Theme 1

Question 1

Consumer surplus

Answer 1

• the additional benefit or utility that consumers receive when they are able to purchase a good or service at a price lower than what they are willing to pay.
• It represents the difference between what consumers are willing to pay and what they actually pay in the market.
• the area above equilibrium and below demand curve

Question 2

Producer surplus

Answer 2

• Producer surplus is the additional profit that producers earn when they sell a good or service at a price higher than their minimum acceptable price.
• It represents the difference between the market price and the producer’s marginal cost of production.
• area below equilibrium and above the supply curve

Question 3

Functions of money

Answer 3

1. medium of exchange: facilitates transactions
2. unit of account: measures the values of goods and services
3. store of value: allows individuals to save for future consumption
4. facilitates exchange: increases efficiency of exchanging goods and services
5. standard of deferred payment: loans, mortgages, insurance contracts

Question 4

Reasons why consumers may not behave rationally

Answer 4

1. influence on other people’s behaviour: social norms, peer-pressure
2. habitual behaviour: habits and routines in their decision making process
3. consumer weakness at computation: may not have access to information

Question 5

Private benefits

Answer 5

benefits received by producers or consumers directly involved in a transaction or economic activity
- e.g. private benefits of education = improved job opportunities

Question 6

External benefits

Answer 6

benefits received by third parties who are not part of the transaction or activity. Beneficial to society
- e.g. vaccination = benefits the community by stopping the spread of a disease.

Question 7

Social benefits

Answer 7

Represent the total benefits of an economic activity. Represents the overall impact of an activity on society.

Question 8

What causes a change in demand

Answer 8

P: price (contraction or extension of demand)
P: population
I: income
R: regulation
A: advertising
T: trends
E: economy
S: substitute