economics points test 2

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beckyscottxox
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economics points test 2
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2013-11-02 14:19:26
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Economics points test 2
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  1. Explain the difference between effective demand notional demand.
    Notional demand for a good/service which is not backed up by an ability to pay. E.g. buying a house. Effective demand is the demand for a good/service which is backed up by payment. E.g. m&m's.
  2. Define the term market.
    A market is where buyers and sellers meet to trade or exchange products/services at the prevailing market prices.
  3. What does ceteris paribus mean?
    Latin phrase meaning 'all other things being equal'
  4. State the first law of demand.
    Is that, all other things remaining constant, a greater quality will be supplied at a higher price. The reason for this is that at a higher quantity, increased costs can be incurred. Suppliers will need a higher price to persuade them to increase their production, if they are to make a profit on the extra production.
  5. What is the formula for calculating total revenue?
    Total revenue = price x quantity demanded.
  6. An increase in price of a good or service will lead to what change in the quantity demanded?
    Contraction along the demand curve.
  7. Define the concept of consumer surplus.
    Consumer surplus can be defined as the difference between the price which a consumer is willing to pay and the actual price charged for the last unit sold.
  8. Draw a diagram to illustrate consumer surplus.
  9. How can consumer surplus be reduced?
    Decrease in price.
  10. What will a change in the conditions of demand result in?
    It will result in either a shift to the left which represents a decrease in demand. Or a shift to the right which represents an increase in demand.
  11. What do you understand by the term inferior good?
    Inferior goods are goods whereas income increases demand for the good decreases. There is an inverse of negative relationship between income and demand. E.g. asda smart price beans
  12. Describe the relationship between income and demand for a normal good.
    There is a positive relationship between income and demand. As income increases demand for the product also increases.
  13. List four factors which would cause a change in the conditions of demand.
    Price of substitute, price of compliments, income and credit.
  14. Define supply.
    Supply can be defined as the quantity of a product that suppliers are willing and able to sell at various prices per period of time, ceteris paribus.
  15. Define the relationship between price and quantity supplied.
    As the price increases, so does the quantity supplied. This shows a positive relationship between price and quantity supplied, as one increases so does the other.
  16. Define producer surplus.
    Producer surplus can be defined as the difference between the price which a producer is willing and able to supply goods for and the actual price charged for the last unit sold. This represents surplus earnings for the firm.
  17. Illustrate producer surplus graphically.
  18. How can producer surplus be reduced?
    Increase in price.
  19. List 5 factors which would result in a change in the conditions of supply.
    The government providing less amount of subsidies to businesses, an increase of taxes which means an increase in costs, an advancement in technology, the weather and the law.
  20. What would cause an extension in supply?
    An increase in price.
  21. Draw a fully labelled diagram to illustrate, equilibrium price, equilibrium quantity and the equilibrium point.
  22. Draw a fully labelled diagram to illustrate both a surplus and a shortage.
  23. Draw a diagram to illustrate what would happen to the equilibrium price and quantity if a firm's costs increased.
  24. Define price elasticity of demand.
    is a numerical measure of the responsiveness of demand for one product following a change in the price of that product alone.
  25. What formula should be used to calculate PED?
    & change in the quantity demanded / % change in the price of that product
  26. List 5 factors which determine the elasticity of demand for a product.
    The % of income spent on the product, needs or wants, existence of substitutes, branded goods, width of definition and time.
  27. Elasticity values?
    • 0 - Perfectly inelastic
    • >0 & <1 - relatively inelastic
    • 1 - unitary elastic
    • >1 - relatively elasticĀ 
    • infinity - perfectly elastic
  28. Draw a diagram to illustrate what would happen to total revenue if a firm faced with a relatively inelastic demand curve decided to increase price.
  29. Draw a diagram to illustrate what would happen to total revenue if a firm faced with a relatively elastic demand curve decided to decrease price.
  30. Define income elasticity of demand.
    Is defined as a numerical measure of the responsiveness of demand following a change in income alone.
  31. What formula should be used to calculate YED?
    & change in quantity demanded / & change in income.
  32. What does the answer tell us?
  33. If there is an inverse relationship between income and the quantity demanded what does this tell us about the good concerned?
    That the goods are compliments.
  34. What are complementary goods?
    Those goods which are used together in order to enhance the consumer utility. E.g. mash and bangers
  35. What are substitute goods?
    Those goods which are used in place of another and satisfy thee same consumer needs/wants. E.g. 7up and sprite.
  36. Define cross elasticity of demand.
    Is a numerical measure of the responsiveness of demand for one product following a change in the price of a related product.
  37. What formula is used to calculate cross elasticity of demand?
    % change in the quantity demand of good A / % change in the price of good B
  38. List 5 factors which determine price elasticity of supply.
    Time, factor mobility, natural constraints or the length of the production process, the number of firms within the industry, ease of holding stocks and the existence of spare capacity.
  39. If PES is greater than 0 but less than 1, how would it be described?
    Relatively inelastic supply.
  40. Explain 2 reasons a business might find a PED calculation useful.
    How a change in price will effect quantity demanded and the effect of a change in price on the total revenue and expenditure on a product.

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