Theme 1

Question 1

define price elasticity of demand

Answer 1

a measure of how reactive the demand for a good or service is to a change in price

Question 2

define price elasticity of supply

Answer 2

a measure of how reactive supply of a good or service is to a change in price

Question 3

what factors determine the PED of a product

Answer 3

price as a % of income
availability of substitutes
brand loyalty
necessity or luxury

Question 4

what is surge pricing

Answer 4

when demand is greater than supply, prices increase to incentivise supply

Question 5

what is income elasticity of demand

Answer 5

a measure of how reactive the quantity demanded for a good or service is to a change in income

Question 6

what is a good with a YED greater than 0

Answer 6

normal good

Question 7

what is a good with a YED less than 0

Answer 7

inferior good

Question 8

what is a good with a YED between 0-1

Answer 8

a necessity

Question 9

what is a good with a YED greater than 1

Answer 9

luxury

Question 10

what are the 4 types of efficiency

Answer 10

productive
allocative
x efficiency
dynamic efficiency

Question 11

define the term creative destruction, and which economist coined this phrase?

Answer 11

Joseph Schumpeter’s theory of creative destruction refers to the need for constant innovation and competition in a capitalist society to find more efficient processes to replace old ones

Question 12

define the term market failure

Answer 12

inefficient distribution of goods and services in the free market

Question 13

what are the main functions of the price mechanism

Answer 13

ration, incentivise, signal and allocate

Question 14

what is the relationship between wage rate and the demand for labour

Answer 14

as the wage rate for labour increases the demand for labour decreases

Question 15

what factors affect the elasticity of labour demand

Answer 15

labour as a % of TC
Ease and cost of factor substitution
PED of final output- can higher costs be passed on to consumers

Question 16

what are factors that affect the supply of labour

Answer 16

net migration
retirement age
real wage rate
occupational mobility
barriers to entry

Question 17

what are government policies that can be used to increase the supply of labour

Answer 17

apprenticeships/ internships
housing market intervention- to prevent occupational immobility/ geographic
cut benefits
lower income tax

Question 18

which two factors may cause a consumer to make a satisficing decision

Answer 18

bounded rationality- consumers may not have time to make a rational decision, over-abundance of choice or imperfect info

bounded self control- many consumers may not maximise utility because they lack self control, e.g making gambles you know won’t pay off

Question 19

what is bounded rationality

Answer 19

the idea that humans are limited in their ability to make completely rational decisions due to cognitive limitations and time constraints.

Question 20

what is bounded self-control

Answer 20

the idea that individuals’ self-control is limited and can be depleted over time or in the face of competing demands.

Question 21

what is anchoring

Answer 21

individuals rely too heavily on the first piece of information they receive when making a decision, even if it is irrelevant or misleading

Question 22

what is availability bias?

Answer 22

individuals give greater importance to information that is more readily available in their memory, rather than considering all relevant information equally

Question 23

what is loss aversion

Answer 23

people feel the pain of losses more strongly than the pleasure of gains, making them risk-averse and hesitant to take actions that might result in losses.

Question 24

what is choice architecture

Answer 24

the way in which the options are presented to individuals in a given context, which can affect their decision-making, often without limiting their choices.

Question 25

what is framing

Answer 25

the way information is presented to individuals, which can influence the way they perceive and respond to the information

Question 26

what is herd behaviour

Answer 26

individuals follow the actions or opinions of a larger group, often ignoring their own beliefs, which can lead to irrational or harmful outcomes.

Question 27

what is nudge theory

Answer 27

theory that small changes to a person’s environment can influence their behaviour in positive ways

Question 28

define income elasticity of demand

Answer 28

a measure of how reactive the quantity demanded for a good or service is to a change in income

Question 29

define positive externality

Answer 29

when the consumption of a good or service benefits a 3rd party not involved in the market transaction