Theme 1: How do Markets Work

Question 1

When making economic decisions, consumers aim to maximise their …….. and firms aim to maximise ……..

Answer 1

Utility and Profits

Question 2

Consumer Utility

Answer 2

total satisfaction received from consuming a good or service

Question 3

Limitations of rational decision making?

Answer 3

Takes longer despite possibly being fairer.

Question 4

What are the assumptions of the bounded rationality model?

Answer 4

1- The first satisfactory alternative is selected.
2- The decision maker recognises they perceive the world as simple.
3- The decision maker recognises the need to be comfortable without considering every alternative.
4- Decisions could be made by heuristics.

Question 5

Ceteris paribus

Answer 5

“All else being equal”

Question 6

Factors that shift the demand curve are?

Answer 6

Population
Income
Related goods
Advertising
Tastes
Fashions
Expectations
Seasons

Question 7

Derived demand

Answer 7

Demand for one good is linked to the demand for a related good.

Question 8

Composite demand

Answer 8

When the good demanded has more than one use so assuming supply stays the same an increase in one good leads to a decrease in supply of another.

Question 9

Joint demand

Answer 9

When goods are bought together.

Question 10

diminishing marginal utility

Answer 10

Decreasing satisfaction or usefulness as additional units of a product are acquired

Question 11

equation for price elasticity of demand

Answer 11

% change in quantity demanded / % change in price

Question 12

unitary elastic

Answer 12

describes demand whose elasticity is exactly equal to 1

Question 13

inelastic demand

Answer 13

A situation in which an increase or a decrease in price will not significantly affect demand for the product

Question 14

elastic demand

Answer 14

A situation in which consumer demand is sensitive to changes in price

Question 15

perfectly inelastic

Answer 15

quantity does not respond at all to changes in price (E=0)

Question 16

perfectly elastic

Answer 16

demand which falls to zero when price changes

Question 17

Factors effecting PED

Answer 17

Necessity Substitutes Addictiveness Proportion of income Durability Peak and off peak

Question 18

If a firm sells a good with an inelastic demand, they are likely to put most of the tax burden on ……………

Answer 18

consumer

Question 19

If a firm sells a good with an elastic demand, they are likely to put most of the tax burden on ……………

Answer 19

themselves (the firm)

Question 20

Equation for income elasticity of demand

Answer 20

% change in quantity demanded / % change in income

Question 21

Luxury goods have a PED of YED ……

Answer 21

> 1 as income increases this causes an even bigger increase in demand/

Question 22

Normal goods have a PED of YED ……

Answer 22

> 0 as demand increases as income increases

Question 23

Inferior goods have a PED of YED ……

Answer 23

<0 as they see a fall in demand as income rises.

Question 24

Equation for cross elasticity of demand

Answer 24

% change in quantity demanded of good X / % change in price of good Y

Question 25

Complementary goods have a ………. XED

Answer 25

negative

Question 26

Substitute goods have a ………. XED

Answer 26

Positive

Question 27

Unrelated goods have a ………. XED

Answer 27

0

Question 28

Factors that cause a shift in the supply curve

Answer 28

Productivity Indirect taxes Number of firms Technology Subsidies Weather Costs of production

Question 29

equation for price elasticity of supply

Answer 29

% change in quantity supplied / % change in price

Question 30

Factors effecting PES

Answer 30

NAME?

Question 31

What are the 3 main functions the price mechanism uses to allocate resources

Answer 31

Rationing
Incentive
Signalling

Question 32

Consumer surplus

Answer 32

The difference between what a firm is willing to pay and the price they actually pay.

Question 33

Producer surplus

Answer 33

The difference between the price the producer is willing to charge and the price they actually charge.

Question 34

Economic welfare

Answer 34

The total benefit society receives from an economic transaction.

Question 35

How is economic welfare calculated

Answer 35

The area of producer surplus and consumer surplus added together.

Question 36

Two types of indirect taxes

Answer 36

specific tax and ad valorem tax

Question 37

Consumer subsidies affect demand and do/do not shift the ………. curve.

Answer 37

do not supply

Question 38

Producer subsidies lower the cost of production and do/do not shift the ………… curve.

Answer 38

do supply

Question 39

What are the 3 reasons why a consumer might not act rationally?

Answer 39

1- The influence of other peoples behaviour. 2- The importance of habitual behaviour. 3- Consumer weakness at computation.