1.2 How markets work

Question 1

Ad valorem tax

Answer 1

tax levied as a percentage of the value of the good.

Question 2

Complement

Answer 2

a good that is purchased with other goods to satisfy a want. (Negative XED).

Question 3

Conditions of demand

Answer 3

– factors other than price, such as income or the price of other goods, which lead to changes in demand which are associated with shifts in the demand curve.

Question 4

Conditions of supply

Answer 4

– factors other than price, such as income or the price of other goods, which lead to changes in supply which are associated with shifts in the supply curve.

Question 5

Consumer surplus

Answer 5

– the difference between how much the consumer is prepared to pay for a good and what they actually pay.

Question 6

Contraction of demand

Answer 6

– when quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve.

Question 7

Cross elasticity of demand

Answer 7

a measure of the responsiveness of quantity demanded for good ‘y’ to a change in price of good ‘x’.

Question 8

Demand

Answer 8

– the quantity purchased of a good at any given price, given that other determinants of demand remain unchanged.

Question 9

Economic welfare

Answer 9

– the level of well-being or prosperity or living standards of an individual or group of individuals such as a country.

Question 10

Elastic demand

Answer 10

– where the price elasticity of demand is greater than 1. The responsiveness of demand is proportionally greater than the change in price. Demand is perfectly elastic if the price elasticity of demand is infinity.

Question 11

Equilibrium price

Answer 11

the price at which there is no tendency to change because planned purchases are equal to planned sales. (Where supply meets demand)

Question 12

Incidence of tax

Answer 12

– the tax burden on the taxpayer

Question 13

Income elasticity of demand

Answer 13

– a measure of the responsiveness of quantity demanded to a change in income.

Question 14

Inelastic demand

Answer 14

– where the price elasticity of demand is less than 1. The responsiveness of demand is proportionally less than the change in price. Demand is perfectly inelastic if the price elasticity of demand is zero.

Question 15

Inferior good

Answer 15

– a good where demand falls when income increases. (Negative IED)

Question 16

Law of diminishing marginal utility

Answer 16

– the value or utility that individual consumer gain from the last product consumed falls the greater the number consumed.

Question 17

Macroeconomics –

Answer 17

– the study of the economy as a whole, including inflation, growth and unemployment.

Question 18

Market clearing price –

Answer 18

the price at which there is neither excess demand nor excess supply but where everything offered for sale is purchased.

Question 19

Microeconomics

Answer 19

– the study of the behaviour of individuals or groups such as consumers, firms or workers, typically within a market context.

Question 20

Neo-classical theory

Answer 20

– a theory of economics which typically starts with the assumption that economic agents will maximize their benefits and act rationally, and which develops how resources will be allocated in markets and at what price through the forces of demand and supply; the margin is a key concept in neo-classical theory.

Question 21

Normal good

Answer 21

– a good where demand increases when income increases. (Positive IED)

Question 22

Price elasticity of demand

Answer 22

– the responsiveness of demand to a change in price.

Question 23

Price elasticity of supply

Answer 23

– a measure of the responsiveness of quantity supplied to a change in price.

Question 24

Producer surplus

Answer 24

– the difference between the market price which firms receive and the price at which they are prepared to supply.

Question 25

Shift in the demand curve

Answer 25

– a movement of the whole demand curve to the right or left of the original caused by a change in any variable affecting demand except price.

Question 26

Specific of unit tax

Answer 26

– tax levied on volume.

Question 27

Subsidy

Answer 27

– a grant given which lowers the price of a good, usually designed to encourage production or consumption of a good.

Question 28

Substitute

Answer 28

a good that can be replaced by another good to satisfy a want. (Positive XED)

Question 29

Unitary elastic

Answer 29

where the value of price elasticity of demand is 1. The responsiveness of demand is equal to the change in price.

Question 30

Utility or economic welfare

Answer 30

the satisfaction or benefit derived form consuming a good or a set of goods.