Theme 1 - How do markets work

Question 1

Factors that shift the demand curve

Answer 1

Population
Income
Related goods
Advertising
Tastes and Fashions
Expectations
Seasons

Question 2

Derived demand

Answer 2

Demand for one good is linked to the demand for a related good.

Question 3

Composite demand

Answer 3

When the good demanded has more than one use so assuming supply stays the same an increase in one good leads to a decrease in supply of another.

Question 4

Joint demand

Answer 4

When goods are bought together.

Question 5

Diminishing marginal utility

Answer 5

Decreasing satisfaction or usefulness as additional units of a product are acquired

Question 6

Equation for price elasticity of demand

Answer 6

% change in quantity demanded / % change in price

Question 7

Unitary elastic

Answer 7

describes demand whose elasticity is exactly equal to 1

Question 8

Inelastic demand

Answer 8

A situation in which an increase or a decrease in price will not significantly affect demand for the product

Question 9

Elastic demand

Answer 9

A situation in which consumer demand is sensitive to changes in price

Question 10

Perfectly inelastic

Answer 10

Quantity does not respond at all to changes in price (E=0)

Question 11

Perfectly elastic

Answer 11

Demand which falls to zero when price changes

Question 12

Factors effecting PED

Answer 12

Necessity
Substitutes
Addictiveness
Proportion of income
Durability
Peak and off peak

Question 13

If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on ……………

Answer 13

The consumer

Question 14

If a firm sells a good with an elastic demand, they are likely to put most of the tax burden on ……………

Answer 14

Themsleves (The firm)

Question 15

Equation for income elasticity of demand

Answer 15

% change in quantity demanded / % change in income

Question 16

Luxury goods have a PED of YED ……

Answer 16

> 1 as income increases this causes an even bigger increase in demand/

Question 17

Normal goods have a PED of YED ……

Answer 17

> 0 as demand increases as income increases

Question 18

Inferior goods have a PED of YED ……

Answer 18

<0 as they see a fall in demand as income rises.

Question 19

Equation for cross elasticity of demand

Answer 19

% change in quantity demanded of good X / % change in price of good Y

Question 20

Complementary goods have a ………. XED

Answer 20

negative

Question 21

Substitute goods have a ………. XED

Answer 21

Positive

Question 22

Unrelated goods have a ………. XED

Answer 22

0

Question 23

Factors that cause a shift in the supply curve

Answer 23

Productivity
Indirect taxes
Number of firms
Technology
Subsidies
Weather
Costs of production

Question 24

Equation for price elasticity of supply

Answer 24

% change in quantity supplied / % change in price

Question 25

What are the 3 main functions the price mechanism uses to allocate resources

Answer 25

Rationing Incentive Signalling

Question 26

Consumer surplus

Answer 26

The difference between what a firm is willing to pay and the price they actually pay.

Question 27

Producer surplus

Answer 27

The difference between the price the producer is willing to charge and the price they actually charge.

Question 28

Economic welfare

Answer 28

The total benefit society receives from an economic transaction.

Question 29

How is economic welfare calculated

Answer 29

Producer Surplus + Consumer Surplus

Question 30

Two types of indirect taxes

Answer 30

specific tax and ad valorem tax

Question 31

Consumer subsidies affect demand and do/do not shift the .......... curve.

Answer 31

do not supply

Question 32

Producer subsidies lower the cost of production and do/do not shift the ............ curve.

Answer 32

do supply