HL topics demand and supply - profit

Question 1

Explanations for the law of demand (2)

Answer 1

1. income effect (price decreases, real income increases –> spent on the product), 2. Substitution effect (price of alternative goods have increased, switching to a cheaper alternative increases satisfaction)

Question 2

Key assumptions behind theory of demand

Answer 2

1. consumers behave rationally and seek to maximise utility. 2. Consumers act in self-interest. 3. Consumers have access to all information and make logical decisions

Question 3

Dual system model of thinking

Answer 3

Fast and slow, subconscious and deliberate

Question 4

Behavioural biases

Answer 4

1. Availability (recent information – salmonella somewhere means you’ll get sick) 2. Anchoring bias (we have a set value for something in our mind) 3. Framing bias (response depends on how something is presented)

Question 5

Short run

Answer 5

At least one FoP is fixed. Where all production takes place.

Question 6

Long run

Answer 6

All FoPs are variable, but state of tech is fixed. Planning takes place in LR.

Question 7

Fixed costs

Answer 7

costs not linked to Qt produced (rent, labour, advertising etc.)

Question 8

Variable costs

Answer 8

Costs linked to qt produced -> more output, higher costs (materials, occasionally labour)

Question 9

Total product TP

Answer 9

Qt of output produced by given number of inputs over a period of time (TP of 1,000 workers is 30,000 cars, AP is 30, MP is additional production with one more input)

Question 10

How is the law of supply explained

Answer 10

1. SR (impossible to increase supply immediately), 2. diminishing returns (adding one more will eventually cause output to fall) 3. increasing marginal costs

Question 11

Difference in the PED of primary and manufactured goods

Answer 11

Demand for commodities tend to be inelastic (no choice), manufactured goods are more elastic due to substitutes

Question 12

PED

Answer 12

% change in Qd / % change in P

Question 13

YED

Answer 13

% change in Qd / % change in Y

Question 14

Why is knowledge of YED important?

Answer 14

1. Firms will know what to sell at which markets (e.g. producing more luxury goods when salaries rise), 2. Explaining sectorial changes in economy (proportions of sectors change as countries grow and living standards improve)

Question 15

Sectors of the economy

Answer 15

Primary (agricultural) Secondary (manufacturing) Tertiary (service)

Question 16

PES of commodities and manufactured goods

Answer 16

Supply for commodities cannot be easily changed (inelastic), Manufactured goods have more elastic supply

Question 17

Calculating producer and consumer surplus

Answer 17

From equilibrium price: 1/2 base x height

Question 18

Asymmetric information types as market failure

Answer 18

Adverse selection (one party has more information e.g. selling car with defects), Moral hazard (changing behaviour to worse when getting away with it e.g. after getting car insurance)

Question 19

Different types of costs classified by economists

Answer 19

Opportunity cost, explicit costs (direct payment, e.g. rent), implicit costs (earnings if FoPs used differently)

Question 20

Calculating average costs AFC, AVC, ATC

Answer 20

Total _ cost divided by q

Question 21

Calculating MC

Answer 21

cost of producing one extra unit

Question 22

Shut down price

Answer 22

P=AVC (will stop producing in the short run, making heavy losses. If P>AVC, firm can continue producing even when making a loss)

Question 23

Revenue definition

Answer 23

Income that a firm receives from selling its products over a period of time

Question 24

Measurements of revenue

Answer 24

TR (total amount, p x q), AR (from one product, TR/q), MR (one additional unit, change in TR / change in q)

Question 25

PED and maximising revenue

Answer 25

Elastic PED -> decrease price for more revenue, Inelastic price -> increase price for more revenue. PED=1 revenue max (also MR=0)

Question 26

Total profit

Answer 26

TR - economic costs

Question 27

Objectives for businesses besides profit maximisation

Answer 27

1. CSR (corporate social responsibility, responsibility for impact of actions), 2. Satisficing (performing satisfactorily in order to pursue other goals), 3. Growth maximisation (increasing market share), 4. Revenue maximisation