Theme 1: Demand and Supply

Question 1

What is utility?

Answer 1

The satisfaction consumers gain after getting a good or service

Question 2

What do consumers seek to maximise?

Answer 2

Utility

Question 3

What do firms seek to maximise?

Answer 3

Profits

Question 4

What is irrational behaviour?

Answer 4

Actions and decisions made that aren’t based on reason or sound judgement

Question 5

Explain 3 reasons why agents may behave irrationally

Answer 5

Influence, seek immediate satisfaction, limited capacity to calculate all costs and benefits of a decision

Question 6

What is bounded rationality?

Answer 6

The idea that rational individuals will select a decision that is satisfactory rather than optimal

Question 7

What is demand?

Answer 7

The quantity of a good/service consumers are willing and able to buy at a given price in a given time period

Question 8

Why are demand curves downward sloping?

Answer 8

Because as price goes up, demand goes down

Question 9

Illustrate an extension in demand.

Question 10

What could cause an extension in demand?

Answer 10

Increased substitute prices, seasonal factors, changes in real disposable income

Question 11

Illustrate a contraction in demand

Question 12

What could cause a contraction in demand?

Answer 12

Reduced substitute prices, seasonal factors, changes in real disposable income

Question 13

Give conditions (shifters) of demand (PASIFIC)

Answer 13

Population, Advertising, Substitutes price, Income, Fashion/Tastes, Interest rates, Complement’s price

Question 14

what is the law of diminishing marginal utility?

Answer 14

As quantity consumed increases, the marginal utility derived from each extra unit decreases

Question 15

What is supply?

Answer 15

Quantity of a good/ service produces are willing and able to produce at a given price at a given time period

Question 16

Why are supply curves upward sloping?

Answer 16

Because as price goes up, supply goes up to maximise profit potential

Question 17

Illustrate an extension in supply

Question 18

What could cause an extension in supply? (PINTS WC)

Answer 18

Increased Productivity, decreased indirect tax, decreased no. of firms, improved tech, good weather, decreased costs of production

Question 19

Illustrate a contraction in supply

Question 20

What could cause a contraction in supply? (PINTS WC)

Answer 20

Decreased Productivity, Increased indirect tax, Increased no. of firms, worse tech, bad weather, increased costs of production

Question 21

Give conditions (shifters) of supply. (PINTS WC)

Answer 21

Productivity, Indirect Tax, No of firms, Technology, Subsidy, Weather, Costs of production

Question 22

What is equilibrium price?

Answer 22

Where demand meets supply

Question 23

What is equilibrium quantity?

Answer 23

Where quantity demanded and quantity supplied are the same

Question 24

What is a shortage?

Answer 24

Where there is more demand than supply

Question 25

Referring to extension and contraction, explain how shortages are resolved.

Answer 25

Excess demand signals to producers that they should supply more which causes them to raise the prices as consumers have bidder

Question 26

What is a surplus?

Answer 26

Where there is more supply than demand

Question 27

Referring to extension and contraction, explain how surpluses are resolved.

Answer 27

Low demand signals to producers to push the price down which contracts supply and creates an extension in demand until it reaches equilibrium price

Question 28

Explain 3 functions of the price mechanism. (SIR)

Answer 28

Signalling function. Prices perform a signalling function – they adjust to demonstrate where resources are required.
Incentive function. Through choices consumers send information to producers about their changing nature of needs and wants.
Rationing function. Prices ration scarce resources when demand outstrips supply.

Question 29

What is consumer surplus?

Answer 29

Difference between the actual price and the price that consumers are willing and able to pay for a good or service

Question 30

How do we illustrate consumer surplus on a diagram?

Question 31

What is producer surplus?

Answer 31

Difference between the actual price and the price producers are willing and able to sell at

Question 32

How do we illustrate producer surplus on a diagram?

Question 33

What is total economic welfare?

Answer 33

The sum of consumer and producer surplus