1.2 How markets work

Question 1

a) The underlying assumptions of rational economic
decision making:

Answer 1

o consumers aim to maximise utility
o firms aim to maximise profits

Question 2

a) The distinction between movements along a demand
curve and shifts of a demand curve

Question 3

b) The factors that may cause a shift in the demand curve
(the conditions of demand)

Question 4

c) The concept of diminishing marginal utility and how this
influences the shape of the demand curve

Question 5

a) Understanding of price, income and cross elasticities of
demand

Question 6

b) Use formulae to calculate price, income and cross
elasticities of demand

Question 7

c) Interpret numerical values of
o price elasticity of demand: unitary elastic, perfectly
and relatively elastic, and perfectly and relatively
inelastic
o income elasticity of demand: inferior, normal and
luxury goods; relatively elastic and relatively inelastic
o cross elasticity of demand: substitutes,
complementary and unrelated goods

Question 8

d) The factors influencing elasticities of demand

Question 9

e) The significance of elasticities of demand to firms and
government in terms of:
o the imposition of indirect taxes and subsidies
o changes in real income
o changes in the prices of substitute and
complementary goods

Question 10

f) The relationship between price elasticity of demand and
total revenue (including calculation)

Question 11

a) The distinction between movements along a supply
curve and shifts of a supply curve

Question 12

b) The factors that may cause a shift in the supply curve
(the conditions of supply)

Question 13

a) Understanding of price elasticity of supply

Question 14

b) Use formula to calculate price elasticity of supply

Question 15

c) Interpret numerical values of price elasticity of supply:
perfectly and relatively elastic, and perfectly and
relatively inelastic

Question 16

d) Factors that influence price elasticity of supply

Question 17

e) The distinction between short run and long run in
economics and its significance for elasticity of supply

Question 18

a) Equilibrium price and quantity and how they are
determined

Question 19

b) The use of supply and demand diagrams to depict
excess supply and excess demand

Question 20

c) The operation of market forces to eliminate excess
demand and excess supply

Question 21

d) The use of supply and demand diagrams to show how
shifts in demand and supply curves cause the
equilibrium price and quantity to change in real-world
situations

Question 22

a) Functions of the price mechanism to allocate resources:
o rationing
o incentive
o signalling

Question 23

b) The price mechanism in the context of different types of
markets, including local, national and global markets

Question 24

a) The distinction between consumer and producer surplus

Question 25

b) The use of supply and demand diagrams to illustrate
consumer and producer surplus

Question 26

b) The use of supply and demand diagrams to illustrate
consumer and producer surplus

Question 27

c) How changes in supply and demand might affect
consumer and producer surplus

Question 28

a) Supply and demand analysis, elasticities, and:
o the impact of indirect taxes on consumers, producers
and government
o the incidence of indirect taxes on consumers and
producers
o the impact of subsidies on consumers, producers and
government
o the area that represents the producer subsidy and
consumer subsidy

Question 29

a) The reasons why consumers may not behave rationally:

Answer 29

o consideration of the influence of other people’s
behaviour
o the importance of habitual behaviour
o consumer weakness at computation

Question 30

Subsidy EVALUATION

Question 31

subsidy CS&PS calculation

Question 32

demand APPLICATION

Question 33

state and explain types of demand WITH examples

Question 34

expl. individual vs market demand

Question 35

elasticity of demand EVALUATION

Question 36

YED application

Question 37

Types of supply WITH examples

Question 38

supply Application

Question 39

price determination APPLICATION

Question 40

price mechanism (ADVANTAGES and disadvantages

Question 41

indirect taxes APPLICATION

Question 42

indirect taxes EVALUATION

Question 43

expl. PED - total rev. and demand curve

Question 44

PED EVALUATIONNN

Question 45

expl. why we need to know ped

Question 46

expl. importance of knowing YED

Question 47

YED - APPLICATIOIN

Question 48

expl. importance of cross elasticity

Question 49

expl. strong vs weak XED

Question 50

what are giffen goods