week 3 (GPT)

Question 1

What is utility?

Answer 1

The satisfaction a consumer receives from consuming a good or service.

Question 2

What is marginal utility?

Answer 2

The additional satisfaction from consuming one more unit of a good.

Question 3

What is the law of diminishing marginal utility?

Answer 3

Each additional unit consumed provides less satisfaction than the one before.

Question 4

What is total utility?

Answer 4

The total satisfaction received from consuming all units of a good.

Question 5

When do consumers stop buying a product?

Answer 5

When marginal utility falls below the product’s price.

Question 6

What is the rational spending rule?

Answer 6

Spend money where the marginal utility per dollar is highest.

Question 7

How is marginal utility per dollar calculated?

Answer 7

Marginal utility divided by the price of the good.

Question 8

Why do consumers switch products?

Answer 8

Because another product gives higher marginal utility per dollar.

Question 9

What is the demand curve?

Answer 9

A graph showing the relationship between price and quantity demanded.

Question 10

Why does the demand curve slope downward?

Answer 10

Because marginal utility falls as more units are consumed; people are willing to pay less for more.

Question 11

What causes movement along the demand curve?

Answer 11

A change in the product’s own price.

Question 12

What causes the entire demand curve to shift?

Answer 12

Changes in income,
preferences,
population,
price of other goods.

Question 13

If the demand curve shifts right, what does it mean?

Answer 13

Consumers are now willing to buy more at each price.

Question 14

If the demand curve shifts left, what does it mean?

Answer 14

Consumers are now willing to buy less at each price.

Question 15

What is the substitution effect?

Answer 15

Consumers switch to a cheaper product when the original product becomes more expensive.

Question 16

What is the income effect?

Answer 16

A fall in price increases real income, allowing more consumption.

Question 17

What is a normal good?

Answer 17

A good where demand increases when income increases.

Question 18

What is an inferior good?

Answer 18

A good where demand increases when income decreases.

Question 19

Give an example of an inferior good.

Answer 19

Instant noodles, home-brand groceries, or cheap wine.

Question 20

What are substitute goods?

Answer 20

Goods used in place of each other (e.g. car and bus).

Question 21

What are complementary goods?

Answer 21

Goods used together (e.g. car and petrol).

Question 22

In a graph, what happens if the price of a substitute decreases?

Answer 22

The demand curve for the original product shifts left.

Question 23

In a graph, what happens if the price of a complement decreases?

Answer 23

The demand curve for the related product shifts right.

Question 24

What is horizontal reading of the demand curve?

Answer 24

Given a price, it tells how much a consumer will buy.

Question 25

What is vertical reading of the demand curve?

Answer 25

Given a quantity, it tells the maximum price a consumer is willing to pay.

Question 26

What is price elasticity of demand (PED)?

Answer 26

PED measures how much the quantity demanded of a good responds to a change in its price.

Question 27

What is the formula for PED?

Answer 27

% Change in Quantity Demanded ÷ % Change in Price.

Question 28

What does it mean if PED > 1?

Answer 28

Demand is elastic – consumers are responsive to price changes.

Question 29

What does it mean if PED < 1?

Answer 29

Demand is inelastic – consumers are not very responsive to price changes.

Question 30

What does it mean if PED = 1?

Answer 30

Demand is unit elastic – percentage change in quantity equals percentage change in price.

Question 31

Is demand for necessities typically elastic or inelastic?

Answer 31

Inelastic, because people will still buy them even if prices rise.

Question 32

Give an example of an inelastic product.

Answer 32

Insulin or Panadol – demand remains stable even when prices change.

Question 33

Is demand for luxury goods typically elastic or inelastic?

Answer 33

Elastic, because consumers can cut back if prices rise.

Question 34

What is the total revenue test?

Answer 34

A method to determine elasticity by observing what happens to total revenue when price changes.

Question 35

If price increases and total revenue decreases, is demand elastic or inelastic?

Answer 35

Elastic.

Question 36

If price increases and total revenue increases, is demand elastic or inelastic?

Answer 36

Inelastic.

Question 37

What is point elasticity?

Answer 37

A measure of elasticity at a single point on the demand curve.

Question 38

What is the formula for point elasticity?

Answer 38

(1 ÷ slope) × (P ÷ Q)

Question 39

What happens to elasticity along a straight-line demand curve?

Answer 39

It changes – more elastic at higher prices, more inelastic at lower prices.

Question 40

What factors affect PED?

Answer 40

Availability of substitutes, necessity vs luxury, time, share of income spent.

Question 41

How does the availability of substitutes affect PED?

Answer 41

More substitutes = more elastic demand.

Question 42

What’s the substitution effect?

Answer 42

When a price rises, consumers switch to similar but cheaper goods.

Question 43

What’s the income effect?

Answer 43

When a price rises, the consumer's real income falls, leading to less quantity demanded.

Question 44

What is price elasticity of supply (PES)?

Answer 44

It measures how much quantity supplied responds to a change in price.

Question 45

What is the formula for PES?

Answer 45

% Change in Quantity Supplied ÷ % Change in Price.

Question 46

What factors influence PES?

Answer 46

Time, availability of resources, mobility of resources.

Question 47

Is supply more elastic in the short run or long run?

Answer 47

Long run, because firms have more time to adjust.

Question 48

What does it mean if PES > 1?

Answer 48

Supply is elastic – producers can respond easily to price changes.

Question 49

What does it mean if PES < 1?

Answer 49

Supply is inelastic – harder to increase output quickly.

Question 50

Why do firms avoid operating in the inelastic part of the demand curve?

Answer 50

Because lowering price decreases revenue – not efficient for maximizing profits.