Micro Book 2

Question 1

effective demand

Answer 1

the willingness and ability to buy goods and services

Question 2

diminishing marginal utilty

Answer 2

the first unit of a good consumed will provide the most utility and this will decline each subsequent unit

Question 3

factors affecting demand (4)

Answer 3

• income
• price of other goods
• tastes and preferences
• expectations of the future

Question 4

substitute goods + type of demand

Answer 4

• if an increase in the price of one good leads to a increase in demand for another good (vice versa)
• in competitive demand

Question 5

complementary goods

Answer 5

• goods bought and consumed together, so an increase in price for one good leads to a fall in demand for the other
• in joint demand

Question 6

factors affecting supply (10)

Answer 6

• costs of production
• subsidies/grants given
• taxes
• price of other goods
• available technology
• productivity
• government legislation
• expectations of future events
• firms entering/exiting market
• weather/natural disasters

Question 7

derived demand

Answer 7

demand for one good is dervied from the demand for another

Question 8

consumer surplus

Answer 8

• the welfare gained by a consumer who pays less for a good or service than the maximum they would’ve been prepared to pay
• ON A DIAGRAM = area under demand curve

Question 9

producer surplus

Answer 9

• the welfare gained by a seller who recieves more for a good than the minmum they’d have been prepared to accept
• ON A DIAGRAM = area above the supply curve

Question 10

determinants of PED (6)

Answer 10

• neccessity vs luxury
• availablility of substitutes
• habit and addiction
• expected duration of price change
• proportion of income
• brand loyalty

Question 11

YED interpretation

Answer 11

• YED > 1 = luxury
• 0 < YED < 1 = normal
• YED < 0 = inferior

Question 12

XED + interpretation

Answer 12

• examines relationship between two goods
• XED = 0 = no relation, demand is perfectly cross-price inelastic
• positive XED = substitute
• negative XED = complement
• higher the |XED| = stronger relation
• -1 < XED < 1 = cross price inelastic
• |XED| > 1 = cross price elastic

Question 13

joint supply

Answer 13

when an increase in demand for one good causes production of another good to increase