Introduction to markets

Question 1

Explain excess supply and demand

Answer 1

Supply is when there is more supply than demand and then vice versa

Question 2

What is Consumer surplus

Answer 2

The value that consumers gain from consuming a good or service over and above the paid price

Question 3

What is Producer surplus

Answer 3

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

Question 4

What are the 3 parts of the pricing mechanism

Answer 4

• Signalling
• Incentivising
• Rationalising

Question 5

Explain signalling in the pricing mechanism with an example (demand)

Answer 5

When the price of a good informs the producer or consumer about changes in the market to guide it toward equilibrium.

A decrease in demand for a good will be clear to firms causing them to decrease price to clear stock easier and decrease supply as there is less of an incentive

Question 6

Explain Incentivising and give an example

Answer 6

When the price of a good leads to corrective price and demand or supply action in a market

An increase in demand has caused firms to increase price as they have a profit incentive. A decrease in price incentivises consumers to consume more

Question 7

Explain rationing and give an example

Answer 7

When supply is low but demand is high, price is increased to signal to consumers that supply is low and demand decreases, rationing out resources and guiding market to equilibrium

Question 8

What are the different types of taxes and explain them

Answer 8

Indirect tax - tax on goods and services rather than revenues or profits

direct tax - tax on individuals or firms

Question 9

What is an incidence of tax and how is it graphed

Answer 9

An illustration of who pays what part of the tax, similarly to producer surplus and consumer surplus

Question 10

What is a subsidy

Answer 10

Grant given by government to encourage the production of a certain good or service

Question 11

Do all consumers act rationally

Answer 11

We assume so to prevent complications in theory

Question 12

What are the types of irrational behaviours

Answer 12

Herd
Habitual
Nudge

Question 13

Explain Herding

Answer 13

Where people make decisions based on the actions of others

Question 14

Explain Habitual

Answer 14

When consumers persist in acting in a particular way even if conditions change

Question 15

Explain nudge theory

Answer 15

When people’s behaviour can be influenced by making a decision seem easier than it is