2.1-2.6

Question 1

What is specialisation?

Answer 1

-Occurs when each worker completes a specific task in a production process

Question 2

What are the functions of money?

Answer 2

-Medium of exchange
-A measure of value
-A store of value
- A method of deferred payment

Question 3

Demand: relationship between price and quantity demanded

Answer 3

Downward sloping due to diminishing marginal utility- consumer surplus generally declines with extra units consumed.

Question 4

Explain Individual/ market demand

Answer 4

I- demand curve of an individual or a firm
M- sum of all individual demands in a market

Question 5

Explain Joint/ Competitive and composite demand

Answer 5

> Joint- When goods are bought together e.g. a camera and a memory card
Competitive- Demand for goods which are substitutable e.g. Samsung tv and Sony tv
Composite- When good demanded has more than one use.

Question 6

Draw and explain movements along the demand curve

Answer 6

> At price P1, a quantity of Q1 is demanded. At the lower price of P2, a larger quantity of Q2 is demanded. This is an expansion of demand. At the higher price of P3, a lower quantity of Q3 is demanded. This is a contraction of demand. Only changes in price will cause these movements along the demand curve.

Question 7

Draw and a shift in the demand curve and causes

Answer 7

> P-Population- larger the population, the higher the demand.
I- Income- If consumers have more disposable income, they are able to afford more goods
R- Related goods. Related goods are substitutes- If the price of the substitute falls, the quantity demanded of the original good will fall because consumers will switch to the cheaper option
A- Advertising- will increase consumer loyalty to the good and increase demand.
T- Tastes and fashions- Demand curve will also shift if consumer tastes change. For example, the demand for physical books might fall, if consumers start preferring to read e-books.
E- Expectations- . If speculators expect the price of shares in a company to increase in the future, demand is likely to increase in the present.
S- Seasons. Demand changes according to the season. For example, in the summer, the demand for ice cream.

Question 8

Explain Individual and Market supply

Answer 8

-Individual supply is the supply that a producer is willing and able to sell at a given price in a given period of time.
-Market supply is the sum of all individual supplies in a market.

Question 9

Explain the relationship between price and quantity supplied.

Answer 9

Supply curves are upward sloping because if price increases, it is more profitable for firms to supply the good, so supply increases.

Question 10

Explain joint/ composite/ competitive supply

Answer 10

> Joint supply: This is when increasing the supply of one good causes an increase or decrease in the supply of another good. For example, producing more lamb will increase the supply of wool.
Composite supply: This occurs when a good or service can be obtained from different sources. For example, light can be produced from candles, electricity and gas.
Competitive supply: If the raw materials producing the good in composite supply are perfect substitutes of each other, the sources of supply are in competition to satisfy a particular need or want.

Question 11

Explain/Draw movements along the supply curve

Answer 11

At price P1, a quantity of Q1 is supplied. At the lower price of P2, Q2 is supplied. This is a contraction of supply. If price increases from P2 to P1, QS increases from Q2 to Q1. This is an expansion of supply. Only changes in price will cause these movements along the supply curve.

Question 12

Draw and explain causes of shifts in the supply curve

Answer 12

> P- Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall.

> I- Indirect taxes. Inward shift in supply.

> N- Number of firms. The more firms there are, the larger the supply.

> T- Technology. More advanced the technology causes an outward shift in supply.

> S- Subsidies. Subsidies cause an outward shift in supply.

> W- Weather. This is particularly for agricultural produce. Favourable conditions will increase supply.

> C- Costs of production. If costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward shift in supply. Also, depreciation in the exchange rate will increase the cost of imports, which will cause an inward shift in supply.

Question 13

Explain with the aid of a diagram consumer surplus

Answer 13

-Difference between price the consumer is willing and able to pay and the price they actually pay.
-Shown by the area of the shaded triangle P1XY.
-Inelastic demand curves gives a larger consumer surplus- consumers are willing to pay a higher price to consume the good.

Question 14

Explain with the aid of a diagram producer surplus

Answer 14

• Difference between price producer is willing to charge vs what they actually charge.
• Always the area below the market price and able supply curve- Triangle YXP1.

Question 15

Draw and explain an increase in consumer surplus

Answer 15

• An increase in demand from D1 to D2 increases consumer surplus from PQR to ABC.

Question 16

Draw and explain a decrease in consumer surplus

Answer 16

• Supply has shifted to the left- causes market price to increase and consume surplus to decrease from PQR to ABR

Question 17

Draw and explain increasing producer surplus( 2 diagrams)

Answer 17

• Caused by a right shit in supply from S1 to S2- therefore market price decreases and producer surplus increases.
• Could also be due to an increase in demand which causes price to increase.

Question 18

Draw and explain a decrease in producer surplus

Answer 18

If demand decreases, and the demand curve shifts to the left, producer surplus decreases

Question 19

Draw and explain market equilibrium

Answer 19

• When demand meets supply.
• Market equilibrium price is aka market clearing price- has no tendency to change

Question 20

Draw and explain excess demand

Answer 20

-At Q2, price is P2 which is below market equilibrium, demand is now greater than supply.
-There is now a shortage in the market.

Question 21

Draw and explain excess supply

Answer 21

-This is when price is above P1.
- Supply is now at Q2 and demand is at Q1- there is a surplus of Q2-Q1.

Question 22

Explain Ceteris paribus

Answer 22

-Providing all other conditions remains the same e.g. an increase in VAT, ceteris paribus, means disposable incomes are lower.

Question 23

Draw and explain new market equilibriums

Answer 23

-When the demand or supply curves shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established.

Question 24

Explain elasticity

Answer 24

• How responsive demand or supply is to a change in price

Question 25

Explain/ calcuate with the aid of diagrams PED

Answer 25

-PED is responsiveness of a change in demand to a change in price.
- PED= %change in QD/ %change in price
-Elastic: PED>1
-Inelastic<1
-Unitary= 1
-Perfectly inelastic= 0
-Perfectly elastic- PED= infinity

Question 26

Explain and calculate the relationship PED and total revenue.

Answer 26

-Total revenue is equal to average price times quantity sold. TR= P x Q
>If a good has an inelastic demand, the firm can raise its price, and quantity sold will not fall significantly. This will increase total revenue.
>If a good has an elastic demand and the firm raises its price, quantity sold will fall. This will reduce total revenue.

Question 27

What are the factors influencing PED?

Answer 27

1. Necessity: Necessary good- relatively inelastic
2. Substitutes: Several substitutes- More elastic
3. Addictiveness: Inelastic
4. Proportion of income spent on good: small proportion- relatively elastic
5. Durability of good: Good which lasts a long time- more elastic
6. Peak and off peak demand: during peak times demand is relatively elastic.

Question 28

Explain income elasticity of demand (YED) and factors affecting it

Answer 28

-Responsiveness of a change in demand to a change in income.
-Formula: % change in demand/ % change in income
Factors:
-Nature of the good will determine the income elasticity of demand; i.e whether it is inferior, normal or luxury
-Versatility of the good

Question 29

Explain Inferior, Normal and luxury goods

Answer 29

> Inferior goods are those which see a fall in demand as income increases.YED < 0.

> Normal goods, demand increases as income increases. YED >0.

> Luxury goods, an increase in income causes an even bigger increase in demand. YED >1

• Firms will make use of income elasticity of demand by producing more luxury goods during periods of economic growth.
  In a recession with falling incomes, supermarkets might be advised to promote more ‘value’ inferior goods.

Question 30

Explain and calculate XED- Cross elasticity of demand.

Answer 30

-Responsiveness of a change in demand of one good, X, to a change in price of another good, Y.
-%Change in QD in good A / % change in price of good B.

Question 31

Explain factors affecting XED with diagrams (C-goods)

Answer 31

> Type of good will affect cross price elasticity.

1. Complementary goods have a negative XED. If one good becomes more expensive, the quantity demanded for both goods will fall.

o Close complements: a small fall in the price of good X leads to a large increase in QD of Y.
DIAGRAM

oWeak complements: a large fall in the price of good X leads to only a small increase in QD of Y.
DIAGRAM

Question 32

Explain factors affecting XED with diagrams (S)

Answer 32

-Substitutes can replace another good, so the XED is positive and the demand curve is upward sloping.

o Close substitutes: a small increase in the price of good X leads to a large increase in QD of Y.
DIAGRAM.

o Weak substitutes: a large increase in the price of good X leads to a smaller increase in QD of Y.
DIAGRAM

Question 33

Explain factors affecting XED with diagrams (U)

Answer 33

Unrelated goods have a XED equal to zero. For example, the price of a bus journey has no effect on the demand for tables.

Question 34

Explain and Calculate PES (Draw diagrams for each value)

Answer 34

> Price elasticity of supply is the responsiveness of a change in supply to a change in price.
Formula: % change is QS/ % change in P.

-Elastic: PES> 1-Firms can increase supply quickly at little cost.

-Inelastic: PES<1- Increase in supply will be expensive for firms and take a long time.

-Perfectly Inelastic: PES=0- Supply is fixed , so if there is a changed in demand, it cannot be met easily.

-Perfectly inelastic: PES= Infinity- Any QD can be met w/o changing price.

Question 35

Explain factors influencing PES.

Answer 35

> Time scale: In the short run, supply is more price inelastic, because producers cannot quickly increase supply.
Spare capacity: If the firm is operating at full capacity, there is no space left to increase supply. If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly.
Level of stocks: If goods can be stored, firms can stock them and increase market supply easily. If the goods are perishable, firms cannot stock them for long so supply is more inelastic.
How substitutable factors are:
If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed.
Barriers to entry to the market: Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market.