The Price System And Microeconomy

Question 1

What is the price mechanism?

Answer 1

The price mechanism is essential to the allocation of resources in market economies.

Question 2

What does the price mechanism signal to producers?

Answer 2

It signals whether to allocate more or fewer resources to a good or service based on consumer demand.

Question 3

What happens if consumers think a good is overpriced?

Answer 3

They will not buy it in expected quantities, indicating oversupply and a need to reallocate resources.

Question 4

What is meant by ‘market’?

Answer 4

A market is where trade takes place and does not have to have a physical presence.

Question 5

Define demand.

Answer 5

Demand refers to the quantity of a product that buyers are willing and able to buy at different prices, ceteris paribus.

Question 6

What is ‘effective demand’?

Answer 6

Effective demand refers to those who are able to purchase at the given price.

Question 7

What does ‘ceteris paribus’ mean?

Answer 7

It means all other things remain equal at that given point when money is exchanged.

Question 8

What does the law of demand state?

Answer 8

As price goes up, quantity demanded goes down and vice versa.

Question 9

List factors that affect demand.

Answer 9

• Income
• Substitutes
• Complements
• Taste & Fashion

Question 10

What is a ‘normal good’?

Answer 10

A good for which demand increases as people’s incomes rise.

Question 11

What is an ‘inferior good’?

Answer 11

A good for which demand decreases as people’s incomes rise.

Question 12

What are substitutes in terms of demand?

Answer 12

Substitutes are alternative goods that can replace each other; if one is cheaper, consumers may prefer it.

Question 13

What are complements?

Answer 13

Complements are goods consumed together; a price change in one can affect the demand for the other.

Question 14

What causes a shift in the demand curve?

Answer 14

Non-price factors such as income changes, tastes, and the prices of substitutes and complements.

Question 15

What does a rightward shift in the demand curve indicate?

Answer 15

An increase in demand.

Question 16

What does a leftward shift in the demand curve indicate?

Answer 16

A decrease in demand.

Question 17

What does supply refer to in economics?

Answer 17

Supply refers to the quantities of a product that suppliers are willing and able to sell at various prices, ceteris paribus.

Question 18

What relationship does supply have with price?

Answer 18

As price increases, quantity supplied also increases.

Question 19

List factors that can impact supply.

Answer 19

• Costs
• Size and nature of industry
• Government policy
• Weather conditions

Question 20

What causes a shift in the supply curve?

Answer 20

Changes in conditions affecting supply that are not related to price.

Question 21

What happens when costs of production decrease?

Answer 21

Supply is likely to increase as products become more profitable.

Question 22

What is Price Elasticity of Demand (PED)?

Answer 22

PED measures the responsiveness of quantity demanded to a change in price.

Question 23

What does a PED value of less than 1 indicate?

Answer 23

It indicates that demand is inelastic and not significantly impacted by price changes.

Question 24

What is perfectly inelastic demand?

Answer 24

A situation where quantity demanded does not change regardless of price changes, resulting in a PED of 0.

Question 25

What is perfectly elastic demand?

Answer 25

A situation where any increase in price leads to zero quantity demanded, resulting in an infinite PED.

Question 26

What does unitary elastic demand mean?

Answer 26

The relative change in price is equal to the relative change in quantity demanded, resulting in a PED of exactly 1.

Question 27

What factors impact Price Elasticity of Demand?

Answer 27

* Range and attractiveness of substitutes * Relative expenses of the product * Time

Question 28

How do substitutes affect PED?

Answer 28

More substitutes increase the likelihood of consumers switching away from a product when its price rises.

Question 29

What is Income Elasticity of Demand (YED)?

Answer 29

YED measures the responsiveness of the quantity demanded following a change in income.

Question 30

What is the impact of a percentage increase in energy bills compared to a percentage increase in the price of bread?

Answer 30

A larger impact on purchasing power.

Question 31

In the short term, how might consumers react to price increases?

Answer 31

They might find it hard to change their spending patterns.

Question 32

What is the long-term consumer response to permanent price rises?

Answer 32

Consumers will find a way to adapt and adjust.

Question 33

What does YED stand for?

Answer 33

Income Elasticity of Demand.

Question 34

What does YED measure?

Answer 34

Responsiveness of quantity demanded following a change in income.

Question 35

For normal goods, what happens to quantity demanded when income increases?

Answer 35

It increases.

Question 36

What is the expected YED for inferior goods?

Answer 36

Negative.

Question 37

What effect does a YED greater than 1 indicate for normal goods?

Answer 37

Demand is expected to grow quicker than incomes.

Question 38

What does XED stand for?

Answer 38

Cross Elasticity of Demand.

Question 39

What does XED measure?

Answer 39

Responsiveness of quantity demanded of one product to a change in price of another related product.

Question 40

What type of products have positive XED values?

Answer 40

Substitutes.

Question 41

What type of products have negative XED values?

Answer 41

Compliments.

Question 42

If the price of laptops decreases and demand for PCs drops, what does this indicate?

Answer 42

Laptops are substitutes for PCs.

Question 43

What happens to the demand for soft drinks when meal prices decrease?

Answer 43

Demand for soft drinks increases.

Question 44

What is the relevance of PED to businesses?

Answer 44

Helps understand price variations and impacts on revenues.

Question 45

How does PED help in understanding total expenditure?

Answer 45

Indicates how consumer spending changes as prices rise or fall.

Question 46

What does PES stand for?

Answer 46

Price Elasticity of Supply.

Question 47

What does PES measure?

Answer 47

Responsiveness of quantity supplied to a change in price of the product.

Question 48

What is a key factor influencing PES?

Answer 48

Supply flexibility.

Question 49

What can stocks allow firms to do?

Answer 49

Meet demand at various levels through output changes.

Question 50

How does investment in capital equipment affect PES?

Answer 50

Improves supply capabilities over time.

Question 51

What does equilibrium refer to in economics?

Answer 51

A situation of balance with no tendency for change.

Question 52

What happens when there is excess supply in the market?

Answer 52

Firms reduce supply and prices to attract buyers.

Question 53

What does consumer surplus represent?

Answer 53

The difference between what consumers are willing to pay and the market price.

Question 54

What happens to consumer surplus when prices increase?

Answer 54

It reduces.

Question 55

What is producer surplus?

Answer 55

The difference between the price a producer is willing to accept and what is actually paid.

Question 56

How does a change in quantity supplied affect producer surplus?

Answer 56

It can increase or decrease based on market conditions.

Question 57

True or False: A rise in quantity demanded signals producers to supply more.

Answer 57

True.

Question 58

Fill in the blank: The price mechanism transmits ________ of preferences.

Answer 58

transmission.

Question 59

What does it mean for consumers to 'vote with their feet'?

Answer 59

Choosing not to buy a good for reasons such as distaste or price.