How markets work

Question 1

Define:

1) Substitute goods

2) Complement goods

Answer 1

1) An increase in the price of one good will increase QD of another
2) An increase in the price of one good will cause a decrease in QD of another

Question 2

Define:

1) Normal good

2) Inferior good

Answer 2

1) Increased income will increase QD

2) Increased income will decrease QD

Question 3

PED equation

Answer 3

PED = % change in QD / % change in price

Question 4

(income) YED equation

Answer 4

YED = % change in QD / % change in income

Question 5

XED equation

Answer 5

XED = % change in QD of good A / % change in price of good B

Question 6

What affects elasticity of demand

Answer 6

• Substitutes
• Type of good
• Indirect tax

Question 7

PES equation

Answer 7

PES = % change in QS / % change in price

Question 8

Factors affecting PES

Answer 8

• Agility
• Recession (easy in rec)
• Perishable goods

Question 9

Functions of price mechanism

1-2-3

Answer 9

• Incentive, rising prices encourages firms to expand output
• Signalling, if price changes, this signals to the consumer or producer that they shoudl change cons or prod
• Rationing, scarce resources, limits supply to willing buyers

Question 10

Impacts of indirect taxes on prod and cons

Answer 10

• If demand is inelastic, consumers bear burden

- If demand is elastic, producers bear burden