1.2 demand and supply

Question 1

what is utility?

Answer 1

satisfaction

Question 2

what do consumers seek to maximise?

Answer 2

utility

Question 3

what do firms seek to maximise?

Answer 3

profit

Question 4

what is irrational behaviour?

Answer 4

where actions do not maximise utility

Question 5

explain 3 reasons why agents may behave irrationally

Answer 5

habit
inertia
influenced by others

Question 6

what is bounded rationality?

Answer 6

rationality within constraints (eg of time, information, computational skill, using rules of thumb)

Question 7

what is demand?

Answer 7

the amount of a good or service customers are willing to
buy at a given price (over a given time period)

Question 8

why are demand curves downward sloping?

Answer 8

law of diminishing marginal utility
income effect
substitution effect

Question 9

what could cause an extension in demand?

Answer 9

an outward shift in supply

Question 10

what could cause a contraction in demand?

Answer 10

an inwards shift in supply

Question 11

give the conditions (shifters) of demand

Answer 11

population
advertising
substitutes
income
fashion and trends
intrest rates
complements

Question 12

what is the law of diminishing marginal utility?

Answer 12

as more of a good is consumed, each additional unit provides less additional satisfaction

Question 13

what is supply?

Answer 13

the quantity firms are willing and able to sell at a given price (over a given period of time)

Question 14

why are supply curves upward sloping?

Answer 14

law of diminishing marginal returns
profit motive
attracting new entrants

Question 15

what could cause an extension in supply?

Answer 15

outward shift in demand

Question 16

what could cause a contraction in supply?

Answer 16

inward shift in demand

Question 17

give the conditions (shifters) of supply

Answer 17

productivitiy
indirect tax
number of firms (competition)
technology
subsidies
weather
cost of production
regulations

Question 18

what is equilibrium price?

Answer 18

the price at which D=S

Question 19

what is equilibrium quantity?

Answer 19

the quantity at which D=S

Question 20

what is a shortage?

Answer 20

where demand is greater than supply

Question 21

referring to extension and contraction, explain how shortages are resolved

Answer 21

price rises, supply expands and
demand contracts

Question 22

what is a surplus?

Answer 22

where supply is greater than
demand

Question 23

referring to extension and contraction, explain how surpluses are resolved

Answer 23

price falls, supply contracts and
demand expands

Question 24

explain the functions of the price mechanism

Answer 24

incentive
rationing
signalling
allocative

Question 25

what is consumer surplus?

Answer 25

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

Question 26

what is producer surplus?

Answer 26

the difference between the price the market is willing to supply at and what they actually supply at

Question 27

what is total economic welfare?

Answer 27

consumer surplus + producer surplus