1.2 How markets work - Basic Concepts + definitions

Question 1

Utility

Answer 1

The satisfaction to an individual from consuming a product.

Question 2

Diminishing Marginal Utility

Answer 2

As an individual consumes more of a product, each successive unit generates less utility. (This falls with consumption)

Question 3

Demand

Answer 3

The quantity of a good consumers are willing and able to buy at a given price per period.

Question 4

Supply

Answer 4

The quantity of a good producers are willing and able to sell at a given price per period

Question 5

Market

Answer 5

Institution where buyers are in contact with sellers to arrange sale of goods.

Question 6

Ceteris Paribus

Answer 6

All other factors remaining constant.

Question 7

Equilibrium

Answer 7

The price and quantity which is acceptable to both buyers and sellers so long as conditions of demand and supply stay constant

Question 8

Excess demand

Answer 8

Where quantity of a product consumers are willing and able to buy at a given market price, exceeds the quantity producers are willing and able to supply

Question 9

Excess supply

Answer 9

Where quantity of a product producers are willing and able to supply, exceeds the quantity consumers are willing and able to buy at a given market price

Question 10

Disequilibrium

Answer 10

A combination of price and quantity traded which has a tendency to change for the given demand and supply conditions

Question 11

Joint demand

Answer 11

When demand for one good involves demand for another good (complement)

Question 12

Joint supply

Answer 12

Where supply of one good necessarily involves supply of another

Question 13

Consumer surplus

Answer 13

Measure of consumer welfare, the maximum price a consumer is willing to pay for a good minus the market price

Question 14

Producer surplus

Answer 14

Measure of producer welfare, the surplus of market price the producer would be prepared to accept

Question 15

Price elasticity of demand (PED)

Answer 15

The responsiveness of quantity demanded to a change in price, ceteris paribus.
% change in quantity demanded / % change in price

Question 16

Income elasticity of demand (YED)

Answer 16

The responsiveness of quantity demanded to a change in income, ceteris paribus.
% change in income / % change in income

Question 17

Cross price elasticity of demand (XED)

Answer 17

The responsiveness of quantity demanded of one good to a change in price of another, ceteris paribus.
% change in quantity demanded of A / % change in price of B

Question 18

Price elasticity of supply (PES)

Answer 18

The responsiveness of quantity supplied to a change in price, ceteris paribus.
% change in quantity supplied / % change in price

Question 19

Normal good

Answer 19

Good whose demand rises as income rises eg. luxuries and necessities

Question 20

Inferior good

Answer 20

Good whose demand falls as income rises, opposite of normal good

Question 21

Substitute good

Answer 21

Good which is an alternative to a particular good from the consumer’s point of view

Question 22

Framing

Answer 22

Notion that consumer choice depends on the way the question is presented, rather than on an objective comparison of competing options.

Question 23

Altruism

Answer 23

Behaviour motivated by concern for others’ welfare rather than one’s own eg. unselfishness