Elasticities and Externalities

Question 1

Define Externalities

Answer 1

Costs or Benefits that spill over to third parties external to a market transaction

Question 2

Define Positive Externality

Answer 2

A positive spillover effect to third parties of an economic transaction; social benefits exceed private benefits

Question 3

Define Negative Externality

Answer 3

A negative spillover effect to a third party of an economic transaction; social costs exceed private costs

Question 4

Define Marginal Private Cost

Answer 4

The cost to an individual or firm of an economic transaction

Question 5

Define Marginal External Cost

Answer 5

The spillover cost to third parties of an economic transaction

Question 6

Define Marginal Social Cost

Answer 6

The full cost to society of an economic transaction, including private and external costs

Question 7

Equation for Marginal Social Cost

Answer 7

Marginal Private Cost+ Marginal External Cost

Question 8

Define Marginal Private Benefit

Answer 8

The benefit to an individual or firm of an economic transaction

Question 9

Define Marginal External Benefit

Answer 9

The spillover benefit to third parties of an economic transaction

Question 10

Define Marginal Social Benefit

Answer 10

The full benefit of an economic transaction, including private and external benefits

Question 11

Equation of Marginal Social Benefit

Answer 11

Marginal Private Benefit + Marginal External Benefit

Question 12

Define Demand

Answer 12

The amount that consumers are willing and able to buy at each given price point

Question 13

Define Effective Demand and Latent Demand

Answer 13

Effective Demand is demand backed by the ability to pay and Latent Demand is the opposite

Question 14

Define Extension in Demand

Answer 14

Increases in quantity demanded caused by a fall in price

Question 15

Define Contraction in Demand

Answer 15

Decreases in quantity demanded caused by a rise in price

Question 16

List the Determinants of Demand

Answer 16

Changes in income
Changes in Population
Changes in quality
Prices of Substitutes
Prices of Complementary Goods
Uncertainty over future prices
Consumer Confidence
Consumer tastes and Preferences
Fashion
Advertising and Publicity
Weather conditions
The law
Interest rates

Question 17

Define Substitute

Answer 17

A good that could replace another

Question 18

Define Complementary Good

Answer 18

Goods which are consumed together

Question 19

Define Normal Good

Answer 19

A good with Demand that increases as incomes rise

Question 20

Define Inferior Good

Answer 20

A good with Demand that decreases when incomes rise

Question 21

Define Composite Demand

Answer 21

A good that is for more than one purpose so that an increase in demand for one purpose reduces the supply for other purposes

Question 22

Define Derived Demand

Answer 22

When the demand for one good or service comes from the demand for another good or service

Question 23

List the Factors of production and their payments

Answer 23

Land - Rent
Labour - Wages
Capital - Interest
Enterprise- Profit

Question 24

Define Utility

Answer 24

How much a consumer values a good

Question 25

Define the Law of Diminishing Marginal Utility

Answer 25

With every subsequent purchase of a product the value to the consumer decreases

Question 26

Define Price Elasticity of Demand and give the Equation

Answer 26

A measure of the responsiveness of quantity demanded to a change in the price of a good
Percentage change in Quantity Demanded/
Percentage change in Price

Question 27

A PeD of

Answer 27

The good has a price elastic Demand
A fall in price will mean quantity demanded rises by proportionately more than the price cut

Therefore a fall in price will increase total revenue

Question 28

If PeD > -1

Answer 28

The good is price inelastic in Demand
When prices fall quantity demanded increases but by a smaller proportion than the fall in price

When prices fall total revenue will fall

Question 29

When PeD is 0…

Answer 29

The good is perfectly inelastic
When prices change there is no effect on quantity demanded at all
When prices fall quantity demanded does not change so total revenue must fall

Question 30

When PeD is Infinite

Answer 30

The good is Perfectly Elastic in Demand
Demand is infinite at a specific price

A change in price would eliminate all demand

Question 31

When PeD = -1…

Answer 31

The good has a unitary price elasticity of Demand
A change in price brings about an equally proportionate change in quantity demanded
Total Revenue will remain the same from a price cut

Question 32

List the Factors that Determine PeD

Answer 32

Availability of Substitutes (High Availability= Elastic)
Time (If it takes time to find a substitute it may be more inelastic)
Luxury or Necessity (Necessities are usually inelastic)
Proportion of Income Spent on a good (Low proportion may mean inelasticity)

Question 33

Define Income Elasticity of Demand and give the equation

Answer 33

YeD: A measure of the responsiveness of quantity demanded to a change in income

YeD= %Change in QD/ %Change in Income

Question 34

If -1 < YeD < 1

Answer 34

It is income inelastic

Question 35

If YeD>1 or YeD

Answer 35

The good is income elastic

Question 36

If YeD > 0 (Positive)…

Answer 36

It is a normal Good

Question 37

If YeD is <0 (Negative)…

Answer 37

It is an inferior good

Question 38

Define Cross Price elasticity of Demand and give the equation
(XPeD)

Answer 38

XPeD= A measure of the responsiveness of quantity demanded of a good to a change in price of another good
XPeD= %Change of Quantity Demanded of Good A/
%Change of Price of Good B

Question 39

If XPeD > 0

Answer 39

The goods are Substitutes

Question 40

If XPeD <0

Answer 40

The goods are complementary