1.2 how markets work - definitions

Question 1

Utility

Answer 1

Satisfaction that consumers get from the goods and services that they buy

Question 2

Demand

Answer 2

The amount of a product that consumers are willing and able to purchase at any given price

Question 3

PIRATES

Answer 3

Non-price factors that influence demand
Population
Income
Related goods (complements/substitutes)
Advertising
Taste/fashion
Expectations
Seasons
and gov legislation

Question 4

PINTSWC

Answer 4

Non-price factors that influence Supply
Productivity
Indirect taxes
Number of firms in the market
Technology
Subsidies
Weather
C.O.P.
and legislation

Question 5

PED

Answer 5

(%ΔQD / %ΔP) PED value is always negative
The reactivity of demand to price

Question 6

PED <1

Answer 6

Price inelastic. A change in price results in a proportionately smaller change in demand

Question 7

PED > 1

Answer 7

Price elastic. A change in price results in a proportionately greater change in demand

Question 8

Factors Influencing PED

Answer 8

Time, Competition for the same product, Branding, the proportion of income spent on a product, Product types vs the product of an individual business, habit–forming nature of the good.

Question 9

Factors influencing YED

Answer 9

Necessities ( basic goods that a customer needs to buy) & Luxury (goods that customers like to buy if they can afford to)

Question 10

Normal Goods

Answer 10

When incomes increase, demand for normal goods goes up.

Question 11

Inferior Goods

Answer 11

When incomes increase, demand for inferior goods falls

Question 12

XED

Answer 12

The responsiveness of demand for one good to the change in price of another good (%ΔQD Good B / %Δ P Good A)

Question 13

Substitute Goods

Answer 13

Goods that are very similar and can be close alternatives for each other. Substitutes have positive XED

Question 14

Complementary Goods

Answer 14

Goods that go together well or are actually used or consumed together. Complementary goods have negative XED

Question 15

Supply

Answer 15

The amount of a product which suppliers will offer to the market at a given price

Question 16

PES

Answer 16

(%ΔQS / %ΔP) PES value is always positive.

Question 17

Price mechanism

Answer 17

This refers to the way in which prices respond to changes in supply or demand, so that a new equilibrium is reached and the market clears.

Question 18

Equilibrium

Answer 18

When Supply is equal to Demand

Question 19

Total revenue

Answer 19

Price X Quantity

Question 20

Excess demand

Answer 20

When Demand exceeds Supply - there are market shortages

Question 21

Excess supply

Answer 21

When Supply exceeds Demand- there are unsold goods in the market

Question 22

Consumer Surplus

Answer 22

The extra amount of money consumers are prepared to pay for a good, above what they actually pay

Question 23

Producer Surplus

Answer 23

The extra amount of money that producers are paid, above what they would be willing to take

Question 24

Direct tax

Answer 24

A tax that is paid straight from your income

Question 25

Indirect tax

Answer 25

A tax is a tax on spending

Question 26

Ad valorum tax

Answer 26

A tax that increases the price by a certain percentage. For example, VAT

Question 27

Tax incidence

Answer 27

This is the idea of WHO actually pays the tax, the consumer or the producer

Question 28

Subsidy

Answer 28

A grant given to a firm to encourage the firm to produce more and/or lower the price of its goods.

Question 29

Reasons for irrational behaviour

Answer 29

-Influence of others

-Habitual behaviour

-Computational problems

-Inertia