how markets work

Question 1

objective of consumer

Answer 1

maximise their economic welfare (utility/ satisfaction) from consumption by correctly spending their income

Question 2

objectives of firms

Answer 2

maximise profits by producing at the lowest cost
dividend are then played to the shareholders

Question 3

objectives of the government

Answer 3

maximise social welfare of the citizen

Question 4

demand meaning

Answer 4

the ability and willingness to buy a particular good at a given price over a given period of time

Question 5

causes of shifts in the demand curve

Answer 5

change in price of substitute
change in price of complements
change in real incomes
changes in the distribution of income (equal distribution causes more demand as poorer people spend more)
effects of advertising and marketing
change in regulation
interest rates
demography changes
seasons
trends

Question 6

law of diminishing marginal utility

Answer 6

the utility from consuming an additional unit of a good will decrease as more of a good is consumed

Question 7

consumer surplus meaning

Answer 7

difference between what consumers are willing and able to pay and what they actually pay

Question 8

derived demand meaning

Answer 8

demand for the FOP to produce another good or service

Question 9

price elasticity of demand (PED) meaning

Answer 9

the responsiveness of demand to a change in price of the good/ service

%change in quantity demanded/ %change in price

Question 10

relatively elastic PED

Answer 10

PED more than 1

Question 11

relatively inelastic PED

Answer 11

PED less than one

Question 12

factors affecting PED

Answer 12

number of close substitutes available
price of product relative to total income
cost of substituting between different products
brand loyalty and habits
necessity or luxury good
addiction
If u need it now or had time to think

Question 13

why firms use PED

Answer 13

the effect of a change in price on total revenue
changes in tax and weather the firm can pass on the cost to the consumer
price discrimination- can charge higher prices for the good when its needed and less when its not

Question 14

EV for PED

Answer 14

not complete data
consumer demand changes over time
PED varies by time and region
not all firms profit maximise
elasticity will vary with each product
substitutes will change market strategies

Question 15

cross elasticity of demand (XED) meaning

Answer 15

responsiveness of demand for one product to the change in price of another product

Question 16

income elasticity of demand (YED) meaning

Answer 16

responsiveness of demand to a change in income

Question 17

inferior good number and explanation

Answer 17

YED less than 0
rise in income will lead to a fall in demand for the good

Question 18

normal good number and explanation

Answer 18

YED more than 0
rise in income will lead to a rise in demand for the good

Question 19

luxury good number

Answer 19

YED more than 1

Question 20

substitutes number and explanation

Answer 20

XED is larger than 0
increase in price of good B will increase demand of good A

Question 21

complementary goods number and explanation

Answer 21

XED is smaller than 0
increase in the price of good B will decrease demand for good A

Question 22

supply meaning

Answer 22

quantity of goods and services that a producer is willing and able to sell at a given price over a given time period

Question 23

movements along a supply curve

Answer 23

extension- price rises producers will produce more ass there are more profits to be made
contraction- fall in price causes less profits so there will be less supplied

Question 24

causes of shifts in the supply curve

Answer 24

change in the unit cost of production
better quality tech
depreciation in the exchange rate
cost of production
producers entering or leaving the market
weather conditions
speculation in the future (higher prices in future so stock the good)
taxes and subsides

Question 25

price elasticity of supply (PES) meaning

Answer 25

responsiveness of supply to a change in price of the good or service

Question 26

relatively elastic PES number

Answer 26

PES higher than 1

Question 27

relatively inelastic PES number

Answer 27

PES lower than 1

Question 28

factor affecting PES

Answer 28

spare production capacity - room to grow is more elastic stocks of finished good - if high stocks and demand increases demand can be met FOP mobility- if FOP are more mobile to shift to produce what is more in demand then its elastic time to produce- short run inelastic as supply cannot meet demand. long run elastic as supply can meet demand

Question 29

excess demand meaning

Answer 29

when quantity demanded is higher than quantity supplied

Question 30

excess supply meaning

Answer 30

when quantity supplied is higher than quantity demanded

Question 31

price mechanisms meaning

Answer 31

decisions of consumers and businesses interact to determine the allocation of resources

Question 32

rationing function meaning

Answer 32

when there are scarce resources price increases cos of excess demand the higher price causes some people not being able to afford the good or they lose interest so the goods are rationed to the people who can afford it or desire it

Question 33

signalling function meaning

Answer 33

where resources should be used when prices rise producers more resources into the manufacturing of the product changes in price lead to a change in supply and demand

Question 34

incentive function meaning

Answer 34

change in behaviour of a consumer or producer working harder leads to more benefits

Question 35

producer surplus meaning

Answer 35

difference between the price producers are willing and able to supply at and the actual price they supply at

Question 36

direct taxes meaning

Answer 36

levy on income wealth and profits e.g. income tax, inheritance tax, national insurance, capital gains, corporation tax

Question 37

indirect taxes meaning

Answer 37

levy on expenditure e.g. VAT, sugar tax, alcohol, tobacco

Question 38

specific/ unit tax meaning

Answer 38

set at a constant amount per unit of output

Question 39

ad valorem tax meaning

Answer 39

set at a percentage of the selling price

Question 40

indirect tax and PED effects on consumer and producer

Answer 40

if PED is inelastic burden can be passed onto the consumer if PED is elastic burden is absorbed by the producer

Question 41

subsidies meaning

Answer 41

government giving out loans to firms which do not need to be paid back they are used to lower cost of production

Question 42

effects of subsidies

Answer 42

increase output lower prices increase employment through parentships reduce inequality control inflation increase demand during decline encourage competition of merit goods

Question 43

causes of irrational consumer behaviour

Answer 43

influence of others habitual behaviour weakness at computation

Question 44

how does influence of others decrease utility

Answer 44

herb behaviour- make decisions based on people around you social norms and trends

Question 45

how does habitual behaviour decrease utility

Answer 45

mental shortcuts- helps people make quick but not perfect decisions

Question 46

how does weakness at computation decrease utility

Answer 46

consumers are not willing or able to make comparisons between prices