The Role of Markets 2.4-2.7

Question 1

What is consumer surplus

Answer 1

The difference between the price consumers are willing and able to pay and the price that they actually pay.

Question 2

What is producer surplus?

Answer 2

the difference between the price a producer is willing to accept for a supply and the amount they actually receive

Question 3

What is marginal cost

Answer 3

the cost of producing an additional unit of output

Question 4

What is market equilibrium?

Answer 4

When the quantity demanded by consumers is exactly balanced with the quantity supplied by firms

Question 5

What is disequilibrium ?

Answer 5

any position in the market where demand and supply are not equal

Question 6

When will a firm choose to stop supplying goods?

Answer 6

When the cost of producing their final pizza is higher than the price they can sell it for

Question 7

What is price elasticity of demand?

Answer 7

Ped measures the responsivenes of quantity demanded given a change in price

Question 8

How do you calculate PED?

Answer 8

% change in qd / % change in price

Question 9

Why is PED always negative

Answer 9

Because of the law of demand.

Question 10

What does price elastic mean?

Answer 10

The proportional change in demand is greater than the related proportional change in price
- the figure is greater then 1

Question 11

What does price in elastic mean?

Answer 11

The proportional change in demand will be less than the relative proportional change in price
- less than 1 but more than 0

Question 12

What does perfectly price inelastic mean?

Answer 12

Regardless of price change quantity demanded won’t change
- the value would be 0

Question 13

What does perfectly price elastic mean?

Answer 13

quantity demanded changes by an infinite amount in response to any change in price

Question 14

When is demand for a good or service price elastic or inelastic

Answer 14

SPLAT
substitutes - the more there are the price elastic demand will be
percentage of income - greater the percentage of income it takes from consumers = more elastic
Luxury/ Necessity- luxury is elastic and necessity is inelastic
Addictive/ Habit forming - demand is inelastic
Time period - short inelastic due to less substitutes but long run elastic as there is more choice

Question 15

Why is ped important to businesses/firms

Answer 15

Because it helps them make pricing decisions to help them increase total revenue

Question 16

What should a firm do with price to increase total revenue if demand is elastic or inelastic

Answer 16

EOIS - ELASTIC ONLY IRRITATES SKIN

Elastic Opposite, Inelastic Same
price elastic - the opposite will happen
price inelastic- the same will happen

Question 17

What does unitary elasticity mean

Answer 17

a percent change in price will lead to an exact and opposite change in demand
- the value is 1

Question 18

What is income elasticity of demand

Answer 18

YED measures the responsiveness of quantity demanded given a change in income

Question 19

How do you calculate income elasticity of demand ?

Answer 19

% change in qd/ % change in y

Question 20

Why is YED important?

Answer 20

It tells us if we are working with normal goods or inferior goods

Question 21

What is a normal good ?

Answer 21

A positive relationship between income and demand
- as income goes up demand will go up

Question 22

What is an inferior good?

Answer 22

They have an inverse relationship between income and demand
- as income goes up demand goes down

Question 23

Difference between Normal and inferior good

Answer 23

If the figure is positive it is a normal good
If the figure is negative it is an inferior

Question 24

Normal good YED figures

Answer 24

more than 1 demand = income elastic normal luxury
less than 1 = income inelastic normal necessity

Question 25

Inferior good YED figures

Answer 25

more than 1 = income elasticity
less than 1 = income inelastic

Question 26

What is XED ?

Answer 26

XED measures the responsiveness of quantity demanded of a good or service given a change in price of another

Question 27

What does XED tell us ?

Answer 27

Whether the goods are substitute goods or complimentary goods and whether they are strongly or weakly related

Question 28

How do you calculate XED

Answer 28

% change in qd of product A / % change in price of product B

Question 29

What does market equilibrium show?

Answer 29

It represents allocative efficiency
- at equilibrium, the resources that firms use to make goods and services are perfectly following consumer demand

Question 30

What are the functions of price

Answer 30

ARSI
A - allocate scarce resources efficiently
R - ration scarce resources by encouraging/discouraging consumption
S - signals excess demand/supply and need for more or less resources
I - incentivise producers to produce more or less to maximise profit
EXCESS DEMAND = PRICES RISE
EXCESS SUPPLY = PRICES FALL

Question 31

What are the symbol YED figures

Answer 31

+ = normal good
- = inferior good

Question 32

What are the symbol XED figures

Answer 32

+ = substitutes
- = compliments

Question 33

What are the symbols of XED?

Answer 33

More than 1 = price elastic (strongly related)
Less than 1 = price inelastic
0 = perfectly inelastic

Question 34

What is PES?

Answer 34

Measures the responsiveness of quantity supplied given a change in the market price

Question 35

How do you calculate PES?

Answer 35

% change in quantity supplied / % change in price

Question 36

What are the values of PES

Answer 36

More than 1 = price elastic
Less than 1 = price inelastic
1 = unitary elastic
0 = perfectly inelastic
Infinity. = perfectly elastic

Question 37

What are the determinants of supply

Answer 37

PSSST
- Production lag (longer the lag means more inelastic
- stocks ( more stock means more elastic , easier to respond to inc in price
- spare capacity (more means more elastic)
- substitutability of fops ( more substitutes means more elastic supply is) - e.g could move workers from making cars to making vans
- time (short run one fixed factor of production , difficult to inc production making supply inelastic, long run no fops are fixed