HOW MARKETS WORK EDEXCEL A LEVEL ECONOMICS #7
Rational decision making - correct answer describes choices that are logical and
consistent and maximize value (consumers want to maximize utility and producers want
to maximize profit)
Utility - correct answer ability or capacity of a good or service to be useful and give
satisfaction to someone.
Demand - correct answer the quantity of a good or service that consumers are willing
and able to buy at any given price in a given time period
Law of demand - correct answer quantity demanded varies inversely with price
Extension of demand - correct answer the increase in quantity demanded due to a fall in
price
Contraction of demand - correct answer the fall in the quantity demanded due to a rise
in price
The income effect - correct answer the change in consumption that results when a price
increase causes real income to decline
Consumers can buy less with a given budget
The substitution effect - correct answer the change in the quantity demanded of a good
that results from a change in price, making the good more or less expensive relative to
other goods that are substitutes ( depends on closeness of substitutes )
Shifting the demand curve - correct answer things that determine buyers' demand for a
good, other than the good's price (non-price determinants) (shift right=increase; shift
left=decrease)
Conditions of demand - correct answer changes in income
Fashion/tastes/preferences
Advertising and branding
Population size/demographic change
External shocks
Seasonality
Market expectations
Price of complements
Price of substitutes
Marginal utility - correct answer the extra usefulness or satisfaction a person gets from
acquiring or using one more unit of a product, customers are willing to pay a price less
than or equal to their marginal utility
, Diminishing marginal utility - correct answer the principle that our additional satisfaction,
or our marginal utility, tends to go down as more and more units are consumed, the
additional satisfaction obtained from the consumption of the next unit will go down as
we consume more units
Derived demand - correct answer demand for a good when it is required in the making
of another
Veblen goods - correct answer are goods that have snob value and are bought to
display wealth rather than utility. Their demand curve slopes upwards from left to right,
as the higher the price the greater the quantity demanded, reverse economic logic,
more expensive they are the more effectively they claim their status
Supply - correct answer quantity that producers are willing and able to sell at any given
price in a given time period
Law of supply - correct answer supply has a direct relationship with price because the
higher the price the more opportunity for profit
Extension of supply - correct answer when there is an increase in supply because the
market price has risen.
Contraction of supply - correct answer when the amount offered for sale is reduced
because the price level has fallen.
Shifting the supply curve - correct answer non-price determinants shift the supply curve
(shift right=increase; shift left=decrease)
Conditions of supply - correct answer cost of production
External shock
New technology
Indirect taxes (increases cost of production)
Subsidies
Equlibrium price - correct answer the quantity consumers are willing and able to buy is
exactly equal to the quantity firms are willing and able to sell. Here there is no excess
supply causing surplus and no excess demand causing shortage
When market price is above equilibrium price - correct answer producers supply more
and consumers demand less so there is a surplus, market price will fall. There will be a
contraction of supply and extension of demand until equilibrium price and quantity is
reached
When market price is below equilibrium price - correct answer consumers demand more
and producers supply less so there is a shortage, which causes the market price to rise.
Rational decision making - correct answer describes choices that are logical and
consistent and maximize value (consumers want to maximize utility and producers want
to maximize profit)
Utility - correct answer ability or capacity of a good or service to be useful and give
satisfaction to someone.
Demand - correct answer the quantity of a good or service that consumers are willing
and able to buy at any given price in a given time period
Law of demand - correct answer quantity demanded varies inversely with price
Extension of demand - correct answer the increase in quantity demanded due to a fall in
price
Contraction of demand - correct answer the fall in the quantity demanded due to a rise
in price
The income effect - correct answer the change in consumption that results when a price
increase causes real income to decline
Consumers can buy less with a given budget
The substitution effect - correct answer the change in the quantity demanded of a good
that results from a change in price, making the good more or less expensive relative to
other goods that are substitutes ( depends on closeness of substitutes )
Shifting the demand curve - correct answer things that determine buyers' demand for a
good, other than the good's price (non-price determinants) (shift right=increase; shift
left=decrease)
Conditions of demand - correct answer changes in income
Fashion/tastes/preferences
Advertising and branding
Population size/demographic change
External shocks
Seasonality
Market expectations
Price of complements
Price of substitutes
Marginal utility - correct answer the extra usefulness or satisfaction a person gets from
acquiring or using one more unit of a product, customers are willing to pay a price less
than or equal to their marginal utility
, Diminishing marginal utility - correct answer the principle that our additional satisfaction,
or our marginal utility, tends to go down as more and more units are consumed, the
additional satisfaction obtained from the consumption of the next unit will go down as
we consume more units
Derived demand - correct answer demand for a good when it is required in the making
of another
Veblen goods - correct answer are goods that have snob value and are bought to
display wealth rather than utility. Their demand curve slopes upwards from left to right,
as the higher the price the greater the quantity demanded, reverse economic logic,
more expensive they are the more effectively they claim their status
Supply - correct answer quantity that producers are willing and able to sell at any given
price in a given time period
Law of supply - correct answer supply has a direct relationship with price because the
higher the price the more opportunity for profit
Extension of supply - correct answer when there is an increase in supply because the
market price has risen.
Contraction of supply - correct answer when the amount offered for sale is reduced
because the price level has fallen.
Shifting the supply curve - correct answer non-price determinants shift the supply curve
(shift right=increase; shift left=decrease)
Conditions of supply - correct answer cost of production
External shock
New technology
Indirect taxes (increases cost of production)
Subsidies
Equlibrium price - correct answer the quantity consumers are willing and able to buy is
exactly equal to the quantity firms are willing and able to sell. Here there is no excess
supply causing surplus and no excess demand causing shortage
When market price is above equilibrium price - correct answer producers supply more
and consumers demand less so there is a surplus, market price will fall. There will be a
contraction of supply and extension of demand until equilibrium price and quantity is
reached
When market price is below equilibrium price - correct answer consumers demand more
and producers supply less so there is a shortage, which causes the market price to rise.
