1.2

Question 1

what are the assumptions of rational economic decision making

Answer 1

consumers aim to maximise utility - satisfaction gained from receiving a product

firms aim to maximise proft

governments aim to maximise social welfare

Question 2

define demand

Answer 2

demand is the ability and willingness to buy a particular good at a given price at a given time

Question 3

what does a movement along a demand curve represent compared to a shift in the demand curve

Answer 3

movement along a curve is a change in price of a good

short of demand curve is a change in the factors that affect demand

Question 4

what does it mean if there is the shift to the right on demand curve compared to a shift to the left

Answer 4

increase In demand if shifts to the right

decrease in demand if shifts to the left

Question 5

what does it mean if there is movement to the right along the demand curve compared to a movement to the left

Answer 5

extension in demand if to the right, quantity demand rises as prices fall

contraction in demand if to the left, quantity demanded decreases as prices rise

Question 6

what are the conditions of demand

Answer 6

PIRATES

Population
Income
Related goods
Advertising
Taste
Expectations
Seasons

Question 7

what is diminishing marginal utility

Answer 7

the satisfaction derived from the consumption of an additional unit will decrease as more of a good is consumed

Question 8

what is PED

Answer 8

price elasticity of demand

responsiveness of demand to a change in the price of a good

Question 9

what is the formula of PED

Answer 9

% change in quantity demanded divided by % change in price

Question 10

what are the numerical values of PED

Answer 10

unitary elastic = 1 - quantity demanded changes by how much price changes

relatively elastic = PED>1

Relatively inelastic = PED<1

perfectly elastic = PED = infinity

perfectly inelastic = PED = 0

Question 11

factors influencing PED

Answer 11

availability of substitutes

time

necessity

size of total expenditure

addictive

Question 12

significance of PED

Answer 12

if demand is inelastic, the imposition of tax will be ineffective as quantity demanded will not fall

Question 13

PED and revenue

Answer 13

for elastic demand curve, prices decrease increase revenue as there is a higher quantity demanded

for inelastic demand curve, prices decrease, decrease revenue as

for unitary elastic curve - change in price does not effect revenue

Question 14

income elasticity of demand equation

Answer 14

%chnage in quantity demanded divided by % change in income

Question 14

what is income elasticity of demand

Answer 14

responsiveness of demand to a change in income

Question 15

numerical values for income elasticity of demand

Answer 15

YED<0- inferior good

YED>0- normal good

YED>1 - luxury good

Question 16

significance of YED

Answer 16

during times of high income, businesses may produce more luxury goods, likely increasing sales

Question 17

what is cross elasticity of demand

Answer 17

responsiveness of demand for one product to the change of price of another product

Question 18

equation of cross elasticity of demand

Answer 18

%change of quantity demanded for A divided by %chnage in price of B

Question 19

numerical values for XED

Answer 19

XED> 0 is substitutes

XED < 0 is complimentary goods

XED -0 is unrelated goods

Question 20

significance of XED

Answer 20

firms need to be aware of their competition and those producing complementary goods, need to know how price changes by other firms will impact them

Question 21

what is supply

Answer 21

ability and willingness to provide a good or service at a particular price and a given moment in time

Question 22

What does the movement along the supply curve represent compared to a shift of the supply curve

Answer 22

Movement along is a change in price which then changes quantity supplied

A shift is caused due to a change in the factors of supply

Question 23

What are the conditions of supply

Answer 23

Cost of production

Price of other goods (joint supply, competitive supply)

Weather

Technology

Goals of supplier

Government legislation

Taxes and subsidies

Question 24

What is the elasticity of supply

Answer 24

Responsiveness of a Change of supply to a change in price of a good

Question 25

What is the equation for PES

Answer 25

% change in quantity supplied divided by % change in price

Question 26

What are factors influencing PES

Answer 26

Time

Stock

Efficiency

Availability of factors of production

Substitutes availability

Ease of entry into market