micro 1.2

Question 1

What is the primary aim of consumers in economic decisions?

Answer 1

To maximise their utility

Question 2

What is a consumer’s utility?

Answer 2

The total satisfaction received from consuming a good or service

Question 3

What is the first step in the rational decision-making process for a firm?

Answer 3

Identify the problem

Question 4

What does the bounded rationality model suggest?

Answer 4

Decision makers select the first satisfactory alternative without considering every option

Question 5

What is heuristics in decision-making?

Answer 5

Shortcuts that simplify the decision-making process

Question 6

What is demand?

Answer 6

The quantity of a good or service that consumers are able and willing to buy at a given price during a given period

Question 7

How does price affect demand?

Answer 7

Generally, the lower the price, the higher the demand

Question 8

What is an expansion of demand?

Answer 8

An increase in quantity demanded as price decreases

Question 9

What is a contraction of demand?

Answer 9

A decrease in quantity demanded as price increases

Question 10

What mnemonic can help remember the factors that shift the demand curve?

Answer 10

PASIFIC
* Population
* Advertisements
* Substitute goods
* Income
* Fashion and tastes
* Interest rates
* Complementary goods

Question 11

What is derived demand?

Answer 11

Demand for one good linked to the demand for a related good

Question 12

What is composite demand?

Answer 12

Demand for a good that has more than one use

Question 13

What is joint demand?

Answer 13

When goods are bought together

Question 14

What does the law of diminishing marginal utility state?

Answer 14

As an extra unit of a good is consumed, the marginal utility derived from it falls

Question 15

What is price elasticity of demand (PED)?

Answer 15

The responsiveness of a change in demand to a change in price

Question 16

What is the formula for calculating PED?

Answer 16

PED = % change in quantity demanded / % change in price

Question 17

What characterizes a price elastic good?

Answer 17

|PED| > 1

Question 18

What characterizes a price inelastic good?

Answer 18

|PED| < 1

Question 19

What is a unitary elastic good?

Answer 19

PED = 1

Question 20

What is a perfectly inelastic good?

Answer 20

PED = 0

Question 21

What is a perfectly elastic good?

Answer 21

PED = infinity

Question 22

What is the nmemonic for the factors that influence price elasticity of demand?

Answer 22

Plants
1. Proportion of income
2. Loyalty
3. Addictiveness
4. Nessecity
5.
6. Substitutes

Question 23

How does the elasticity of demand affect tax revenue?

Answer 23

Elasticity determines how the tax burden is shared between consumers and firms

Question 24

What is a subsidy?

Answer 24

A payment from the government to firms to encourage production and lower costs

Question 25

What is income elasticity of demand?

Answer 25

The responsiveness of a change in demand to a change in income

Question 26

What are inferior goods?

Answer 26

Goods for which demand falls as income increases

Question 27

What are normal goods?

Answer 27

Goods for which demand increases as income increases

Question 28

What are luxury goods?

Answer 28

Goods for which demand increases more than proportionately as income increases

Question 29

What is cross elasticity of demand?

Answer 29

The responsiveness of a change in demand of one good to a change in price of another good

Question 30

What is the relationship between complementary goods and cross elasticity of demand?

Answer 30

Complementary goods have a negative XED

Question 31

What is the relationship between substitute goods and cross elasticity of demand?

Answer 31

Substitutes have a positive XED

Question 32

What happens to the quantity demanded (QD) of good Y when there is a large increase in the quantity demanded of good X?

Answer 32

Large increase in QD of Y

Question 33

What is the effect of a large fall in the price of good X on the quantity demanded (QD) of good Y?

Answer 33

Only a small increase in QD of Y

Question 34

What is the relationship between complementary goods in terms of cross-price elasticity of demand (XED)?

Answer 34

Negative XED

Question 35

What happens to the quantity demanded of both complementary goods when the price of one good increases?

Answer 35

Falls for both goods

Question 36

What is the cross-price elasticity of demand (XED) for substitutes?

Answer 36

Positive XED

Question 37

What occurs when the price of one brand of TV increases in relation to its substitutes?

Answer 37

Consumers might switch to another brand

Question 38

What defines close substitutes in terms of price changes?

Answer 38

A small increase in the price of good X leads to a large increase in QD of Y

Question 39

What defines weak substitutes in terms of price changes?

Answer 39

A large increase in the price of good X leads to a smaller increase in QD of Y

Question 40

What is the cross-price elasticity of demand (XED) for unrelated goods?

Answer 40

Equal to zero

Question 41

Provide an example of unrelated goods regarding demand.

Answer 41

The price of a bus journey has no effect on the demand for tables

Question 42

Why are firms interested in cross-price elasticity of demand (XED)?

Answer 42

To see how many competitors they have

Question 43

What is the implication for firms selling complementary goods or substitutes regarding price changes by competitors?

Answer 43

Less likely to be affected by price changes