Theme 1- How the market works (key terms)

Question 1

Normal goods

Answer 1

When incomes increases, demand for these good goes up

Question 2

Inferior goods

Answer 2

When incomes increase, demand for these goods falls

Question 3

XED

Answer 3

%QD Good B / %P Good A

Question 4

YED

Answer 4

% QD / %Y

Question 5

Substitute goods

Answer 5

These are goods that are very similar
Substitutes have a positive XED

Question 6

Complementary goods

Answer 6

These are goods that go together well or are used together
Complements have a negative XED

Question 7

Supply PINTSWC

Answer 7

The amount of a product which suppliers will offer to the market at a given price
Productivity, indirect taxes, number of firms, technology, subsidies, weather, cost of production

Question 8

Utility

Answer 8

Satisfaction that consumers get from the goods and services that they buy

Question 9

Diminishing marginal utility

Answer 9

Marginal utility is the change in satisfaction from consuming an extra unit of a good or service
- Beyond a certain point, marginal utility may start to fall (diminish). If marginal utility becomes negative, then consuming an extra unit will cause total utility to fal;

Question 10

Demand

Answer 10

The amount of a product that consumers are willing and able to purchase at any given price

Question 11

Perverse demand curve

Answer 11

One which slopes upwards from left to right - an increase in price leads to an increase in demand
- This may happen where goods are strongly affected by price expectation

Question 12

Market incentives

Answer 12

Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency

Question 13

PASIFIC

Answer 13

Non-price factors that influence demand
Population, advertising, substitutes, income, fashion trends, income tax, complements

Question 14

PED

Answer 14

%QD / %P - PED value is always negative

Question 15

PED < 1

Answer 15

Price inelastic - a change in price results in a proportionately smaller change in demand

Question 16

PED > 1

Answer 16

Price elastic - a change in price results in a greater change in demand

Question 17

Factors influencing PED

Answer 17

S.P.L.A.T
- Availability of Substitutes
- Price of product as a Proportion of income
- Luxury or necessity goods
- Addictiveness of the product (habitual goods)
- Time period

Question 18

Factors influencing YED

Answer 18

Necessities (basic goods that a customer needs to buy) & Luxury (goods that customers like to buy if they can afford to)

Question 19

Price mechanism

Answer 19

This refers to the way in which prices respond to changes in supply or demand, so that a new equilibrium is reached and the market clears

Question 20

PES

Answer 20

% QS / %P - PES value is always positive

Question 21

Equilibrium

Answer 21

When supply is equal to demand

Question 22

Total revenue

Answer 22

price x quantity sold

Question 23

Excess demand

Answer 23

Occurs when the demand is greater than the supply
It can occur when prices are too low or when demand is so high that supply cannot keep up

Question 24

Excess supply

Answer 24

The quantity of a good or service that is being offered for sale exceeds the quantity that is being demanded by consumers at the current price
Occurs when prices are too high or when demand falls unexpectedly

Question 25

Disequilibrium

Answer 25

Prices where demand and supply are out of balance are points of disequilibrium - there is either excess demand (market prices too low) or excess supply (market prices too high

Question 26

Consumer surplus

Answer 26

The extra amount of money consumers are prepared to pay for a good, above what they actually pay

Question 27

Producer surplus

Answer 27

Measured as the difference between what producers are willing and able to supply a good for and the price they actually receive

Question 28

Direct tax

Answer 28

A tax that is paid straight from your income

Question 29

Indirect tax

Answer 29

A tax imposed by the government on the value of goods and services

Question 30

Demerit goods

Answer 30

Goods which have harmful impacts on society/consumers

Question 31

Ad valorem tax

Answer 31

A tax that is a percentage of the purchase price e.g. VAT

Question 32

Excise duties

Answer 32

Indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance

Question 33

Specific/ unit tax

Answer 33

A fixed tax per unit of output

Question 34

Tax incidence

Answer 34

The share/burden of the total tax to be paid

Question 35

Subsidy

Answer 35

A grant given by the government to firms to encourage consumption or production

Question 36

Reasons for irrational behaviour

Answer 36

• Influence of others
• Habitual behaviour
• Computational problems
• Inertia

Question 37

Computational weakness

Answer 37

Irrationality arises when consumer’s decisions are dominated by computational weakness
- Occurs when consumers find it difficult to calculate the probability of something happening when they make purchasing decisions e.g. people may underestimate the long-term health consequences of eating processed meats

Question 38

Law of diminishing marginal returns

Answer 38

It states that employing an additional factor of production will eventually cause a relatively smaller increase in output

Question 39

Price level

Answer 39

Price level refers to the weighted average price of goods and services produced in an economy

Question 40

Spare capacity

Answer 40

Under-utilisation of the factors of production so there is room to increase output