1.2 (how markets work)

Question 1

rational decision making

Answer 1

we assume that:
consumers aim to maximise utility
firms aim to maximise profits
governments aim to maximise welfare

however alternative views may be caused by:
herd mentality
habitual behaviour
consumers not understanding

Question 2

PED

Answer 2

responsiveness of demand to a change in price (%change QD / %change P)

Question 3

YED

Answer 3

how sensitive demand is to a change in income (%change QD / %change Y)

Question 4

XED

Answer 4

determines whether goods are complementary or substitutes (%change QD (product A) / %change P (product B))

Question 5

PES

Answer 5

responsiveness of supply to a change in demand (%change QD / %change P) *always positive
<1 = inelastic
>1 = elastic

Question 6

price determination

Answer 6

how demand and supply interact to determine the prices

Question 7

price mechanism

Answer 7

supply and demand together

Question 8

consumer surplus

Answer 8

difference between how much buyers are prepared to pay and what they actually pay

Question 9

producer surplus

Answer 9

difference between market price and price prepared to be supplied at

Question 10

indirect taxes

Answer 10

taxes on expenditure, can be avoided

Question 11

subsidies

Answer 11

given grant by government to encourage production or consumption of certain goods / services
- lowers costs of production
- usually on goods that produce positive externalities + under consumed