Theme 1 Micro - 1.2.2- 1.2.4

Question 1

Consumer goods and services

Answer 1

satisfy our needs and wants directly There is a sub-division between:
Consumer durables: Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine
Consumer non-durables: Products that are used up in the act of consumption e.g. drinking a coffee or turning on the heating)
iii) Consumer services: E.g. a hair cut or ticket

Question 2

Demand

Answer 2

Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Question 3

Demand curve

Answer 3

A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls.

Question 4

Diminishing marginal utility

Answer 4

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 fall.

Question 5

Effective demand

Answer 5

Demand in economics must be effective. Only when a consumers’ desire to buy a product is backed up by an ability to pay for it do we speak of demand.

Question 6

Excess demand

Answer 6

The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price —> an upward pressure on price.

Question 7

Law of demand

Answer 7

an inverse relationship between the price of a good and demand. As prices fall, we see an expansion of demand. If price rises, there should be a contraction of demand.

Question 8

Perverse demand curve

Answer 8

slopes upwards from left to right. Therefore, an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations.

Question 9

Willingness to pay

Answer 9

The maximum price a consumer is prepared pay to obtain a product.

Question 10

Complements

Answer 10

Two complements are said to be in joint demand. Examples include fish and chips, iron ore and steel, hardware and software for digital products.

Question 11

Cross price elasticity of demand

Answer 11

Responsiveness of demand for good X following a change in the price of good Y (a related good) —> important distinction between substitute products and complementary goods and services.

Question 12

Derived demand

Answer 12

Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make.
Low demand for good = low demand for machinery.

Question 13

Elastic demand

Answer 13

Demand for which the coefficient of price elasticity of demand is greater than 1.

Question 14

Income elasticity of demand

Answer 14

Measures the relationship between a change in quantity demanded and a change in real income.
Formula = % in quantity demand/% change in income.

Question 15

Inelastic demand

Answer 15

When the coefficient of price elasticity of demand is less than 1.

Question 16

Inferior good

Answer 16

When demand for a product falls as real incomes increases. Income elasticity is negative.

Question 17

Luxury good

Answer 17

Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4.

Question 18

Necessities

Answer 18

Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but <+1). Examples might include milk.

Question 19

Normal goods

Answer 19

Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.

Question 20

Price elasticity of demand

Answer 20

Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price.

Question 21

Real income

Answer 21

The money earned from employment after the distorting effects of inflation have been removed.

Question 22

Substitutes

Answer 22

Goods in competitive demand that act as replacements for another product.

Question 23

Total revenue

Answer 23

The amount of money earned by a firm from selling its output. TR = P X Q

Question 24

Unit elasticity of demand

Answer 24

A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending

Question 25

Unrelated goods

Answer 25

Goods or services that have no relationship between them in which case the cross- price elasticity of demand will be zero.

Question 26

Competitive supply

Answer 26

Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots.

Question 27

Excess supply

Answer 27

When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.

Question 28

Law of supply

Answer 28

positive relationship between the price of a good and supply. As prices rise, we see an expansion of supply. If price fall, there should be a contraction of supply.

Question 29

Market supply

Answer 29

total amount of an item producers are willing and able to sell at different prices, over a given period of time e.g. one month. Industry, a market supply curve is the horizontal summation of all each individual firm’s supply curves.

Question 30

Supply

Answer 30

Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Question 31

Supply chain

Answer 31

Different stages of making, distributing and selling a good or service from the production of parts, through to distribution and sale of the product.

Question 32

Supply curve

Answer 32

The relationship between market price and quantity supplied onto the market.

Question 33

Supply curve

Answer 33

The relationship between market price and quantity supplied onto the market.