economics unit 2 test

Question 1

what is the law of demand?

Answer 1

there is a negative relationship between price and quantity (the graph is slanted downwards, left to right). as the price of a product increases, the quantity demanded decreases and vice versa

Question 2

what is demand?

Answer 2

concerned with the behaviour of consumers and refers to the quantities of a product that consumers are willing and able to buy at various prices over a period of time.

Question 3

individual consumers demand and market demand curve

Answer 3

market demand curve refers to the sum of all individual demand for a product at each price level. it is found by adding up all the individual demand at each price level.

Question 4

what are the non price determinants of demand?

Answer 4

income, tastes and preferences, future price expectations, price of related goods and Number of consumers.

Question 5

What is the price of related goods? Non price determinants of demand

Answer 5

Substitute goods - goods that can replace each other (ie. Laptops and desk computers) products which satisfy the same use
Complement goods- goods that are used in conjunction to each other (ie. Keyboard and mouse, if price of keyboard goes up demand for mouse goes down.)

Question 6

Movements along the demand curve:

Answer 6

Movements along the demand curve are due to changes in price, resulting in changes in quantity demanded.

Question 7

Shifts of the demand curve

Answer 7

A change in non price determinants, that affect demand, cause a shift of the demand curve.

Question 8

The law of supply

Answer 8

There is a positive correlation between the quantity supplied of a product and it’s price. Higher prices generally mean profit increase, incentive to increase output. Lower prices generally mean low profitability so firms have less incentive to produce, thus output decreases.

Question 9

Supply curve (draw)

Answer 9

Positive relationship between price of good and quantity supplied over a period of time. (Diagram is upwards sloping from left to right)

Question 10

individual producers supply and market supply

Answer 10

Market supply curve: som of all individual supply of a product at each price level. ( add up all individual supply)

Question 11

Non price determinants of supply

Answer 11

STORES:
Subsidies & taxes
Technology
Other related goods
Resource costs
Expectations (if producers)
Size of the market

Question 12

non price determinant of supply: resources cost

Answer 12

If the cost of 4 factors of production increases, supply curves shift to left. If the cost of 4 factors of production decreases, supply curve shifts to right.

Question 13

non price determinant of supply: other related goods (competitive and joint supply)

Answer 13

Competitive supply:
Output of one product prevents or limits the output of another product due to competing resources (perhaps growing organise and apples, they both need the same water and fertilisation, they compete for resources)
Joint supply:
An increase in production of one product automatically increases the supply of at least another (joint) product (such as lamb meat = wool, cows for meat, also allows cow milk)

Question 14

non price determinant of supply: Subsidies and taxes

Answer 14

Indirect taxes:
Government charges on expenditure. imposed on good and services to increase price paid by customers. Indirect taxes are used to scourge output, reduce profitability.
Subsidies:
Financial aid from government.
Given to producers who produce goods which are deemed to be beneficial to society (ie. Production of agricultural products or provision of education)

Question 15

non price determinant of supply: expectation future price

Answer 15

If sellers expect the demand for their product to sharply increase in the near future, then firms may choose to increase production to meet the future demand shift. And vice versa

Question 16

non price determinant of supply: size of market

Answer 16

If market of a good or service increases then the number of firms will increase

Question 17

Movements along and shifts of the supply curve

Answer 17

Movements along: if the price of the product changes, this causes a change in the quantity supplied. Shift of supply curve:
Due to changes in non-price determinants that affects supply

Question 18

market equilibrium

Answer 18

Where demand is equal to supply. Anything above market equilibrium is a surplus (more supply than demand.) Anything below market equilibrium is a shortage (more demand than supply)

Question 19

functions of price mechanism: signalling function

Answer 19

Signalling function: forces of demand and supply signify where resources are required (when prices increase) and where they are not(when prices fall). (A rise in the market price for a product sends a signal to potential manufacturers to enter the market. )

Question 20

functions of price mechanism: incentives function

Answer 20

Incentive function: anything that motivates producers or consumers to follow particular course of action. Higher prices in the market may act as an incentive to existing manufacturers of a product to raise the output so that they can earn more profit.

Question 21

price mechanism: the rationing function

Answer 21

serves to ration scarce resources when the demand for a product exceeds its supply.
The rationing function of price mechanism serves to limit or reserve resources. Essentially the higher the price for the product the lower the quantity demanded will tend to be. This helps to conserve scarce resources and spread out their use over time. (Ie. As oil start to run out across the world, its market price will rise, this causes demand to contracts, thereby considering oil supplies)

Question 22

consumer surplus

Answer 22

refers to the gain or benefit to buyers who can purchase a product at a price lower than that which they are willing and able to pay.

Question 23

producer surplus

Answer 23

Refers to the gain or benefit to firms that receive a price higher than the price they are willing and able to supply at

Question 24

SOCIAL/COMMUNITY SURPLUS

Answer 24

The sum of consumer and producer surplus at a given market price and output, thereby maximising economic welfare. It represents the total benefit available to society from an economic transaction or activity.

Question 25

ALLOCATIVE EFFICIENCY AT THE MARKET EQUILIBRIUM:

Answer 25

Socially optimal situation that occurs when resources are distributed in such a way that both consumers and producers get the maximum possible benefit. Meaning that no one can be made better off without making someone else worse off. This occurs when social/community surplus is maximised

Question 26

Price elasticity of demand

Answer 26

The responsiveness of quantity demanded as a result of a change in a factor that affects demand. (Ie. The effect of price change on quantity demanded)

Question 27

Price elastic demand:

Answer 27

When a relatively small change in the price of a product causes a larger percentage change in the quantity demanded. Responsive to changes In products price
PED is greater than 1

Question 28

Price inelastic demand:

Answer 28

When a small change in the price of a product results in an even smaller percentage change in quantity demanded (or even no change at all if the product Is completely inelastic). Unresponsive to changes in products price
PED is less than 1

Question 29

Perfectly price elastic demand:

Answer 29

When demand exists at one price only
PED is infinity. Increase in price leads to infinity change in quantity demanded

Question 30

Perfectly price inelastic:

Answer 30

Change in price has no impact on quantity demanded
PED=0

Question 31

Unitary elastic demand:

Answer 31

Percentage change in quantity demanded is equal to percentage change in price PED=1

Question 32

Determinants of PED:

Answer 32

T-time
I-income
N-necessity
S-substitutes

Question 33

Time (determinant of PED)

Answer 33

Over time a good tends to become more price elastic as consumer have more time to find alternatives/substitutes. Consumers also have time to break/change habits and preferences.

Question 34

Income (determinant of PED)

Answer 34

The greater the proportion of a consumers real income spent on a good, the more price elastic demand will be. This is because the consumers are highly sensitive to changes in price of a product that they spend a large proportion of income on, making that good (price elastic) By contrast if price accounts for a very small proportion of a consumers income then any change in price will most likely not affect their demand, making that good price inelastic.

Question 35

Necessity (determinant of PED)

Answer 35

Products which are regarded as essential (food, fuel, drinking water) tend to be price inelastic. By contrast the demand for luxury products is price elastic.

Question 36

Substitutes (determinants of PED):

Answer 36

The greater the number and availability there is of close substitutes, the more price elastic the demand will be.

Question 37

Relationship between PED and total revenue:

Answer 37

The value of price elasticity of demand shows changes in a firms revenue as a result of price changes, depending on whether demand is price elastic or price inelastic. By increasing the price of a product which is demand inelastic, allows firms to increase their revenue greatly. As the quantity demanded does not greatly change, and they are making more profit for their product. ( this allows them to earn more revenue ) for a product which is price elastic to demand, a consumer may lower the price, in order to receive a larger amount of quantity demanded, which in turn allows more profitability/ more revenue (than having high prices and less quantity demanded). SEE TABLE ON PAGE 100.

Question 38

Importance of PED for firms

Answer 38

Firms: price elasticity of demand is important for firms as it informs business decision makers about the effect, price changes will have on sales/revenues. Firms with different PED values for their products can charge different customers different prices for essentially the same product ( ie , a cinema may charge adults higher prices and offer discounts to children, students and elderly in order to increase their revenues). Or increasing price of goods at different times during the day (uber)

Question 39

Importance of PED for government decision-making:

Answer 39

Government:
Use peds to determine taxation policies, ( ie imposing heavy taxes on goods such as cigarettes and alcohol, knowing that the demand for the product is highly inelastic). This means that the tax needs to be sufficiently high to discourage consumption, while generating tax revenue for the government.

Question 40

Market disequilibrium:

Answer 40

Occurs when the quantity demanded for a product is either higher or lower than the quantity supplied. It is inefficient as it means there is either a shortage or surplus in the market.

Question 41

Producer surplus

Answer 41

refers to gain and benefit to firms who were willing and able to supply at a price but the market price was higher than what they expected so they made a producer surplus. (Ie. A farmer is willing and able to supply potatoes for 3dollars a kg, but the market price is 3.80, so the producer surplus is 0.80 dollars.

Question 42

Consumer surplus

Answer 42

refers to gain and benefit to buyers who were willing and able to buy the good at a certain price, but got it for a price which was lower than what they were willing and able to pay for the product. (Ie. If consumers are willing and able to pay 800dollars for a laptop but the price is 750dollars, then the consumer surplus is 50 dollars.

Question 43

allocative efficiency

Answer 43

where scarce resources are put to their best possible use in producing goods and services in optimal combinations for society, minimising the waste of resources. social surplus is maximised, marginal benefit = marginal cost

Question 44

marginal benefit

Answer 44

the maximum amount of money a consumer is willing to pay for an additional good or service.

Question 45

marginal cost

Answer 45

the increase or decrease in the cost of producing one more unit or serving one more customer.