microeconomics 1.2

Question 1

What do consumers aim to maximise?

Answer 1

Utility.

Question 2

What do firms aim to maximise?

Answer 2

Profits.

Question 3

What is Demand?

Answer 3

Demand is the quantity of a good or service that consumers are willing to buy and able to buy at a given price in a given time period.

Question 4

Factors of Demand (PIRATES)?

Answer 4

Population, Income, Related goods, Advertising, Trends, Expectations, Season.

Question 5

What is Diminishing Marginal Utility?

Answer 5

As a consumer consumes more of a product, the additional utility derived from each unit decreases.

Question 6

What is Price Elasticity of Demand (PED)?

Answer 6

The responsiveness of Quantity Demanded in response to an initial change in price.

Question 7

What are the factors of PED (SANDPIT)?

Answer 7

Substitute Goods, addictiveness, Necessity, Durability, Proportion of income spent on good, Time.

Question 8

What is YED?

Answer 8

YED: the degree of responsiveness of quantity demanded following an initial change in income.

Question 9

What are the factors of YED?

Answer 9

Factors of YED: Inferior goods: negative, normal goods: between 0 and 1, luxury goods: >1.

Question 10

What are the unitary values of PED?

Answer 10

PED=1=UNITARY (reciprocal curve)
PED>1=ELASTIC (more sloping)
PED<1=INELASTIC (more steep)
PED=0=PERFECTLY INELASTIC (vertical line)
PED=Infinity=PERFECTLY ELASTIC (Horizontal line)

Question 11

Significance of PED?

Answer 11

PED effects how indirect taxes are imposed. Inelastic = price passed onto consumer. Elastic = Supplier covers majority of tax.

Question 12

Significance of YED?

Answer 12

Its important that businesses know how they will be effected by the income of the population.

Question 13

What is Cross Elasticity of Demand (XED)?

Answer 13

XED is the responsiveness of demand for product A due to a change in price of product B.

Question 14

XED equation?

Answer 14

%change in Qd of product A / %change in price of product B

Question 15

Significance of XED?

Answer 15

Firms need to know how price changes of competitors goods will change the demand of their goods.

Question 16

What is a contraction on the supply curve?

Answer 16

When price and therefore, quantity supplied decrease.

Question 17

What is an extension on the supply curve?

Answer 17

When price and therefore quantity supplied increase.

Question 18

What are the conditions pf supply?

Answer 18

-Costs of production.
-Price of other goods (joint supply).
-Weather (Agricultural goods)
- Technology
-Goals of supplier (may produce for social benefit and not for profit.
-Tax and subsidies.
-Gov legislation
-

Question 19

What is Price Elasticity of Supply (PES)?

Answer 19

PES is the responsiveness of quantity supplied to a change in price.

Question 20

PES equation?

Answer 20

%change in quantity supplied / %change in price.

Question 21

PES values?

Answer 21

=1=UNITARY
<1= INELASTIC
0=PERFECTLY INELASTIC
>1=ELASTIC
INFINITY=PERFECTLY ELASTIC

Question 22

Factors of PES?

Answer 22

-TIME (Suppliers can only sell what they can make in time)
-STOCKS (If they have high stocks of goods, when price rises they can sell them)
- Working below full capacity (If price rises they cam work at a better capacity.
-Availability of factors of production (E.g. labour may need training so unable to instantly respond to price change)
-Availability of substitutes.

Question 23

What is equilibrium?

Answer 23

The point where supply=demand.

Question 24

What is excess demand?

Answer 24

When price is lower than equilibrium, demand will increase and supply will decrease, meaning there will be more demand than quantity supplied.

Question 25

What is excess supply?

Answer 25

Excess supply is when the price is increase. This means supply will increase but demand will decrease, causing there to be too many products supplied to meet the quantity demanded.

Question 26

What is the rationing function?

Answer 26

This is when there is a limit of goods so price is increased to a level where the products will sell but there wont be a excess demand.

Question 27

What is signalling?

Answer 27

Signalling function. Prices perform a signalling function – i.e. they adjust to demonstrate where resources are required. Prices rise and fall to reflect scarcities and surpluses. If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand.

Question 28

What is the incentive function?

Answer 28

The incentive function of the price mechanism encourages producers to supply more when prices rise, because of the possibility of greater profit.

Question 29

What is consumer surplus?

Answer 29

This is the difference between the price consumers ware willing to pay ad what they pay?

Question 30

How is consumer surplus shown?

Answer 30

Its the difference between price and the supply curve.

Question 31

What is producer surplus?

Answer 31

Producer surplus is the difference between the price the suppliers are willing to produce their product at and the price they actually produce it at.

Question 32

What is an indirect tax?

Answer 32

An indirect tax is a tax on expenditure, where the person who ends up paying the taxis not owing the gov, the business is.

Question 33

What is an ad valorum tax?

Answer 33

% of price added on.

Question 34

What is a specific tax?

Answer 34

When a specific amount is added on the the price.

Question 35

What is the incidence of tax?

Answer 35

The relative burden, or incidence, of an indirect tax is determined by the price elasticity of demand (PED) of the consumer in response to a price rise. If the consumer is unresponsive, and PED is inelastic, the burden will fall mainly on the consumer.