supply & demand

Question 1

Substitution
effect

Answer 1

When the price of one good falls, consumers will buy more of the cheaper good or service and less of the more costly good or service. So demand for the cheaper good will increase; demand for the costlier good decreases

Question 2

Income effect

Answer 2

When prices fall, consumers can afford a greater quantity of goods and services (assuming income is fixed). So demand for these goods and services increases

Question 3

inferior good

Answer 3

increase in income causes a fall in demand

Question 4

normal good

Answer 4

increase in income increases demand

Question 5

percentage change in price will be offset by an equivalent percentage change in quantity demanded

Answer 5

unitary PED

Question 6

how to improve PES

Answer 6

1
Improve their technology
2
Introduce flexible working patterns
3
Have excess production capacity

Question 7

factors affecting PED

Answer 7

Substitutes
Percentage of income
Luxary/necessity
Addiction/type of good
Time to adjust

Question 8

factors affecting PES

Answer 8

Production lag
Stocks of finished products
Spare capacity
Substitutability of FOP
Time period due to fixed FOP
Government subsidies

Question 9

rationing price function

Answer 9

prices rise to ration demand

Question 10

incentive price function

Answer 10

prices incentivise to adjust

Question 11

signalling price function

Answer 11

prices provide information to buyers and sellers influencing economic decisions

Question 12

allocative price function

Answer 12

prices allocate resources from excess supply to excess demand