section 3

Question 1

demand

Answer 1

the willingness and ability of a consumer to purchase a good or service at a given price in a given time period

Question 2

law of demand

Answer 2

for most products, the quantity demanded varies inversely with its price

Question 3

individual demand

Answer 3

the demand for a good or service by an individual consumer

Question 4

market demand

Answer 4

the total demand for a good or service, found by adding together all individual demands

Question 5

movements along the demand curve

Answer 5

when the price changes, leading to a movement right or left along existing the demand curve

Question 6

shift of the demand curve

Answer 6

a complete movement of the existing demand curve either outward (to the right) or inward) to the left

Question 7

changes in income effect on demand

Answer 7

normal goods = when income increases demand for normal goods increases
inferior = when income increases demand for inferior goods decreases

Question 8

non price factors that change demand

Answer 8

changes in income
changes in taste fashion and advertising
changes in population
changes in price of a complement
changes in price of a substitute
speculation

Question 9

supply

Answer 9

the willingness and ability fo a firm to supply a product at a given price in a given time period

Question 10

law of supply

Answer 10

for most products, the quantity supplied varies directly with its price

Question 11

individual supply

Answer 11

the supply of a good or service by an individual producer

Question 12

market supply

Answer 12

the total supply of a good or service as a result of adding together all individual producers supplies

Question 13

movements along the supply curve

Answer 13

when the price of the product changes, leading to a movement left or right along the existing supply curve

Question 14

shift of the supply curve

Answer 14

the complete movement of the existing supply curve either outward (to the right) or inward (to the left)

Question 15

non-price factors that cause changes in supply

Answer 15

the costs of production
productivity
new technology
indirect taxes
subsidies
number of firms

Question 16

equilibrium

Answer 16

when qs = qd
when all the firms in the market supply a combined quantity to the combined quantity that all the consumers in the market demand

Question 17

disequilibrium

Answer 17

qs ≠ qd
when excess supply occurs because price is too high or excess demand because price is too low

Question 18

what does the equilibrium theory prove

Answer 18

shows that given time, the market will always adjust back to the equilibrium / create a new equilibrium

Question 19

joint demand

Answer 19

when two ‘complement’ products are consumed together

Question 20

demand for substitute goods

Answer 20

two ‘substitute’ products that can replace each other (inverse relationship)

Question 21

composite demand

Answer 21

two products that require the same factor of production

Question 22

derived demand

Answer 22

demand for one product is dependent on the output of another product (all factors of production are derived demand)

Question 23

joint supply

Answer 23

two products that are both produced from the same factor of production

Question 24

price elasticity of demand (PED)

Answer 24

measures the responsiveness of quantity demanded to a change in price

Question 25

PED formula

Answer 25

ped = (% change in qd / % change in price)

Question 26

PED > 1

Answer 26

elastic products

Question 27

PED < 1

Answer 27

inelastic products

Question 28

is PED pos or neg

Answer 28

assume PED is always neg (p and qd have a inverse relationship)

Question 29

factors effecting PED

Answer 29

number of close substitutes necessity or luxury addictiveness time price as a percentage of income

Question 30

total revenue

Answer 30

total income from selling goods and services

Question 31

total revenue formula

Answer 31

tr = p x q

Question 32

income elasticity of demand (yed)

Answer 32

yed measures the responsiveness of quantity demanded to a change in income

Question 33

normal goods

Answer 33

income increases demand increases and vice versa

Question 34

inferior goods

Answer 34

income increases demand decreases vice versa

Question 35

yed formula

Answer 35

yed = (% change in qd / % change in income)

Question 36

negative yed

Answer 36

inferior product

Question 37

positive yed

Answer 37

normal product

Question 38

yed greater or less than 1

Answer 38

same as PED (>1 = elastic and <1 = inelastic)

Question 39

relevance of yed

Answer 39

shows what products will be increasing/decreasing output depending on booms and recessions (based on income)

Question 40

cross price elasticity of demand (xed)

Answer 40

xed measures the responsiveness of the quantity demanded of one product to a change in the price of another product

Question 41

xed formula

Answer 41

xed = (% changes in quantity demanded of b / % change in price of a)

Question 42

positive xed

Answer 42

substitute

Question 43

negative xed

Answer 43

complement

Question 44

xed < 1

Answer 44

relationship is weak, weak substitutes / complements

Question 45

xed > 1

Answer 45

the relationship is strong, strong substitutes/complements

Question 46

price elasticity of supply

Answer 46

pes measures the responsiveness of quantity supplied to a change in price

Question 47

pes formula

Answer 47

pes = (% change in quantity supplies / % change in price)

Question 48

pes > 1

Answer 48

elastic products

Question 49

pes < 1

Answer 49

inelastic products

Question 50

the availability of stocks

Answer 50

if you can store a product, the product becomes more elastic

Question 51

time

Answer 51

the quicker the product can be produced, the more elastic the product is

Question 52

spare capacity in production

Answer 52

the more spare capacity left, the more elastic the product is

Question 53

difference between pes elasticity

Answer 53

elastic pes is good inelastic pes is not good

Question 54

price mechanism

Answer 54

the interaction of the market forces of supply and demand

Question 55

rationing function

Answer 55

increasing prices rations demand to those most able to afford the service

Question 56

signalling function

Answer 56

prices provide important information to market participants

Question 57

incentive function

Answer 57

price creates incentives for market participants to change their actions

Question 58

allocative functions

Answer 58

the function of prices that acts to divert recourses to where returns can be maximised

Question 59

allocative efficiency

Answer 59

occurs when consumer welfare is maximised when quantity supplied = quantity demanded

Question 60

advantages of the price mechanism

Answer 60

resolves the basic economic problem consumer sovereignty provides an argument for privatisation

Question 61

disadvantages of the price mechanism

Answer 61

market failure (under/no production pollution over production inequality)