1.2 - How markets work - MICRO

Question 1

What’s diminishing marginal utility

Answer 1

Idea that as quantity increases, the benefit decreases

Question 2

How is diminishing marginal utility to shown

Answer 2

Demand curve - negative gradient

Question 3

What causes a movement along the demand curve

Answer 3

A change in price

Question 4

What are the shifters of Demand

Answer 4

Population
Advertising
Substitute goods
Income
Fashion and trends
Interest
Complementary goods

Question 5

What are the two types of goods that are affected by income

Answer 5

Normal good - increase income, decrease demand

Inferior good - decrease income, increase demand

Question 6

Definition of demand

Answer 6

quantity of goods that consumers are willing and able to buy at various prices

Question 7

Definition of supply

Answer 7

Quantity of goods that a producer is willing and able to sell at various prices

Question 8

What are the shifters of supply

Answer 8

Productivity
Indirect Tax
Number of firms
Technology
Subsidies

Weather
Costs of production

Question 9

How is a shortage shown in a supply, demand curve

Answer 9

QD is bigger than QS

Question 10

What happens when there is a shortage

Answer 10

firms raise prices, consumers bid up prices

Question 11

How is a surplus shown in a supply, demand curve

Answer 11

QS is bigger than QD

Question 12

What happens when there is a surplus

Answer 12

Firms lower prices

Question 13

When do prices stop changing in a supply demand curve

Answer 13

Equilibrium

Question 14

Definition of PED

Answer 14

How responsive quantity demanded is to a change in price

Question 15

How to calculate PED

Answer 15

%change in QD/ %change in price

Question 16

What does it mean if something has PED of -1 or 1

Answer 16

It is unitary elastic - changes proportionally

Question 17

What does it mean if something has PED of under 1 or under -1

Answer 17

It is elastic - very responsive

Question 18

What does it mean if something has PED of 0

Answer 18

It is inelastic - not responsive

Question 19

How does an inelastic curve look

Answer 19

very steep

Question 20

How does an elastic curve look

Answer 20

very flat

Question 21

How to find total revenue

Answer 21

Price x Quantity - using equilibrium

Question 22

What are factors to PED

Answer 22

Closeness of Substitutes - elastic if more

Brand loyalty - inelastic if strong

Addictiveness - inelastic if addicted

Necessity - inelastic if necessary

Time - inelastic if SR, LR - time to find sub

Proportion of income taken by product -inelastic if low

Specificity of product - inelastic if not specific

Question 23

Definition of YED

Answer 23

How responsive QD is to a change in income (Y)

Question 24

How to calculate YED

Answer 24

%change QD/ %change Income

Question 25

When's YED positive

Answer 25

Increase in income and QD

Question 26

When's YED negative

Answer 26

Increase in income, decrease QD

Question 27

What type of good has a YED positive

Answer 27

Normal good

Question 28

What type of good has a YED negative

Answer 28

Inferior good

Question 29

What happens to YED when the good is a necessity

Answer 29

It is positive and less than 1 - inelastic

Question 30

What happens to YED when the good is a luxury

Answer 30

It is positive and more than 1 - elastic

Question 31

Definition of PES

Answer 31

How responsive supply is to a change in price

Question 32

What would the PES be if a good were elastic

Answer 32

Bigger than 1

Question 33

What would the PES be if a good were inelastic

Answer 33

Between 0 and 1

Question 34

What does it mean if a product is PES inelastic

Answer 34

Supply is fixed or takes long

Question 35

What does it mean if a product is PES elastic

Answer 35

Supply can be changed quickly

Question 36

What are the factors of PES

Answer 36

Flexibility of FoP - more flexible - elastic Spare Capacity - high capacity means elastic Stock - high stock means elastic Time - longer means elastic

Question 37

What is the difference between the short run and long run

Answer 37

short run - 1 FoP fixed long run - all FoP variable

Question 38

Definition of consumer surplus

Answer 38

Difference between the price you pay and the price you're wiling and able to pay

Question 39

Definition of producer surplus

Answer 39

Difference between the price you sell and the price you're willing and able to sell

Question 40

What's an indirect tax

Answer 40

tax on a product that is paid when purchased

Question 41

What is specific tax

Answer 41

Tax is a set monetary amount

Question 42

How does specific tax affect the supply curve

Answer 42

increases directly upwards by the price

Question 43

What is Ad Valorem Tax

Answer 43

Tax is a % of the sale price

Question 44

How does Ad Valorem tax affect a supply curve

Answer 44

Slight rotation by the percentage at different points

Question 45

What is the incidence of tax

Answer 45

How much is paid by the consumer versus the producer

Question 46

What's a subsidy

Answer 46

Money paid by government to firms in order to increase supply

Question 47

What is the incidence if PED is inelastic

Answer 47

Tax is mostly paid by consumer

Question 48

How is subsidies shown on a supply curve

Answer 48

Vertical distance as supply shifts outwards when its added

Question 49

Explain rationing when the price of a good rises

Answer 49

Less people are willing and able to buy the good and it is rationed

Question 50

Explain incentives for consumers and producers when the price of a good rises

Answer 50

Consumers have an incentive to find a substitute/save/conserve the good Producers have an incentive to produce more of the good

Question 51

Explain signalling when the price of a good rises

Answer 51

Signals that the good is valuable So producers aim to produce more and consumers aim to conserve it