Theme 1: How do Markets Work

Question 1

When making economic decisions, consumers aim to maximise their …….. and firms aim to maximise ……..

Answer 1

Utility and Profits

Question 2

Consumer Utility

Answer 2

total satisfaction received from consuming a good or service

Question 3

Two ways to make a decision are?

Answer 3

Intuition and Rational

Question 4

Limitations of rational decision making?

Answer 4

Takes longer despite possibly being fairer.

Question 5

Factors that shift the demand curve are?

Answer 5

Population Income Related goods Advertising Tastes and Fashions Expectations Seasons

Question 6

Derived demand

Answer 6

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

Question 7

Composite demand

Answer 7

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 8

Joint demand

Answer 8

When goods are bought together.

Question 9

diminishing marginal utility

Answer 9

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

Question 10

equation for price elasticity of demand

Answer 10

% change in quantity demanded / % change in price

Question 11

unitary elastic

Answer 11

describes demand whose elasticity is exactly equal to 1

Question 12

inelastic demand

Answer 12

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

Question 13

elastic demand

Answer 13

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

Question 14

perfectly inelastic

Answer 14

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

Question 15

perfectly elastic

Answer 15

demand which falls to zero when price changes

Question 16

Factors effecting PED

Answer 16

Necessity Substitutes Addictiveness Proportion of income Durability Peak and off peak

Question 17

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

Answer 17

consumer

Question 18

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

Answer 18

themselves (the firm)

Question 19

Equation for income elasticity of demand

Answer 19

% change in quantity demanded / % change in income

Question 20

Luxury goods have a PED of YED ……

Answer 20

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

Question 21

Normal goods have a PED and YED ……

Answer 21

> 0 as demand increases as income increases

Question 22

Inferior goods have a PED and YED ……

Answer 22

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

Question 23

Equation for cross elasticity of demand

Answer 23

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

Question 24

Complementary goods have a ………. XED

Answer 24

negative

Question 25

Substitute goods have a .......... XED

Answer 25

Positive

Question 26

Unrelated goods have a .......... XED

Answer 26

0

Question 27

Factors that cause a shift in the supply curve

Answer 27

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

Question 28

equation for price elasticity of supply

Answer 28

% change in quantity supplied / % change in price

Question 29

Factors effecting PES

Answer 29

Availability of substitutes, Time, Government Regulation, Technology

Question 30

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

Answer 30

Rationing Incentive Signalling

Question 31

Consumer surplus

Answer 31

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

Question 32

Producer surplus

Answer 32

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

Question 33

Economic welfare

Answer 33

The total benefit society receives from an economic transaction.

Question 34

How is economic welfare calculated

Answer 34

The area of producer surplus and consumer surplus added together.

Question 35

Two types of indirect taxes

Answer 35

specific tax and ad valorem tax

Question 36

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

Answer 36

supply

Question 37

Producer subsidies lower the cost of production and shift the ............ curve.

Answer 37

supply

Question 38

What are the 3 reasons why a consumer might not act rationally?

Answer 38

1- The influence of other peoples behaviour. 2- The importance of habitual behaviour. 3- Consumer weakness at computation.