Theme 1: 1.2.1 - 1.2.10 (How markets work)

Question 1

What does utility theory refer to?

Answer 1

• Satisfaction, well-being or value that an individual derives from consuming goods + services
• Not directly measurable but theoretical
• Focuses on behaviour of individual, consumers and firms in market
• Subjective preferences and choices of individuals when they make decisions

Question 2

What is marginal utility?

Answer 2

Additional satisfaction or utility gained from consuming one more unit of a good or service

(normally diminishing)

• The price that a consumer is willing to pay, derives from the utility that they gain from consuming a good

Question 3

What is disutility?

Answer 3

refers to the negative feelings, discomfort or displeasure associated with certain activities, goods or services

Question 4

What is rational choice theory?

Answer 4

assumes that consumers always behave rationally in allocating their limited budget to maximise total satisfaction from their purchases

Question 5

What is the substitution effect?

Answer 5

As the price of a product decreases, it becomes more attractive compared to other similar products. Consumers are more likely to switch to the cheaper option, leading to an increase in the quantity demanded

Question 6

What is the income effect?

Answer 6

When the price of a product falls consumers effectively have more real purchasing power. allows them to buy more which increases quantity demanded

Question 7

What is derived demand?

Answer 7

The demand for a factor of production that is used to produce another good or service

Question 8

What is joint demand?

Answer 8

• When the demand for one product is directly and positively related to market demand for a related good or service
• Occurs when demand for 2 goods / services is independent

Question 9

What is real income?

Answer 9

Income adjusted for inflation

Question 10

What is demand?

Answer 10

Willing and able to buy at a given price

Question 11

What does the law of demand state?

Answer 11

Demand varies inversely with price lower prices makes products more affordable. Higher prices reduces demand

Question 12

What happens to demand when there is a fall in market price?

Answer 12

Extension in demand

Question 13

What happens to demand when there is a rise in market price?

Answer 13

Contraction in demand

Question 14

What is a normal good?

Answer 14

Demand rises with an increase in real incomes as people have a higher purchasing power

Question 15

What is an inferior good?

Answer 15

Demand falls as incomes increase

Question 16

What is effective demand?

Answer 16

Backed up with an ability to pay

Question 17

What is potential (latent) demand?

Answer 17

Not yet expressed in market price

Question 18

What are examples of derived demand?

Answer 18

• Steel = demand for steel strongly linked to market demand for cars and construction of new buildings
• Minerals = world price of cobalt and lithium has surged as production of electric vehicles has grown

Question 19

What is composite demand?

Answer 19

Goods which have more than one use.
increase in market demand for one product can lead to a fall in market supply

Question 20

What causes a shift of the demand curve?

Answer 20

• Changing prices of SUBSTITUTES in competitive demand
• Changing prices of a COMPLEMENTS in joint demand
• Changes in REAL DISPOSIABLE INCOMES of consumers
• Effects of ADVERTISING & MARKETING changing peoples tastes
• INTEREST RATES affecting cost of credit demand for mortgages
• Changes in the SIZE & AGE STRUCTURE of nations POPULATION
• SEASONAL FACTORS
• SOCIAL + EMOTIONAL FACTORS

Question 21

What is a movement of extension & contraction related to?

Answer 21

Price