Theme 1, CC3

Question 1

mortgage

Answer 1

a loan to buy a property
a secured loan which means that if the buyer cannot afford to repay the mortgage, the bank is able to sell the house to get their money back

Question 2

variable interest rates mortgage

Answer 2

a mortgage where the reapyments change according to the interest rate set by the Bank of England

Question 3

fixed interest rates mortgage

Answer 3

a mortgage where the repayments stay the same for the whole loan

Question 4

rational consumer

Answer 4

a person who weighs up the costs and benefits to him or her of each additional unit of a good purchased

Question 5

rational decision making

Answer 5

where consumers allocate their expenditure on goods and services to maximise utility and producers allocate their resources to maximise profits

Question 6

total utility

Answer 6

total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given time period

Question 7

marginal utility

Answer 7

utility or extra satisfaction gained from consuming one extra unit of a good within a given time period

Question 8

diminishing marginal utility

Answer 8

as more units of a good are consumed, additional units will provide less additional satisfaction than previous units

Question 9

price mechanism

Answer 9

the mechanism through which price is determined in a free market system

Question 10

government failure

Answer 10

government intervention leads to an inefficient or misallocation of resources/welfare loss

Question 11

factors affecting the demand of housing

Answer 11

• higher incomes
• low interest rates/availability of loans
• population
• confidence/speculation
• ‘help to buy’ schemes

Question 12

factors affecting the supply of housing

Answer 12

• availability of land, materials

- low selling prices (firms don’t want to waste their time if they won’t make as much profit)

Question 13

shares in a Public Limited Company - PLC

Answer 13

• shares bought and sold on stock exchange

- limited liability: if the company goes bankrupt, shareholders can only lose the amount of money they invested

Question 14

dividends

Answer 14

• a share of the profits of business

- paid to shareholders to give them an incentive to buy shares in the company

Question 15

FTSE 100 index

Answer 15

an index of the share prices of the biggest 100 companies listed on the London Stock Exchange
acronym from Financial Times and Stock Exchange as they created it
measured in terms of market capitalism which is the total value of all the shares issued

Question 16

determination of the share price

Answer 16

• if investors believe the company will make less profit in the future they are less likely to buy shares in that company and more likely to sell shares in that company instead
• so demand for the shares will fall and the supply of the shares will rise, causing the share price to fall

Question 17

commodities

Answer 17

• soft commodities: agricultural goods
• hard commodities: raw materials eg tin, copper
• demand and supply relatively inelastic
• volatile prices

Question 18

functions of price mechanism to allocate resources

Answer 18

• signalling
• incentive
• rationing

Question 19

functions of price mechanism: signalling

Answer 19

• market prices are rising because of stronger demand, signal to suppliers to expand output
• if demand falls, prices fall, signal to producers to supply less, supply falls

Question 20

functions of price mechanism: incentive

Answer 20

• when the price of a good rises, an incentive for firms to shift production to generate higher profits
• falling prices create incentive to move away from producing a particular good

Question 21

rationing

Answer 21

• resources are scarce

- if there is a shortage, price increases so only those who can and are willing to pay the higher price get it

Question 22

two types of decision making

Answer 22

intuitive/automatic:

• from an older part of our brain
• habit
• routine
• unconscious

reflective/rational thinking:

• deliberate
• logical
• critical
• creative

Question 23

factors affecting purchasing decisions

Answer 23

• habit
• what we feel is the right thing to do (social norms)
• what others are doing (herd mentality)
• consumer weakness at computation

Question 24

Daniel Kahneman

Answer 24

• Nobel Prize for Economics

- behavioural economics

Question 25

confirmation bias

Answer 25

tendency to interpret new evidence as confirmation of one’s existing beliefs or theories

Question 26

loss aversion

Answer 26

framed in the case of a loss, a person will take more risks than in the case of a gain

Question 27

heuristics

Answer 27

mental shortcut

Question 28

availability heuristic

Answer 28

• base their assessment of the risk on immediate examples that spring to mind
• ‘Should I spend money on a more secure front door?’ could turn into ‘What is my likelihood of being burgled?’

Question 29

anchoring heuristic

Answer 29

tendency to use reference points to value items

Question 30

nudge

Answer 30

deliberate framing of choices to influence the behaviour and decisions of an individual/group of people

Question 31

nudges for policies

Answer 31

• default settings
• simpflication/framing (more attractive name for healthier food)
• warnings