1.3

Question 1

what is the formula for income elasticity of demand?

YED

Answer 1

Y= income

Question 2

what does YED measure?

income elasticity of demand

Answer 2

how much quantity demanded will respond to a chnage in income

Question 3

what is the YED value for inferior goods?

Answer 3

• the YED will be negative
• as income decreases, demand increases

Question 4

what is the YED value for normal goods?

Answer 4

• will be positive
• as when income increases demand also increases

Question 5

what are income inelastic goods?

Answer 5

• normal goods
  *0< YED<1
• QD will increase by a smaller percentage than I
• seen as necessities

Question 6

what are income elastic goods?

Answer 6

• normal good
• YED between 1 and ∞
• QD will increases by a larger % than Y
• seen as a luxury

Question 7

what are inferior goods?

Answer 7

as income increases, the demand for the good decreases

YED= -

Question 8

what are normal goods?

Answer 8

as income increases, demand for the good increases

YED=+

Question 9

what are income elastic goods?

Answer 9

QD is very responsive to chnages in income
* luxury goods

YED from 1 to ∞

Question 10

what are income inelastic goods?

Answer 10

when QD is unresponsive to chnages in income
* necessitiy goods

YED between 0 and 1

Question 11

what is cross elasticty of demand (XED)?

Answer 11

how is the demand for good A affected by chnages in price of good B

Question 12

what is the formula for (XED) cross elasticity of demand?

Answer 12

Question 13

what type of good has an XED of 0?

Answer 13

unrelated goods

Question 14

what type of good has a negative XED?

Answer 14

• complementary goods
• as price of good A increases, demand for good B will decrease

Question 15

what are complemenatry goods?

Answer 15

• goods bought and used together
• if price of good A increases then demand of good B decreases

XED= -

Question 16

what type of good has a positive XED?

Answer 16

• substitute goods
• as the price goes up for price A, demand for price B goes up

Question 17

What are substitute goods?

Answer 17

• goods which can replace another
• if price of good A increases then demand for good B decreases

XED= +

Question 18

what is the price mechanism?

Answer 18

the interaction of supply and demand to determine prices

Question 19

what are the functions of the price mechanism?

Answer 19

• signalling
• rationing
• incentivising

Question 20

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

Answer 20

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 21

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

Answer 21

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 22

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

Answer 22

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

contraction in demand

Question 23

what does rationing do?

Answer 23

limit/ration the quanity demanded by consumers

Question 24

what happens to the revenue when the price changes for a elastic demand good?

Answer 24

• price increases= revenue decreases
• price decreases= revenue increases

Question 25

what happens to the revenue when the price of an inelastic demand good changes?

Answer 25

* price **increases** = revenue **increases** * prices **decrease**= revenue **decreases**

Question 26

how is revenue affected by unitary price demand?

Answer 26

no relationship/ correlation * as price increases/decreases revenue stays the same

Question 27

what are negative externalities? | two types of negative externalities

Answer 27

costs which affec third parties outsid the price mechanism * negative consumption externalities * negative production externalities | negative effect on others

Question 28

what is the price mechnaism?

Answer 28

the transaction between the consumer and producer

Question 29

what are negative comsumption externalities?

Answer 29

when consuming a good leads to negative externalities | eg: alchohol, cars

Question 30

what are negative production externalities?

Answer 30

when producing goods leads to negative externalities | eg: building buildings, factories

Question 31

what are private costs?

Answer 31

a cost to a producer or consumer within the price mechanism

Question 32

what is market failure?

Answer 32

when the price mechanism leads to an inefficent allocation of resources | price/quantity produced not beneficial to society

Question 33

what are the 4 types of market failure?

Answer 33

1. negative externalities 2. positive externalities 3. public goods 4. information gaps

Question 34

what are public goods?

Answer 34

* non-excludable * non- rival

Question 35

what does it mean for a good to be exludable/ non excludable?

Answer 35

* excludable: to can stop others from using a good * non- excludable: yo cannot stop others from using a good

Question 36

what does it mean for a good to be rival/ non rival?

Answer 36

* rival: your consumption stops others from enjoying * non- rival: your consumption of a good cannot stop anyone else from using it (no cost)

Question 37

what is the free rider problem?

Answer 37

1.public goods non excludable so others can use your public good for free- without paying 2. consumers wait for others to buy and free ride 2. no one demands the public good 3. producers won't supply the public good because they cannot make profit | resources underproduced/ underprovided in the market

Question 38

what is the state provision of good?

Answer 38

when the goverment provide (public) goods | not always public: education/ healthcare

Question 39

what types of goods are the following: 1. healthcare 2. flood defences 3. education 4.police force 5. fire brigade

Answer 39

1. private 2. public 3. private 4. public 5. public | although could become rival/ non rival, exludable/ non excludable (Ev)

Question 40

How can you argue tha tthese goods are not pure public goods: 1. parks 2. police 3. roads

Answer 40

1. parks can become excludable 2. police can become rival goods if a large incidence stops police attending others 3. roads can become exludble(road tarrifs )