theme 1 chapter 1

Question 1

what is effective demand

Answer 1

consumer is both willing and able to purchase a good at a given price

Question 2

what do you call a fall in demand and rise in demand

Answer 2

contraction
extension

Question 3

what are the 8 conditions of demand

Answer 3

1. seasonality
2. advertising
3. income
4. government legislation
5. population
6. demographics
7. trends and fashions
8. price of other goods

Question 4

what is the rational behaviour for consumers

Answer 4

maximise utility (satisfaction)

Question 5

what is the rational behaviour for firms

Answer 5

maximise profit

Question 6

what is the concept of diminishing marginal utility

Answer 6

as extra units are consumed additional satisfaction decreases. as a result the prices we are willing and able to pay decreases, which is why demand curve has negative gradient.

Question 7

when will the rational consumer stop consuming

Answer 7

when marginal utility reaches 0

Question 8

What is PED

Answer 8

the responsiveness of demand to a change in price

Question 9

what is the formula for PED

Answer 9

&change of QD / %change of price

Question 10

Price elastic meaning, PED values and steepness of curve and how to increase TR

Answer 10

change in price leads to a more than proportionate change in demand
PED > 1
curve has a shallow negative gradient
decrease price

Question 11

price inelastic meaning, PED values and steepness of curve and how to increase TR

Answer 11

change in price leads to a less than proportionate change in demand
PED < 1
curve has a steep negative gradient
increase price

Question 12

What does it mean if PED is unitary

Answer 12

change in price leads to an equally proportionate change in demand
PED = 1
curve is at a perfect diagonal

Question 13

What are the 6 factors that effect PED

Answer 13

1. necessity vs luxury (N=I , L=E)
2. level of addiction (L=E , H=I)
3. number of substitutes (L=I , H=E)
4. % of salary (L=I , H=E)
5. short run vs long run (S=I , L=E)
6. breathe of definition (L=E , H=I)

Question 14

What is YED

Answer 14

the responsiveness of demand to a change in income

Question 15

what is the formula for YED

Answer 15

&change of QD / %change of income

Question 16

income elastic meaning, YED values and curve steepness + type of good it is

Answer 16

change in income leads to a more than proportionate change in demand
YED > 1 (positive)
curve is shallow and positive gradient
normal luxury good (champagne)

Question 17

income inelastic meaning, YED values and curve steepness + type of good it is

Answer 17

change in income leads to a less than proportionate change in demand
YED < 1 (positive)
curve is steep and positive gradient
normal necessity good (baked beans)

Question 18

what is an inferior good, its YED values and curve orientation

Answer 18

as income increases demand decreases or as income falls demand increases.
YED < 0 (negative)
curve has negative gradient

Question 19

what is XED

Answer 19

responsiveness of demand of good A after price changes of good B

Question 20

formula for XED

Answer 20

%change in QD of (A) / %change in price of (B)

Question 21

What does a positive XED mean, an example and orientation of curve

Answer 21

increase in price of good B results in the increase in demand for good A
Substitute goods - coke and Pepsi
positive gradient

Question 22

What does a negative XED mean, an example and orientation of curve

Answer 22

increase in price of good A results in a decrease in demand for good B
complimentary goods - petrol and cars
negative gradient

Question 23

what does it mean if XED = 0

Answer 23

there is no relationship between the goods

Question 24

what does it mean if XED value is really far from 0

Answer 24

relationship between goods is stronger

Question 25

what is meant by perfectly inelastic demand, its value and curve orientation

Answer 25

change in price leads to no change in demand PED = 0 curve is vertical water

Question 26

what is meant by perfectly elastic demand, its value and curve orientation

Answer 26

change in price leads to an infinite change in demand PED = infinite curve is horizontal nothing

Question 27

Supply meaning

Answer 27

the amount a producer is willing and able to supply at a given price

Question 28

what are the 7 conditions of supply

Answer 28

1. weather for farmers 2. new technology 3. external shocks 4. indirect tax 5. government subsidies 6. number of firms in market 7. discovery of new resources

Question 29

PES meaning

Answer 29

responsiveness of supply to a change in price

Question 30

PES formula

Answer 30

%change in QD / %change in price

Question 31

price elastic meaning, PES values and steepness of curve

Answer 31

change in price leads to a more than proportionate change in supply PES > 1 curve is positive and shallow

Question 32

price inelastic meaning, PES values and steepness of curve

Answer 32

change in price leads to a less than proportionate change in supply PES < 1 curve is positive and steep

Question 33

What does it mean if PES is unitary

Answer 33

change in price leads to an equally proportionate change in supply PES = 1 curve is at a perfect diagonal

Question 34

what are the 5 factors that effect PES

Answer 34

1. level of spare capacity (high-E , Low-I) 2. Time period (short-I , long-E) 3. level of stock (high-E , low-I) 4. level of perishability (high-I , low-E) 5. barrier to entry (lots-I , little-E)