1.2.8 +1.2.10 consumer/producer surplus, consumer behaviour

Question 1

what are the two assumptions in econimics ?

Answer 1

• consumers wish to maximise utility
• firms wish to maximise profit

Question 2

what is ‘utility’?

Answer 2

the hapiness recieved
* the satisfaction/ benefit derivd from consuming a good

Question 3

why may consumers not act rationally?

Answer 3

• herd behaviour
• habitual behaviour
• weakness at computation

so they don’t switch

Question 4

what do economic agents require to make rational decisions?

Answer 4

• time
• information (otherwise information gaps are created)
• ability to process information

Question 5

show consumer surplus on a graph

Answer 5

were willing to pay more, but equilibrium is less

Question 6

show the producer surplus on a graph

Answer 6

Question 7

what is the price mechanism?

Answer 7

the interaction of supply and demand to determine prices

Question 8

what are the functions of the price mechanism?

Answer 8

• signalling
• rationing
• incentivising

Question 9

prices have fallen. (to eliminate excess supply)
Describe the signalling function of the price mechanism

Answer 9

1. decrease in price signals to producers that consumrs want fewer goods
2. therefore it signals to reduce the quantity supplied

extension in supply (along the curve)

Question 10

Prices have risen (to eliminate excess demand).
Describe the incentivising function of the price mechanism

Answer 10

1. prices are increasing, this increases the incentive to supply as more profit can be made
2. therfore there is an increase in quantity supplied

extension in supply (along the curve)

Question 11

Prices have gone up (excess demand).
Describe the rationing function of the price mechanism

Answer 11

1. fewer consumers are willing and able to demand high prices
2. decrease in quanity demanded

contraction in demand

Question 12

what does rationing do?

Answer 12

limit/ration the quanity demanded by consumers

Question 13

what is the price transaction ?

Answer 13

the transaction between the consumer and producer

Question 14

Define producer surplus

Answer 14

The difference between the price forms are willing to sell the good for and the market price it is sold at.
(Area above the supply curve and below the equilibrium price)

Question 15

Define consumer surplus

Answer 15

The difference between the price a consumer is prepared to pay for a good and the actual price.
(Area above the equilibrium price and below the demand curve)

Question 16

what is rational behaviour for consumers ?

Answer 16

the assumption that consumers wish to maximise utility

utility is the happiness dervied from consumption

Question 17

what is herd behaviour?

Answer 17

consumers are influenced by the behaviour of others

Question 18

what is habitual behaviour?

Answer 18

when consumers are in the habit of making certain decisions, overlooking better alternatives

Question 19

what is weakness at computation?

Answer 19

consumers are bad at making calculations, estimating probabilties and working out future benefits/costs

Question 20

what is information gaps?

Answer 20

not being fully aware of all the costs and benefits leading to poor decisions

Question 21

What is immigration and emigration?

Answer 21

Immigration is people coming into the country (increase in labour, economic growth)
Emigration is people leaving the country