microeconomics 1.2

Question 1

Reasons why rational decision making doesn’t always apply

Answer 1

• Have limited capacity to calculate all costs and benefits of a decision
• Are influenced by their social networks
• Lack self control and seek immediate satisfaction
• Could make emotional choices in cold and emotional states
• Often fall back on simple rules of thumb when choosing
• Satisfy rather than maximise
• Have a strong default to maintain the status quo

Question 2

Definition of demand

Answer 2

Demand for a good or service is the quantity that consumers are willing and able to buy at a given price in a given period of time

Question 3

Definition of effective demand

Answer 3

Only if demand for a product is backed up by willingness and ability to pay the market price does demand become effective or actual

Question 4

What is the basic law of demand

Answer 4

The basic law of demand is that demand varies inversely with price - the lower the price of a good, the higher the quantity demanded and vice versa, ceteris paribus

Question 5

Rules for drawing a demand curve

Answer 5

• label the y axis price and the x axis quantity
• draw demand curve downward sloping from left to right and label (d)
• draw dotted line from given price (p) to quantity (q)

Question 6

What causes movement along the demand curve

Answer 6

Only changes in price causes movement along the demand curve
A higher price leads to a contraction of quantity demanded
A lower price leads to an expansion of quantity demanded
Shows change in quantity demanded

Question 7

What causes a shift in the demand curve

Answer 7

A shift is caused by non price factors
Shows a change in demand

Question 8

Definition of derived demand

Answer 8

Derived demand is the demand for a good or service that is used to produce another good or service
The demand is not for the good/service itself but for its ability to produce another good or service

Question 9

Examples of goods or services in derived demand

Answer 9

• The demand of steel is derived to make cars
• The demand for minerals are derived to make components for electric products

Question 10

Definition of joint/ complementary demand

Answer 10

• Joint or complementary demand is when the demand for one product is directly and positively related to market demand for a related good or service
• The demand is for two or more goods and services which are demanded together

Question 11

Examples of things in complementary demands

Answer 11

• Petrol and cars
• Smartphones and apps

Question 12

Definition of composite demands

Answer 12

Composite demands is where the demand for a good or service is for goods that have more than one use
- The demand is for a good or service to produce more than one type of product

Question 13

Examples of things in composite demands

Answer 13

• Milk which can be used for cheese, yoghurt, butter, cream
• Land which can be used for farming, recreation or development

Question 14

What are the determinants for demands in a market

Answer 14

• The type of good
• Consumer incomes
• Seasonal factors
• Consumer fashion and tastes

Question 15

How does consumer income affect demand

Answer 15

As the income of consumers increases, demand for normal goods will increase
This is shown by a shift to the right of the demand curve

Question 16

How do seasonal factors affect demand

Answer 16

Consumer increase and decrease their demand for certain goods depending on the season eg. demand for plants at garden centres is linked to planting seasons

Question 17

How do consumer tastes and fashion affect demand

Answer 17

• People’s tastes change over time and demand for fashionable products changes regularly, often manipulating by advertising
• As some products become more fashionable there is an increase in demand

Question 18

What other factors affect demand

Answer 18

• Population changes
• Advertising
• The level of competition in the market
• Interest rates and demand
• Social and emotional factors

Question 19

Describe the income effect

Answer 19

• A fall in price increases the real purchasing power of consumers
• Allows people to buy more with a given budget
• For normal goods demand rises with an increase in real income

Question 20

Define the substitution effect

Answer 20

• A fall in the price of goods makes it relatively cheaper compared to substitutes
• Some consumers will switch to good leading to higher demand
• Much depends on whether products are age substitutes

Question 21

What is the concept of utility

Answer 21

Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service

Question 22

What is total utility

Answer 22

The total satisfaction from a given level of consumption

Question 23

What is marginal utility

Answer 23

• The change in satisfaction from consuming an extra or additional unit
• Standard economic theory believes the idea of diminishing returns i.e the marginal utility of extra units declined as more is consumed

Question 24

How does diminishing marginal utility explain the downward sloping demand

Answer 24

• The law of diminishing marginal utility is a law of economics that states that as your consumption increases the satisfaction you derive from each individual unit decreases
• If marginal utility is falling then consumers will only be prepared to pay a lower price

Question 25

What is price elasticity of demand?

Answer 25

Price elasticity of demand (PED) measures the responsiveness of demand after a change in the goods own price

Question 26

Basic formula for calculating demand

Answer 26

percentage change in demand over
percentage change in price

Question 27

When does perfect inelasticity take place and what does this mean

Answer 27

When PED=0
A change in price will not have any effect on demand

Question 28

When does inelasticity take place

Answer 28

When PED < 1
The percentage change in demand is less than the percentage change in price

Question 29

When does unitary elasticity take place

Answer 29

PED = 1
The percentage change in Demand is same as the percentage change in price

Question 30

When does elasticity take place

Answer 30

When PED > 1
The percentage change in Demand is greater than the percentage change in price

Question 31

When does perfect elasticity take place

Answer 31

When PED is infinite
An increase in price will lead to demand falling to zero