UDSE

Question 1

State and explain the characteristics of economic goods.

Answer 1

Price - An economic good is relatively scarce in supply in relation to demand

Utility - economic goods provide the user with some form of pleasure/benefit/satisfaction.

Transferable - Ownership of an economic good must be capable of being passed from one person to another.

Question 2

State and explain the assumptions governing consumer behaviour-

Answer 2

The consumer has a limited income - a consumer does not possess the resources/income to satisfy all their wants. Thus the consumer must choose between the items they wish to buy.

The consumer aims to get maximum satisfaction/utility from that income - The consumer aims for the best value for money/ satisfaction. Consumers obey the equi-marginal principle of consumer behaviour.

The consumer acts rationally - Consumers act in a manner that is consistent with their preferences. If they see an identical items priced in two shops, they will purchase it at the cheaper price.

The consumer is subject to the law of diminishing marginal utility- as a person consumes additional units of a good/service eventually a point is reached where their marginal utility would begin to fall/diminish.

Question 3

Outline the assumptions underlying the law of diminishing marginal utility-

Answer 3

Only applied after the origin- the origin is the minimum quantity of a commodity that must be used in order to render it effective and until this point is reached marginal utility may not decline.

Time has not elapsed - we assume that additional units are consumed consecutively. If this is not the case and there is a gap in time, the marginal utility may not in fact decline.

No change in income- if income rises or falls the marginal utility may not fall as consumption increases

Does not apply to addictive goods - With addictive goods a person gets increased marginal utility from each additional unit.

Question 4

State two commodities that don’t obey the law of diminishing marginal utility and explain the reason why-

Answer 4

Medicine- the second dose may provide more be fit than the first dose.

Unique collection - each item gives increased marginal utility/ satisfaction.

Question 5

Explain the equi-marginal principle of consumer behaviour-

Answer 5

Equi-Marginal principle of consumer behaviour - To maximise utility a person must spend their income in such a way that the ratio of marginal utility to price is the same for all the goods they consume.

Question 6

Explain the factors the affect price elasticity of demand.

Answer 6

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Availability of close substitutes - If a good has a number of close substitutes, demand for the good will be relatively elastic in response to a change in its own price.

Complementary goods - For goods that are in joint demand, demand for the expensive of the two goods is relatively elastic. But demand for the cheaper of the two goods is relatively inelastic.

Durability of the good - For durable goods, demand is relatively elastic in response to a change in its own price. This is because consumers can extend the life of an existing model.

Whether the good is a luxury or a necesitee - It is not vital that people possess luxury goods. Thus demand for luxury goods is relatively elastic in response to a change in its own price. Necessities are vital to survival and therefore relatively inelastic in response to a change in its own price.

Percentage of income spent on a good - The greater the proportion of a persons income that is spent upon a good, the more elastic will be demand in response to a change in its own price..

Number of alternative uses - If a commodity is used in many different markets e.g sugar, demand in each individual market may be relatively inelastic but overall the change in demand will be relatively elastic in response to a change in its own price.

Question 7

What is the law of demand

Answer 7

Law of demand - As the price of a good or service increases, the quantity demanded falls and vice versa.

Question 8

Explain 4 exceptions to the law of demand

Answer 8

Snob goods - these goods derive their appeal from their exclusive price. Thus as the price of a snob good increases so too will quantity demanded.

Giffen goods - these goods form the bulk of expenditure of low income families. As the price of these goods fall so too does quantity demanded as the family switched to more nutritional food such as meat.

Goods that are subject to expectations- when the price of property increases so too does quantity demanded as there is an expectation of further price increases and the prospect of profits.

Addictive goods - when the price of drugs or alcohol increases so too does quantity demanded as the individual is no longer acting rationally.

Question 9

Explain the economic rational as to why the demand curve for normal goods is downward sloping

Answer 9

Equi-marginal principle of consumer behaviour - As the price of a normals good falls, the consumer gets an increased marginal utility and so buys more of this good to restore equilibrium.

Question 10

State and explain the factors which affect a consumers demand schedule other than the price of the good itself.

Answer 10

Change in the price of other goods - an increase in the price of a substitute good will result in an increase in demand while an increase in the price of a complimentary good will result in a fall in demand.

Change in income- for the majority of goods(normal goods) an increase in income will result in an increase in demand.

Change in taste - As a good/service becomes popular fashionable, demand will increase

Unplanned factors - sudden unplanned factors can have a huge impact on demand. An unexpected heatwave increases the demand for sunscreen products.

Expectations - if consumers believe that future prices will be higher than present prices then demand will increase

Government regulations - If the government initiates a program to curtail consumption of a commodity e.g media campaign to reduce smoking, then demand will fall.

Question 11

Distinguish between the terms effective demand and derived demand

Answer 11

Effective demand - this is demand backed up by the necessary purchasing power.

Derived demand - factors of production are demanded for their contribution to the production process rather than for direct utility’s

Question 12

Distinguish between the economic meanings of a “movement along a demand curve” and a “shift in a demand curve”

Answer 12

Movement along a demand curve - This results from a change in price of that particular good or service, Ceteris paribus

Shift in a demand curve - This is brought about by a change in any of the factors that affect demand other than the price of the good itself.

Question 13

Normal good -
Inferior good -
Giffen good -

Answer 13

Normal good - has a positive substitution effect for a price reduction. Has a positive income effect. Normal goods obey the law of demand

Inferior God - has a positive substitution effect for a price reduction. Has a negative income effect. Inferior goods do not obey the law of demand

Giffen goods - have a positive substitution effect for a price reduction. Has a negative income effect. Giffen goods do not obey the law of demand.

Question 14

Income effect-

Answer 14

Income effect -A fall in the price of a consumer product results in an increase in real income

Question 15

Explain substitution effect-

Answer 15

Substitution effect- a consumer buys more of the cheaper good in order to maximise utility.

Question 16

Outline 5 factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve.

Answer 16

Cost of production - If there is an increase in the cost of inputs, a firm will not be able to supply the same volume. As a result supply will fall, shifting the supply curve inwards to the left.

State of firms production technology - As a firms workers become more specialised and/or the firm invests in more advanced technology supply will increase. The will force the supply curve outwards to the right.

Unplanned factors - There may be changed in quantity supplied which were unintended and outside the suppliers control. A problem with suppliers would cause supply to fall, forcing the supply curve inwards to the left.

Taxation/subsidies - An increase in VAT on materials used would increase a firms cost of production, resulting in a fall in supply. This would shift the supply curve inwards to the left.
The granting of a subsidy would reduce a firms cost of production. This would increase supply, forcing the supply curve outwards to the right.

Objectives of the firms - if the objectives of the firm change from profit maximisation to deliberate reduction in output, then supply would fall, shifting the supply curve inwards to the left.

Question 17

Define the economic terms : individual(consumer) demand; market demand

Answer 17

Individual demand - This shows the different quantities a consumer is willing to buy at different prices.

Market demand - This shows the total quantity demanded by all consumers at different prices.

Question 18

Explain the relationship between individual (consumer demand) and market demand

Answer 18

• To derive market demand we add the quantity demanded by each consumer at each price to get the overall quantity demanded by the market at each price.

Question 19

Explain the relationship between individual(firm) supply and market supply.

Answer 19

• To derive market supply we add the quantity that each firm is willing to supply at each price to get the overall quantity supplied by all firms to the market at each price.

Question 20

Define the economic terms :
Individual (firm supply);
Market supply

Answer 20

Individual supply - This shows the different quantities an individual firm is willing to supply at different prices.

Market supply - This shows the total quantity that all firms are willing to supply at different prices.

Question 21

Define what is means by price elasticity of demand.

Answer 21

PED - This measure the percentage change in quantity demanded of a good to a percentage change in its own price.

Question 22

Define the following types of price elasticity of demand:
Perfect elastic demand
Perfect inelastic demand
Elastic demand
Unitary elastic demand
Inelastic demand

Answer 22

Perfect elastic demand - PED = infinity. This means the producer can sell as much of the commodity as they want at the prevailing price. But if they increase price quantity demanded falls to zero.

Perfect inelastic demand - PED = 0. This means a change in price does not result in a change in quantity demanded.

Elastic demand - PED > 1. This means the percentage change in quantity demanded of a good is greater than the percentage change in price.

Unitary elastic demand - PED = 1. This means the percentage change in quantity demanded is identical to the percentage change in price.

Inelastic demand - PED

Question 23

Describe the factors that affect price elasticity of supply.

Answer 23

Cat Caught Ur Tongue Man

Capacity - If a firm is operating at less than full capacity, the supply will be relatively elastic to an increase in price.

Cost of production - Supply will be relatively elastic to an increase in price as long as the firm does not incur a big increase in its cost of production.

Unplanned Factors - Unexpected problems with suppliers and/or a striker by staff would result in supply being relatively inelastic in response to an increase in price.

Time period - It takes time for circumstances to change/adjustment to happen. As a result supply tends to be relatively inelastic in the short run but relatively elastic in the long run in response to an increase in price.

Mobility of the factors of production - If a firm is using specialised labour and capital goods the supply will be relatively inelastic in response to an increase in price.

Question 24

Define each of the following types/degrees of price elasticity of supply

1. Elastic supply
2. Inelastic supply
3. Unitary elastic supply
4. Perfectly elastic supply
5. Perfectly inelastic supply

Answer 24

Elastic supply - This is a good with PES > 1. This means the percentage change in quantity supplied is greater than the percentage change in price.

Inelastic supply - This a good with a PES

Question 25

i) Define income elasticity of demand
ii) “Income elasticity of demand is usually positive but sometimes negative”. Explain giving examples the meaning of this statement.

Answer 25

i) YED - This measures the percentage change in quantity demanded of a good to a percentage change in a persons’ income.
ii) Normal goods - Majority of goods are normal goods and these have a positive YED. i.e as income increases so too will quantity demanded and vice versa e.g cars, electronic goods etc

Inferior goods - Some goods are inferior goods and these have a negative YED. i.e as income increases quantity demanded falls and vice versa e.g supermarket own brand products.

Question 26

Define cross elasticity of demand

Answer 26

CED - This measures the percentage change in the quantity demanded of one good to a percentage change in the price of another good.

Question 27

Define market equilibrium

Answer 27

Market equilibrium - This occurs where market demand intersects market supply. It means there is no tendency for price to change.