Module 10

Question 1

Price Elasticity of Demand calculation?

Answer 1

% change in quantity demanded / % change in price

(Q2-Q1/Q1 / (P2-P1)/P1

Question 2

How to calculate the cross-price elasticity of Demand?

Answer 2

% change in quantity of A demanded / % change in price of B

Substitute +
Complementary -

Question 3

How to calculate the income elasticity of Demand?

Answer 3

% change in quantity demanded / % change in income

Normal +
Inferior -

Question 4

How to calculate the price elasticity of supply?

Answer 4

% change in quantity supplied / % change in price

Question 5

Total cost =

Answer 5

Variable cost + fixed cost

Question 6

What factors help explain the law of demand?

Answer 6

Law of diminishing marginal utility: Once consumer bought one the extra benefit from having more decreases

Income effect: constrained by available income

Substitute effect: more likely to find and switch to substitute as become cheaper

Question 7

Demand is?

Answer 7

Quantity of goods buyers are willing and able to purchase

Negative gradient £y Quantity x

Question 8

How to arrive at a market demand curve?

Answer 8

Add together individual curves of all the consumers in the market

Individual consumer have own relationship between price and demand for a product

Question 9

Demand curve shifts

Answer 9

Left if demand decreases

Right if demand increases

Price changes causes movement along the curve

Question 10

What causes the demand curve to shift?

Answer 10

Price of other goods

Consumer income

Advertising / tastes

Question 11

If a substitute price falls

Answer 11

Demand curve for original shifts to the left

More substitutes more elastic the demand

Question 12

Price of complementary falls

Answer 12

Demand curve shifts to the right (more demand for original to go with it)

Question 13

Consumer incomes normal and inferior goods?

Answer 13

Demand for Normal goods increases as income rises

For inferior goods decreases as income rises

Question 14

Other factors on market demand

Answer 14

Age structure 
Income distribution 
Size of population
Expectations of future rises
Legislation

Question 15

PED results mean? Elastic = sensitive

Answer 15

PED > 1 demand is elastic
Revenue increase when price is lowered

PED < 1 is inelastic
Revenue will fall when price is lowered

Question 16

Perfect elasticity?

Answer 16

PED infinity
Horizontal line
Price shift demand falls to 0

Question 17

Perfect inelasticity?

Answer 17

Demand unaffected by price
PED 0
Vertical line

Question 18

Unit elasticity?

Answer 18

PED is 1
Curved line is a proportionate change
Revenue unaffected by change in price

Question 19

Factors affecting PED?

Answer 19

Substitute products
Advertising and time
Luxury (PED higher) or necessity (PED lower)
Time (short run have less time to adjust spending patterns)
Proportion of income

Question 20

Cross PED for substitute and complementary?

Answer 20

Positive for substitute

Negative for complementary

Question 21

Link between income and demand formula IED

Answer 21

% change in quantity / % change in income

Normal Good if income rises IED > 0 +
Inferior good IED < 0 -

Question 22

Supply curves

Answer 22

Positive gradient

Change is price move along it

Question 23

Factors influences the position of the supply curve

Answer 23

Cost of making rise, shift to left
Technology, improvement shift to right
Government regulation, tighter shift to left
Profitability of alternative products, rises shift to left

Question 24

Price elasticity of supply?

Answer 24

% change quantity / change price

PES > 1 elastic
PES < 1 inelastic

Question 25

Factors influencing the price elasticity of supply?

Answer 25

Time period- short run can’t adjust so inelastic Cost of changing output- high difficult to switch supply inelastic Type of good- some fixed perfectly inelastic

Question 26

The market mechanism

Answer 26

Cross of supply and demand curves where meeting point is the equilibrium where quantity produced is quantity wanted Above cross S>D below cross D>S

Question 27

What are the factors of production?

Answer 27

Land Labour Capital- man made inputs Enterprise- organisation of the other three

Question 28

What is short run?

Answer 28

Period of time in which not all the factors of production can be varied

Question 29

What is long run?

Answer 29

Period of time in which all factors can be varied

Question 30

What are fixed and variable costs?

Answer 30

Fixed- don’t change in the short run even though output changes Variable- do change with output

Question 31

Total cost =

Answer 31

Variable + fixed

Question 32

What is marginal cost?

Answer 32

Cost of making one additional unit | = Total cost of N - total cost of N-1

Question 33

What is marginal revenue?

Answer 33

Increase in total revenue from selling more than one unit MR > MC makes sense to increase productivity as extra revenue from producing and selling the extra unit more than covers extra cost so profits increase MC>MR increasing production reduce profit not sensible to do so

Question 34

Profit is maximised when?

Answer 34

Marginal cost = marginal revenue

Question 35

What is the normal profit?

Answer 35

Minimum amount to keep owners interest in continuing to work Total costs=total revenue

Question 36

What is supernormal profit?

Answer 36

Revenue exceeds total costs

Question 37

What are the four market structures?

Answer 37

Perfect competition Monopoly Monopolistic competition Oligopoly

Question 38

Characteristics of perfect competition?

Answer 38

Identical products Each buyer and seller is small Free entry and exit in the long run Perfect information- aware of all costs and tech Each firm is a price taker - small and no power Demand curve horizontal (perfectly elastic)

Question 39

What is a Monopoly?

Answer 39

Arise when no close substitutes and only one firm producing it No competition and considerable market power Potential to earn supernormal profits High barriers to entry: - Natural, economies of scale - Legal, patent - Artificial, brand loyalty Price maker Demand curve is industries demand curve Incentive for efficiency and cost control is eroded Can drive up prices but economies of scale can keep low

Question 40

What is monopolistic competition?

Answer 40

Similar to perfect as still a large number of small suppliers Free entry and exit Difference: products differentiated oi Brand loyalties develop Degree of market power Many firms so actions of one firm effectively diluted Short run supernormal profits Long run normal profits

Question 41

What is an oligopoly?

Answer 41

Small number of firms that each supply a large proportion of the market Actions of one firm affect actions of other: interdependent Must take into account rivals and their reactions Entry difficult due to competing with large well established companies with economies of scale Collusion may happen illegally