant by equilibrium?
(Market clearing).
When supply is equaled to demand.
It is a steady state
50
Draw a supply and demand curve, and mark on equilibrium.
| Show on this diagram something that would cause the equilibrium price to rise or fall.
see notes attached.
51
What is meant by market clearing?
(Market clearing).
When supply is equaled to demand.
It is a steady state where there is no tendency to change, unless there is an external shock.
52
Draw a diagram to show excess supply?
see notes attached.
53
Draw a diagram to show excess demand?
see notes attached.
54
In a competitive market, what affect would it have on supply if a new supplier entered the market?
A new supplier would increase supply and cause prices to fall.
55
In a competitive market, what affect would it have on supply if a new supplier entered the market?
A new supplier would increase supply and cause prices to fall.
56
What is meant by complementary good and what else can they be called?
Complementary goods are goods that are consumed together.
| Also known as joint demand.
57
Give an example of two goods in joint demand?
Shirts and ties.
| bread and butter.
58
What is the impact of both products if there is an increase in the market price of one of the goods?
If there is an increase in price for a product (football boots). The quantity demanded will decrease for football boots so less people will buy (boot cleaner).
59
If there is an increase in the market price for razors, then consumers will demand fewer razors, so they will need less shaving foam (show the effect on 2 diagrams) side by side.
see notes attached.
60
What is a substitute?
Give two examples of substitutes?
A substitute is good that can be used instead.
Crisps and popcorn.
Biro pencil and HB pencil.
61
What is the impact on both products if there is an increase in the market price of one of the goods?
If there is an increase in the market price of crisps, there will be a decrease in the quantity demanded of crisps. This means that consumers will switch from crisps to popcorn. This will then cause an increase in demand for popcorn.
62
What is the impact on both products if there is an increase in the market price of one of the goods?
Show this effect on 2 diagrams?
If there is an increase in the market price of crisps, there will be a decrease in the quantity demanded of crisps. This means that consumers will switch from crisps to popcorn. This will then cause an increase in demand for popcorn.
63
What is meant by composite demand?
Is when one good demanded for 2 or more different purposes.
64
Give an example of 2 gods that are in composite demand?
Milk is used for drinking and making yoghurt.
| Bread can be used for toast and making breadcrumbs.
65
What is the impact on both products if there is an increase in demand for one of the goods?
If there is an increase in demand for cheese, then there is less milk for making butter so supply of butter goes down.
66
What is meant by derived demand?
When demand for a good is driven by demand for another good.
67
Give an example of derived demand good?
The demand for steel is derived from the demand for car construction.
68
What is meant by joint supply?
Joint supply is when one good is a by-product of another good and is therefore produced at the same time as another good.
69
Name 2 products that are in joint supply?
An example of this is beef and leather. In order to get more beef you must kill more cows which will also give you more leather.
70
What are the functions of price mechanism?
Rationing- When a good becomes more scarce, the price rises to get rid of the excess demand.
Incentives- As the price of the product rises this gives producers more of a profit margin. Which gives an incentive to produce more if they can.
Signalling- A price rise sends a signal to the market to produce more of a good that is in scarce supply.
71
Name 4 factors that affect the PES.
Availability of producer substitutes. Producer substitutes are what a producer can switch to supplying. The more producer substitutes the more elastic supply will be.
Spare Capacity- Spare capacity measures the degree to which the factors of production are being employed.
The more spare capacity the more elastic supply is.
Ability to store/stock pile the product.
If a good can be stored without it perishing the more stock piles can be made.
The more stockpiles the more elastic supply will be.
Time- The longer the time period the more able supply is to respond to a change in price.
For example supply of corn may be inelastic over 24 hours but elastic over 6 months once the Coen has grown.
72
Show the effect of derived demand on a diagram?
see notes attached.
73
Show on a diagram what will cause the equilibrium price to rise or fall.
See notes attached.
74
Draw a supply and demand curve.
See notes attached.
75
Define consumer surplus?
| two definitions
The difference between the price that the consumer is willing to pay and the price they actually pay.
A measure of the welfare people gain from consuming goods or services.
76
Define producer surplus?
Difference between what the producer was willing to sell the product for compared to what they actually sell it for.
77
Draw a supply and demand diagram to show consumer surplus.
see diagram attached
78
Show what happens if supply falls? (consumer surplus)
see diagram attached
79
Show what happens if demand falls (consumer surplus).
see diagram attached
80
Define 'indirect' tax
Is one where the liability can be passed onto the third party.
81
Give two examples of indirect taxes?
Ad valorem taxes. (VAT)
| Specific taxes.
82
What happens to producer incidence if demand is elastic, and VAT increases?
If demand is elastic and VAT increases
83
What happens to producer incidence if demand is elastic, and VAT increases?
If demand is elastic and VAT increases the burden will fall on the producer because the consumers will be sensitive to the change in price.
84
What happens to consumer incidence if demand is inelastic and VAT increases?
The burden falls more on the consumer as they will still buy the good at a higher price so the tax is passed onto them. This is because they know consumers will not reduce consumption significantly after a price rise.
85
Define 'Subsidy'
A subsidy is a payment made by the government to help increase consumption of a product.
86
How are consumers affected by a subsidy?
Price falls so consumers benefit from an increase in consumer surplus.
The benefit to consumers is at the bottom.
87
How are producers impacted by subsidies?
Producers also benefit, as they receive p1 + the unit subsidy means that they take home a price of C per unit sold.
The producer incidence is the above part.
88
How is the government impacted by subsidies?
Pos and neg
Subsidies come with significant costs.
They subsidise goods and services that help society.
They have an opportunity cost as the money can be spent in elsewhere.
Frowned upon by WTO as the british firms will have an increased competitiveness.
89
Show on a diagram the increase of VAT?
See notes attached.
90
Show on a diagram an increase of excise duty?
See notes attached.
91
Shade the area of producer and consumer incidence?
See notes attached.
92
What happens if consumer demand is inelastic and vat increases?
See notes attached.
93
Show on a diagram the impact of a subsidy?
see notes attached.
94
How might other people's behaviour impact consumer choices?
Social norms- becoming unacceptable to use plastic bags or smoke.
Emotional factors- someone in your family is allergic nuts so you don't buy nuts.
Peer pressure, when you make decisions based on others or society.
95
How might habitual consumption be irrational?
You may constantly purchase the same good and never choose another even though you may get more utility from it.
96
Give an example of where a consumer cannot make a rational decision due to lack of information.
Bounded rationality is where consumers are rational but to a point due to lack of information or computational skill.
Instead of this they may use rule of thumb eg it is not Worth getting buy one get 1 free on perishable goods.
97
Can giving to charity be seen as irrational?
It may be seen as irrational as giving to charity gives no utility to the donator.
It is only rational when the peer pressure would ostracise you from society. Or the benefit from donating outweighs that of consuming it yourself.
