Theme 1: How Markets Work

Question 1

Economic objectives of producers

Answer 1

-a firms profit is total revenue
-maximise profit
-ethical objectives

Question 2

Economic objective of consumers

Answer 2

-maximise utility
-workers want to maximise their income
At

Question 3

Economic objective of government

Answer 3

-balance the resources of a country with the needs and wants of population
-economic growth
-full employment
-low inflation
-competing objectives

Question 4

Factors that cause a shift in demand curve

Answer 4

• normal goods
  -inferior goods
  -equal distribution

Question 5

Relationship between law of diminishing marginal utility

Answer 5

Income effect - fixed levels of income a price falls the amount that consumers can buy a with th it income increases
Substation effect - a fall in the price of a good makes it relatively cheaper than other goods increase demand for cheaper goods

Question 6

Cross elasticity of demand

Answer 6

Percentage change in qty of Good A / percentage change in price of Good B

Question 7

Income elasticity of demand

Answer 7

Percentage change in quantity demanded of a good / percentage change in real income

Question 8

Factors influencing elasticities of demand

Answer 8

-substitutes
-type of good or service
-percentage of income spent on good
-time

Question 9

The relationship between price elasticity of demand and total revenue

Answer 9

• elasticity changes along a straight line demand curve
  -if a good has elastic demand then a reduction in price will increase the firms total revenue
  -if a good has inelastic demand a reduction in price reduce the firms total revenue

Question 10

Factors that cause a shift in the supply curve

Answer 10

-changes to the cost of production
-improvement in technology
-changes to the productivity of factors of production
-indirect taxes and subsidies
-changes to the price of other goods
-number of suppliers

Question 11

Factors that influence price elasticity of supply

Answer 11

-during periods of unemployment supply is more inelastic
-perishable goods have an inelastic supply
-firms have high stock levels often have elastic supply
-mobile factors of production

Question 12

Distinction between short and long run

Answer 12

-the short run is the time period when a firms capacity is fixed one factor of production is fixed
-long run all factors of production are variable in the long run increase capacity

Question 13

What are the conditions of supply

Answer 13

-cost of production
-prices of other goods
-weather
-technology
-goals of the supplier
-goverment legislation
-taxes and subsidies

Question 14

Factors affecting PES

Answer 14

-time
-stock
-working below full capacity
-factor of production
-availablility of substitutes

Question 15

Price mechanism

Answer 15

-rationing function
-signalling function
-incentive function

Question 16

Indirect tax

Answer 16

-ad valoren
-specific tax

Question 17

Alternative view of consumer behaviour

Answer 17

-influences of other people
-influence of habitual behaving out
-consumer weakness