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

Two ways to make a decision are?

Answer 3

Intuition and Rational

Question 4

Limitations of rational decision making?

Answer 4

Takes longer despite possibly being fairer.

Question 5

What are the assumptions of the bounded rationality model?

Answer 5

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 6

Heuristics

Answer 6

Mental shortcuts or “rules of thumb” that often lead to a solution (but not always).

Question 7

Factors that shift the demand curve are?

Answer 7

Population
Income
Related goods
Advertising
Tastes and Fashions
Expectations
Seasons

Question 8

Derived demand

Answer 8

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

Question 9

Composite demand

Answer 9

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 10

Joint demand

Answer 10

When goods are bought together.

Question 11

diminishing marginal utility

Answer 11

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

Question 12

equation for price elasticity of demand

Answer 12

% change in quantity demanded / % change in price

Question 13

unitary elastic

Answer 13

describes demand whose elasticity is exactly equal to 1

Question 14

inelastic demand

Answer 14

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

Question 15

elastic demand

Answer 15

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

Question 16

perfectly inelastic

Answer 16

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

Question 17

perfectly elastic

Answer 17

demand which falls to zero when price changes

Question 18

Factors effecting PED

Answer 18

Necessity
Substitutes
Addictiveness
Proportion of income
Durability
Peak and off peak

Question 19

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

Answer 19

consumer

Question 20

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

Answer 20

themselves (the firm)

Question 21

Equation for income elasticity of demand

Answer 21

% change in quantity demanded / % change in income

Question 22

Luxury goods have a PED of YED ……

Answer 22

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

Question 23

Normal goods have a PED of YED ……

Answer 23

> 0 as demand increases as income increases

Question 24

Inferior goods have a PED of YED ……

Answer 24

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

Question 25

Equation for cross elasticity of demand

Answer 25

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

Question 26

Complementary goods have a ………. XED

Answer 26

negative

Question 27

Substitute goods have a ………. XED

Answer 27

Positive

Question 28

Unrelated goods have a ………. XED

Answer 28

0

Question 29

Factors that cause a shift in the supply curve

Answer 29

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

Question 30

equation for price elasticity of supply

Answer 30

% change in quantity supplied / % change in price

Question 31

Factors effecting PES

Answer 31

the number of producers, spare capacity, ease of switching, ease of storage, length of production period, time period of training, factor mobility, and how costs react

Question 32

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

Answer 32

Rationing Incentive Signalling

Question 33

Consumer surplus

Answer 33

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

Question 34

Producer surplus

Answer 34

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

Question 35

Economic welfare

Answer 35

The total benefit society receives from an economic transaction.

Question 36

How is economic welfare calculated

Answer 36

The area of producer surplus and consumer surplus added together.

Question 37

Two types of indirect taxes

Answer 37

specific tax and ad valorem tax

Question 38

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

Answer 38

do not supply

Question 39

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

Answer 39

do supply

Question 40

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

Answer 40

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