1.2 how markets work

Question 1

rational economic decision making

Answer 1

-consumers aim to maximise utility
-firms aim to maximise profit
-governments aim to maximise social welfare

Question 2

things that can increase/ decrease demand

Answer 2

-population
-income
-related goods
-advertising
-tastes/ fashion
-expectations
-season
-government legislation

Question 3

ped formula

Answer 3

% change in quantity demanded/ % change in price

Question 4

unitary elastic

Answer 4

ped = 1

Question 5

relatively elastic

Answer 5

ped > 1

Question 6

relatively inelastic

Answer 6

ped < 1

Question 7

perfectly elastic

Answer 7

ped = infinity

Question 8

perfectly inelastic

Answer 8

ped = 0

Question 9

factors influencing ped

Answer 9

-availability of substitutes
-time
-necessity
-how large of a % of total expenditure
-addictiveness

Question 10

significance of ped

Answer 10

-determines the effects of the imposition of indirect taxes and subsidies
-more elastic the demand curve, the lower the incidence of tax on the consumer
-when demand is elastic, tax will mainly passed to the consumer

Question 11

ped and revenue

Answer 11

-elastic demand curve, decrease in price leads to an increase in revenue and vice versa
-inelastic demand curve, decrease in price leads to decrease in revenue
-unitary elastic curve, a change in price does not affect total revenue

Question 12

income elasticity of demand formula (yed)

Answer 12

% change in quantity demanded/ % change in income

Question 13

numerical values of yed

Answer 13

-inferior good, yed<0
-normal good, yed>0
-luxury good, yed>1

Question 14

significance of yed

Answer 14

-important for businesses to know how their sales will be affected by changes in the income of the population
-may have an impact on the type of good that a firm produces

Question 15

cross elasticity of demand formula (xed)

Answer 15

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

Question 16

numerical values of xed

Answer 16

-substitute good xed>0
-complementary good xed<0
-unrelated good xed=0

Question 17

significance of xed

Answer 17

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

Question 18

conditions of supply

Answer 18

-costs of production
-price of other goods
-weather
-technology
-goals of the supplier
-government legislation
-taxes and subsidies
-producer cartels

Question 19

price elasticity of supply formula (pes)

Answer 19

% in quantity supplied/ % change in price

Question 20

numerical values of pes

Answer 20

-unitary, pes =1
-relatively elastic, pes > 1
-relatively inelastic, pes < 1
-perfectly elastic, pes = infinity
-perfectly inelastic, pes = 0

Question 21

factors affecting pes

Answer 21

-time
-stocks
-working below full capacity
-availability of factors of production
-ease of entry into market
-availability of substitutes

Question 22

price mechanism functions

Answer 22

-rationing function, price increase so people may not be able to afford to buy the product and others may not have the desire to buy
-signalling function, when prices rise, producers move resources into the manufacture of the product. change in price indicates that market conditions have changed so they should change the quantity bought and sold
-incentive function, the more money people have the more they can buy. suppliers make more they sell more and more profit

Question 23

consumer surplus

Answer 23

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

Question 24

producer surplus

Answer 24

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