How Markets Work Definitions

Question 1

Rational economic beahviour (1)

Answer 1

• A decision-making proces by individuals and firms in which they act to maximise their wlefare

Question 2

Effective Demand (3)

Answer 2

• The quantity of a good people are willing to buy
• At any given price
• Over a period of time

Question 3

Supply (3)

Answer 3

• The quantity of the good firms are willing and able to offer for sale
• At any given price
• Over a period of time

Question 4

DMU (3)

Answer 4

• The idea that atisfaction recieved
• from each extra unit
• consumed falls

Question 5

Price elasticity of demand (PED) (3)

Answer 5

• A measure of the responsivenes of the quantity demanded of a product
• to a change in its price
• in percentage terms

Question 6

Income elaticity of demand (YED) (3)

Answer 6

• A measure of the responsivenes of the quantity demanded of a product
• to a change in income
• in percentage terms

Question 7

Cross elasticity of demand (XED)

Answer 7

• A measure of the responsivenes of the quantity demanded of a product
• to a change in the price of another product
• in percentage terms

Question 8

Price Elasticity of supply (PES) (3)

Answer 8

• A measure of the responsiveness of the quantity supplied of a product
• to a change in its price
• in percentage terms

Question 9

Normal goods (3)

Answer 9

• These are any goods wor which the demand increases when income increases
• This means that YED is positive
• The term does not refer to the quality of the good

Question 10

Inferior goods (3)

Answer 10

• These are the goods for which demand decrease when income rises
• This means that the YED is negative
• Inferiority, in thi ense is an observable fact than a statement about the quality of the good

Question 11

Complements (2)

Answer 11

• Goods that are used in conjunction with others
• They have a negative XED

Question 12

Substitutes (2)

Answer 12

• Goods that compete for the same market
• They have a positive XED

Question 13

Price Mechanism (4)

Answer 13

• The price mechanim is the method through which the market allocates scarce resources
• by responding to changes in the conditions of supply and demand
• Prices create signals and incentives

Question 14

Consumer surplus (3)

Answer 14

• The difference between what a person would be willing to pay and what they actually pay to but a certain quantity of a good
• It represents the extra utility that a consumer gains above the price that they pay for it
• It is the area below the demand curve and above the price level

Question 15

Producer surplus (3)

Answer 15

• The difference between ehat a producer is paid for a quantity of a good and the lowest price the producer requires in order to supply that quantity
• It represents the extra revenue that a seller gets above what they will produce it for
• It is the area above the supply curve and below the price level

Question 16

Direct tax (2)

Answer 16

• This is collected by the government from the individuals or companies on whom it is levied (imposed)

Question 17

Indirect tax (3)

Answer 17

• A tax on the production or sale of a good or service
• Indirect taxes are included in the price paid for the good or service by its final purchaser
• Examples include VAT (value added tax) and beer duty
• The introduction or increase of an indirect tax causes a negative shift in the supply curve

Question 18

Specific (or unit) tax (2)

Answer 18

• A tax based on the volume of the product sold
• An example would be the tax od £1 per bottle of whisky
• The supply curve shifts parallel to itself

Question 19

Ad valorem tax (2)

Answer 19

• Ad valorem means ‘according to value’
• This is a mothod of taxation using the value of the product to determine the amount of tax
• VAT is an example of an ad valorem tax because it is charged at 20% (a percentage) of the value of product or service being sold . The supply curve shift is nonparallel

Question 20

Incidence of tax (1)

Answer 20

• The way in which the burden of tax eventually falls on the consumer and the producer

Question 21

Subsidy (3)

Answer 21

• A grant given that reduces production costs
• Usually designed to encourage production or consumption of a good
• It causes a positive shift in the supply curve

Question 22

Behavioural economics (1)

Answer 22

A method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making

Question 23

Commodity (2)

Answer 23

• Any product od agriculture, fishing or mining
• That is produced to be traded or sold
• such as cash crops

Question 24

Exchange rate (2)

Answer 24

• The price of one country’s currency
• Expressed in terms of another countrys currency