Theme 1

Question 1

What is producer surplus

Answer 1

The difference between the price the consumer is willing and able to pay and the market price

Question 2

What triangle does producer surplus represent (top/ bottom)

Answer 2

The bottom triangle

Question 3

What is consumer surplus

Answer 3

The difference between the price the producer is willing and able to supply at and the market price

Question 4

What triangle does consumer surplus represent (top/ bottom)

Answer 4

The top triangle

Question 5

Draw a consumer/ producer surplus diagram

Answer 5

Good job

Question 6

Positive impacts of imposing a minimum price

Answer 6

• Contracts demand, e.g good for de-merit goods
• In LR should encourage firms to produce merit goods without a minimum price
• Could reduce inequality, through higher wages (NMW)

Question 7

Negative impacts of a minimum price

Answer 7

• Distorts the market mechanism, inefficient allocation of resources. Consumers have to pay more. Less disposable income. Decreased S.O.L
• Causes excess supply, in the case of workers this causes unemployment, as the costs of production have risen for businesses. They cannot afford to employ more staff
• May create black market leakage
• Government may have to dump excess supply

Question 8

What is effective demand

Answer 8

When the consumer is both willing and able

Question 9

How to increase demand without changing price

Answer 9

• Advertising
• Trends/Fashion
• Regulation
• Seasonal Demand
• Price of other goods
• Government regulation
• Income

Question 10

What is the law of diminishing marginal utility

Answer 10

The more the buyers are offered, the less value they attach to the good. Thus why the demand curve is downward sloping.
The utility attached decreases each time the unit is consumed

Question 11

What is Adam Smiths paradox of value

Answer 11

Puzzled why consumer would pay such a high price for goods like diamonds, not essential to human existence and then payed so little for essential items

Question 12

What values show elastic , inelastic and unitary

Answer 12

Elastic: >1
Unitary: 1
Inelastic: <1

Question 13

What factors affect PED

Answer 13

• Breadth of definition
• SR vs LR
• Level of addictiveness
• % of income taken up
• Necessity vs Luxury
• Number of substitutes

Question 14

What is a normative statement

Answer 14

A valued judgement, subjective and cannot be proven

Question 15

What is a positive statement

Answer 15

A statement of fact, objective and can be proven