The Market Economy

Question 1

individual demand

Answer 1

refers to the quantity demanded of a good or service by individual consumers at various prices

Question 2

market demand

Answer 2

refers to the aggregate quantity demanded of a good or service by all consumers in a market at various prices

Question 3

factors that affect market demand

Answer 3

• price
• price of substitute/complementary good
• changes in consumer tastes/preferences
• increase in consumer income/confidence
• expectation that the price will rise or fall in the future
• government incentives

Question 4

equi marginal principle of consumer behaviour

Answer 4

states that consumers will spend their limited income in such a way so that the ratio of marginal utility to price is the same for every good consumed to maximise utility.
States that utility is maximised when the utility for the last euro spent on each product is equalised.

Question 5

consumer surplus

Answer 5

happens when the price that consumers pay for a product/service is less than the price they are willing to pay.
It is a measure of the additional benefit that consumers receive because they’re paying less for something than what they were willing to pay

Question 6

total revenue

Answer 6

total receipts a seller can obtain from selling goods or services to a buyer

Question 7

movement along a demand curve

Answer 7

a change in the price of the good itself will cause a movement along the demand curve (all other things being equal) and this is referred to as a change in the quantity demanded

Question 8

shift in the demand curve

Answer 8

a change in any of the factors other than price will cause the demand curve to shift, and this is referred to as a change in demand, at any given price

Question 9

the law of demand

Answer 9

states that as price rises the quantity demanded will fall and vice versa, ceteris paribus.
We illustrate the law of demand using a downward sloping line from left to right
There is an inverse relationship between the price of the good and the quantity demanded

Question 10

the law of supply

Answer 10

states that as price rises the quantity supplied will rise, and vice versa, ceteris paribus.
We illustrate the law of supply using an upward sloping line from left to right.
There is a positive relationship between the price of the good and the quantity supplied

Question 11

producer surplus

Answer 11

the difference between what a producer receives for a good and the minimum they were willing to accept for the good.
The extra earnings obtained by the producer above the minimum required for them to supply the good/service.

Question 12

derived demand

Answer 12

where a factor of production is not demanded for its own sake but rather for its contribution to the production process

Question 13

joint demand

Answer 13

where two(or more) goods are used in conjunction with one another in order to achieve utility.
They are complimentary goods, eg golf clubs and golf balls

Question 14

market equilibrium

Answer 14

arises where the quantity demanded equals the quantity supplied
equilibrium occurs where the price is such that the quantity consumers wish to buy is exactly balanced by the quantity that firms wish to supply
no tendency for price change.

Question 15

law of diminishing marginal utility

Answer 15

states that as a consumer consumes more units of a good the extra satisfaction or marginal utility derived from each additional unit consumed will eventually decline.

Question 16

assumptions under the law of diminishing marginal utility

Answer 16

• applies after the ‘origin’ ie it only sets in after a certain minimum quantity is consumed
• consumer tastes don’t change
• consumer incomes don’t change
• no time lapse between the consumption of successive units which permits a change in tastes

Question 17

complementary goods

Answer 17

goods which are consumed together or used in conjunction with one another
a rise in the price in one good will cause a decrease in the demand for the other

Question 18

effective demand

Answer 18

supported by the necessary purchasing power

Question 19

exceptions to the law of demand

Answer 19

• giffen goods
• addictive goods
• snob items
• speculative goods

Question 20

substitution effect

Answer 20

when the price of a good rises a consumer may switch to a cheaper alternative to maximise utility

Question 21

income effect

Answer 21

when the price of a good rises it means the consumers real income will fall

Question 22

assumptions to analyse consumer behaviour

Answer 22

• consumers act rationally
• consumer has a limited income
• consumer is subject to the law of diminishing marginal utility
• consumer aims for maximum satisfaction

Question 23

equilibrium

Answer 23

quantity demanded equals quantity supplied and there is no tendency for prices to change