Theme 1.2: 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

Main limitation of rational decision making?

Answer 4

Takes longer.

Question 5

What are heuristics, and how would you use this word in a sentence?

Answer 5

Mental shortcuts or “rules of thumb” that often lead to a solution (but not always).

Consumers often rely on heuristics, or mental shortcuts, when making purchasing decisions, especially under conditions of limited information or time pressure.

Question 6

7 examples of factors that shift the demand curve are?

FAIRSTEP

(R is 2 words)

Answer 6

Fashions, Advertising, Income, Related goods, Seasons, Tastes, Expectations, Population

Question 7

What does derived demand refer to?

Answer 7

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

Question 8

Joint demand/Compliment goods

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

unitary elastic

Answer 10

describes demand whose elasticity is exactly equal to 1

Question 11

inelastic demand

Answer 11

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

Question 12

elastic demand

Answer 12

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

Question 13

perfectly inelastic

Answer 13

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

Question 14

perfectly elastic

Answer 14

demand which falls to zero when price changes

Question 15

6 factors effecting PED

Answer 15

Necessity, Substitutes, Addictiveness, Proportion of income, Durability, Peak and off peak

Question 16

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

Answer 16

consumer

Question 17

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

Answer 17

themselves (the firm)

Question 18

Luxury goods have a PED of YED ……

Answer 18

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

Question 19

Normal goods have a PED of YED ……

Answer 19

> 0 as demand increases as income increases

Question 20

Inferior goods have a PED of YED ……

Answer 20

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

Question 21

Complementary goods have a ………. XED

Answer 21

negative

Question 22

Substitute goods have a ………. XED

Answer 22

Positive

Question 23

Unrelated goods have a ………. XED

Answer 23

0

Question 24

7 factors that cause a shift in the supply curve

Answer 24

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

Question 25

Factors effecting PES

Answer 25

Time taken to produce it, Resource availability, Production technology, Perishability

Question 26

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

Answer 26

Rationing, Incentive, Signalling ## Footnote Signalling Function: Prices rise or fall to indicate where resources are needed, guiding producers and consumers based on market conditions. Incentive Function: Prices create incentives for producers and consumers to change their behaviour in response to market signals without central control. Rationing Function: Prices help allocate scarce resources by ensuring only those willing and able to pay can access limited goods.

Question 27

Consumer surplus

Answer 27

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

Question 28

Producer surplus

Answer 28

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

Question 29

Economic welfare

Answer 29

The total benefit society receives from an economic transaction.

Question 30

How is economic welfare calculated

Answer 30

The area of producer surplus and consumer surplus added together.

Question 31

Two types of indirect taxes

Answer 31

specific tax and ad valorem tax ## Footnote Specific tax is a fixed amount charged per unit of a good, regardless of its price. Example: £0.50 tax per litre of petrol. Ad valorem tax is charged as a percentage of the good’s value, so the tax amount increases with the price. Example: 20% VAT on a £100 item means £20 tax.

Question 32

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

Answer 32

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

Question 33

What is Marginal Product?

Answer 33

How much extra output you get when you add one more unit of input. (productivity)