1.2 How markets work

Question 1

What is demand?

Answer 1

The ability and willingness to buy a particular good at a given price and time

Question 2

What causes a movement along a demand curve?

Answer 2

A change in price

Question 3

What causes a shift in demand?

Answer 3

PACIFIC
Population
Advertising
Substitutes
Interest rates
Fashion/trends
Income tax
Complements

Question 4

What is total utility?

Answer 4

The satisfaction gained by a consumer as a result of their consumption

Question 5

What does the Law of Diminishing Marginal Utility state?

Answer 5

As more of a good is consumed the satisfaction derived will decrease

Question 6

PED - Prices elasticity of demand

Answer 6

% change in quantity demanded / % change in price

Question 7

Values of PED

Answer 7

Between 0 - 1 is inelastic
Between 1 and infinity is elastic

Question 8

Factors influencing PED

Answer 8

Availability of substitutes
Time
Necessity
Addictive

Question 9

Income elasticity of demand - YED

Answer 9

% change in quantity demanded / % change in income

Question 10

Valued of YED

Answer 10

Less than 0 is an inferior good
More than 0 is a normal good
More than 1 is a luxury good

Question 11

XED - Cross elasticity of demand

Answer 11

% change in quantity demanded of good A / % change in price of good B

Question 12

Values of XED

Answer 12

Less than 0 is a substitute
More than 0 is a complementary good

Question 13

What is supply?

Answer 13

The ability and willingness to provide a good or service at a particular price and time

Question 14

What causes a movement along a supply curve?

Answer 14

A change in price of the good

Question 15

What causes a shift of the supply curve?

Answer 15

PINTSWC
Productivity
Indirect Tax
Numbers of firms in the market
Tech
Subsidies
Weather
Cost of production

Question 16

PES - Price elasticity of supply

Answer 16

% change in quantity supplied / % change in price

Question 17

Values of PES

Answer 17

Less than 1 is inelastic
More than 1 is elastic

Question 18

What is price equilibrium?

Answer 18

Where supply is equal to demand

Question 19

Price Mechanism

Answer 19

SIRA
Signalling - prices adjust to show where resource are required
Incentive - When the price of the product rises
Ration - Price serve to ration scarce resources
Allocating - Allocating scarce resources

Question 20

What is a consumer surplus?

Answer 20

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

Question 21

What is a producer surplus?

Answer 21

The difference between the price the supplier is willing to produce their product and the price they actually produce at

Question 22

What is an indirect tax?

Answer 22

A tax on expenditure

Question 23

What are the 2 types of indirect tax?

Answer 23

Ad Valorem - where the tax payable increases in proportion to the value of the good
Specific Tax - where an amount is added to the price

Question 24

What is the incidence of tax?

Answer 24

The burden on the taxpayer

Question 25

What is a subsidy?

Answer 25

A grant given by the government to encourage production/consumption of a good or service

Question 26

Why do consumers not always behave rationally? (consumer behaviour)

Answer 26

Influences of other people
Influence of habitual behaviour
Consumer weakness at computation

Question 27

What is the underlying assumption for all rational decision making that consumers aim to maximise?

Answer 27

Maximise utility