1.2 How Markets Work

Question 1

what is the main objective of consumers when making economic decisions?

Answer 1

to maximise utility

Question 2

what is the main objective of producers when making economic decisions?

Answer 2

to maximise profit

Question 3

what is the main objective of governments when making economic decisions?

Answer 3

to maximise economic and social welfare

Question 4

define utility

Answer 4

satisfaction from consumption of products and services

Question 5

define profit

Answer 5

difference between revenue and costs

Question 6

define demand

Answer 6

the quantity of a good or service that consumers choose to buy at any possible price in a given period

Question 7

what is the law of demand?

Answer 7

the inverse relationship between quantity demanded and price of a good or service, ceteris paribus

Question 8

define marginal utility

Answer 8

the change in total satisfaction form consuming an extra unit of a good or service

Question 9

what are the main determinants of the demand function?

Answer 9

price, income, tastes and preferences, prices of other goods, seasons, advertising

Question 10

what would cause a movement along the demand curve?

Answer 10

a change in the price of the product itself

Question 11

what would cause a shift of a demand curve?

Answer 11

a change in the conditions of demand e.g. change in income, advertising, seasons, competitors price change

Question 12

what would a price fall on a demand curve show?

Answer 12

extension in demand

Question 13

what would a price rise on a demand curve show?

Answer 13

contraction in demand

Question 14

define price elasticity of demand (PED) and give the formula

Answer 14

a measure of the responsiveness of the quantity demanded to a change in the price of the good/service
PED= %change in QD/ %change in P

Question 15

define income elasticity of demand (YED) and give the formula

Answer 15

a measure of the responsiveness of the quantity demanded to a change in income
YED= %change in QD/ %change in Y

Question 16

define cross-price elasticity of demand (XED) and give the formula

Answer 16

a measure of the responsiveness of the quantity demanded for one good to a change in the price of another good
XED= %change in QD (good A)/ %change in P (good B)

Question 17

define a normal good and link to YED

Answer 17

a good where demand increases when income increases – positive YED

Question 18

define an inferior good and link to YED

Answer 18

a good where demand decreases if income increases– negative YED

Question 19

define a substitute good and link to XED

Answer 19

a good which is an alternative to another good– positive XED

Question 20

define a complement good and link to XED

Answer 20

a good which is used with, or purchased at the same time as another good– negative XED

Question 21

how do you calculate percentage change?

Answer 21

(new-old)/old x 100

Question 22

range of values for PED

Answer 22

0= perfectly inelastic
0 to -1= relatively inelastic 
-1= unitary elastic
-1 to -infinity= relatively elastic
-infinity= perfectly elastic

Question 23

4 factors affecting PED

Answer 23

–availability of substitutes
–necessity or luxury
–proportion of income spent on the product
–time