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Questions and Answers
What does a shift to the right in the demand curve indicate?
What does a shift to the right in the demand curve indicate?
Which factor is NOT part of the conditions of demand represented by the mnemonic PIRATES?
Which factor is NOT part of the conditions of demand represented by the mnemonic PIRATES?
If the price of a substitute good increases, what is likely to happen to the demand for the other substitute?
If the price of a substitute good increases, what is likely to happen to the demand for the other substitute?
In what scenario would an increase in income result in a decrease in demand?
In what scenario would an increase in income result in a decrease in demand?
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What effect might a successful advertising campaign have on a firm's demand?
What effect might a successful advertising campaign have on a firm's demand?
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If the population of a country significantly increases, what can be expected regarding the demand for goods?
If the population of a country significantly increases, what can be expected regarding the demand for goods?
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What happens to the demand curve for DVDs if the price of DVD players decreases?
What happens to the demand curve for DVDs if the price of DVD players decreases?
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What is the primary goal of firms in a market according to economic theory?
What is the primary goal of firms in a market according to economic theory?
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Which of the following best describes the concept of cross elasticity of demand?
Which of the following best describes the concept of cross elasticity of demand?
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What does a movement along the demand curve indicate?
What does a movement along the demand curve indicate?
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What defines the term 'demand' in economic terms?
What defines the term 'demand' in economic terms?
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When the demand curve shifts from D1 to D2, what does it indicate?
When the demand curve shifts from D1 to D2, what does it indicate?
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What is the term used for the rational consumer who makes decisions to maximize utility?
What is the term used for the rational consumer who makes decisions to maximize utility?
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According to behavioral economists, what is a challenge to the traditional view of rational decision making?
According to behavioral economists, what is a challenge to the traditional view of rational decision making?
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A contraction in demand occurs due to what factor?
A contraction in demand occurs due to what factor?
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What does an extension in demand mean?
What does an extension in demand mean?
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What effect does a successful advertising campaign by Tesco have on its demand compared to Asda?
What effect does a successful advertising campaign by Tesco have on its demand compared to Asda?
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How does government legislation affect demand for car seats?
How does government legislation affect demand for car seats?
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What is the primary reason for the downward slope of the demand curve?
What is the primary reason for the downward slope of the demand curve?
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What happens to demand when consumers expect a future decrease in prices?
What happens to demand when consumers expect a future decrease in prices?
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In relation to seasonal demand, what effect does a hot summer have on sun cream?
In relation to seasonal demand, what effect does a hot summer have on sun cream?
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What does total utility represent in consumer behavior?
What does total utility represent in consumer behavior?
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What is indicated by the law of diminishing marginal utility?
What is indicated by the law of diminishing marginal utility?
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If a product becomes fashionable, what is the expected impact on its demand?
If a product becomes fashionable, what is the expected impact on its demand?
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What does a price elasticity of demand (PED) value of 1 indicate?
What does a price elasticity of demand (PED) value of 1 indicate?
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If the price of good A increases and the quantity demanded for good B decreases, what type of relationship do goods A and B have?
If the price of good A increases and the quantity demanded for good B decreases, what type of relationship do goods A and B have?
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Which of the following would likely have a price elasticity of demand (PED) less than one?
Which of the following would likely have a price elasticity of demand (PED) less than one?
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How is cross elasticity of demand (XED) calculated?
How is cross elasticity of demand (XED) calculated?
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What is the significance of income elasticity of demand (YED) for businesses?
What is the significance of income elasticity of demand (YED) for businesses?
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If a product has a PED of -2, how is consumer behavior likely to react to a price increase?
If a product has a PED of -2, how is consumer behavior likely to react to a price increase?
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Which of the following statements about inelastic demand is true?
Which of the following statements about inelastic demand is true?
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Which best describes a product with a YED greater than 1?
Which best describes a product with a YED greater than 1?
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Study Notes
Rational Decision Making
- Homo Economicus: The rational consumer that aims to maximize utility.
- Utility: The satisfaction derived from the consumption of a product.
- Firms maximize profits: Firms are run for their owners and aim to maximize profit to keep shareholders happy.
- Governments maximize social welfare: Governments work for the public and aim to maximize their satisfaction by increasing social welfare.
Demand
- Demand: Ability and willingness to buy a particular good at a given price and time.
- Movements along the demand curve: Changes in price cause movements along the demand curve. Increase in price = contraction in demand, decrease in price = extension in demand.
- Shifts of the demand curve: Changes in conditions of demand, also known as factors affecting demand, cause a shift in the demand curve.
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Conditions of demand: Factors impacting demand shifts (PIRATES mnemonic)
- Population: Increase in population = increase in demand
- Income: Increase in income = increase in demand for most goods
- Related goods: Complements and substitutes impact demand.
- Advertising: Effective advertising can increase demand.
- Taste/Fashion: Changing fashion = changing demand
- Expectations: Expectations of shortages or price changes can influence demand
- Seasons: Seasonal products have fluctuating demand based on weather conditions.
- Government Legislation: Legal requirements can affect demand, e.g., mandatory car seats.
Diminishing Marginal Utility
- Law of Diminishing Marginal Utility: Marginal utility decreases as more of a good is consumed, assuming consumption of other goods remains constant.
- Total Utility: Total satisfaction gained from the overall consumption of a good.
- Marginal Utility: Change in satisfaction from consuming one additional unit of a good.
Elasticities of Demand
- Elasticity of Demand: Measures responsiveness of quantity demanded to changes in other variables.
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Price Elasticity of Demand (PED): Responsiveness of demand to changes in the price of the good.
- PED Calculation: % change in quantity demanded / % change in price
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Numerical Values:
- Unitary Elastic (PED = 1): Quantity demanded changes by the same percentage as price.
- Relatively Elastic (PED > 1): Quantity demanded changes by a larger percentage than price, indicating responsiveness to price changes.
- Relatively Inelastic (PED < 1): Quantity demanded changes by less percentage than price, meaning demand is less responsive to price changes.
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Income Elasticity of Demand (YED): Responsiveness of demand to changes in income.
- YED Calculation: % change in quantity demanded / % change in income.
- Significance: Helps firms understand how sales are affected by changes in consumer income.
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Cross Elasticity of Demand (XED): Responsiveness of demand for one good to price changes of another good.
- XED Calculation: % change in quantity demanded of good A / % change in price of good B.
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Description
This quiz explores the concepts of rational decision making, utility maximization, and demand dynamics. It covers the roles of consumers, firms, and governments in economic decisions and how various factors influence demand. Test your understanding of these fundamental economic principles.
