2. how markets work

Question 1

rational decision making

Answer 1

-consumers aim to maximise utility
-firms aim to maximise profit
-government aim to maximise welfare
-workers aim to maximise income

Question 2

conditions of demand

Answer 2

-expectations
-seasons
-population
-income
-trend
-related goods
-advertising

Question 3

diminishing marginal utility

Answer 3

the satisfaction derived from each additional unit consumed is less every time

Question 4

price elasticity of demand

Answer 4

responsiveness of demand to a change in price

Question 5

PED>1

Answer 5

elastic

Question 6

PED<1

Answer 6

inelastic

Question 7

influences of PED

Answer 7

-availability of substitutes
-Time
-necessity
-addictive

Question 8

significance of PED

Answer 8

the more elastic the demand curve, the lower the incidence of tax (higher tax revenue for the government the more inelastic)

Question 9

elasticity effect on tax

Answer 9

the more inelastic means the consumers suffer more than the firms

Question 10

elasticity effect on subsidies

Answer 10

more inelastic the demand, the more price of the good falls meaning consumers benefit more than firms

Question 11

PED & revenue

Answer 11

-for elastic demand curve, a fall in price means an increase in revenue
-for inelastic demand curve, a fall in price means a fall in revenue

Question 12

income elasticity of demand YED

Answer 12

responsiveness of demand to a change in income

Question 13

YED<0

Answer 13

inferior good

Question 14

YED>0

Answer 14

normal good

Question 15

YED>1

Answer 15

luxury good

Question 16

significance of YED

Answer 16

it is important for firms to know how changing incomes will effect the sales of their goods

Question 17

cross elasticity of demand XED

Answer 17

change in demand for good A when their is a change in price of good B

Question 18

XED>0

Answer 18

substitute good

Question 19

XED<0

Answer 19

complimentary good

Question 20

XED=0

Answer 20

unrelated good

Question 21

significance of XED

Answer 21

firms need to be aware of hoe price changes may affect the demand for their products

Question 22

conditions of supply

Answer 22

-cost of production
-price of other goods
-weather
-technology
-goals of the supplier
-government legislation
-taxes and subsidies
-producer cartels

Question 23

elasticity of supply PES

Answer 23

responsiveness of supply to a change in price

Question 24

PES=1

Answer 24

unitary elastic

Question 25

PES>1

Answer 25

relatively elastic

Question 26

PES<1

Answer 26

relatively inelastic

Question 27

factors effecting PES

Answer 27

-stocks
-space capacity
-availability of substitutes
-ease of entry into the market

Question 28

rationing function

Answer 28

rise in price means some are no longer able to afford the good, and some no longer want it. this means the good is rationed and allocated to those who can afford them and value them the most

Question 29

signalling function

Answer 29

when prices rise, producers move resources into the manufacture of that product. the change in price indicates to suppliers and consumers that market conditions have changed so they should change the quantity bought and sold

Question 30

incentive function

Answer 30

incentive for parole to work harder. buyer realise the more money they have the more goods they can buy. suppliers realise the more they can produce, the more money they can make. also, lower prices incentivise consumes to buy. higher prices incentivise producers to make more

Question 31

local rationing context

Answer 31

COVID caused some nations to reduce imports in order to stop spread of virus. this meant supermarkets had fewer goods on the shelves, but high demand, so food prices rose to RATION off the excess demand

Question 32

national rationing+incentive context

Answer 32

higher house prices in the south of the UK due to the capital being London with higher FDI and jobs. means increased demand for housing as the population in high so it is rationed to those who are willing to pay the most. the higher prices incentivise firms to allocate resources to the production of housing in London, as there should be profit

Question 33

consumer surplus

Answer 33

difference between the price they are willing to pay and the price they do pay (under demand curve)

Question 34

producer surplus

Answer 34

difference between the price they are willing to produce at and the price they do produce at (above supply curve)

Question 35

indirect tax

Answer 35

tax on expenditure where the person who is ultimately charged the tax is not the person responsible for paying it (VAT or specific tax)

Question 36

what are the types of cognitive bias

Answer 36

-personal judgement
-preconsumptions
-beliefs
-emotions
-social influence

Question 37

what is cognitive bias

Answer 37

reasons why consumers may not act rationally

Question 38

confirmation bias

Answer 38

the influences of other people affect decision making as you want to fit in or want something because others have it

Question 39

the anchoring effect

Answer 39

where people go with their first bit of information they receive

Question 40

habitual behaviour

Answer 40

where people do not change due to being creatures of habit

Question 41

consumer weakness at computation

Answer 41

aren’t willing or able to make comparisons between prices which also affects long term decision making (not putting money into pensions as being too short sighted)