7. Economical Factors

Question 1

Define economics, micro and macro

Answer 1

Economics - study of wealth creation

Micro-analyze effects of supply/demand decision of individuals on prices

Macro-focus how economy works as a whole (AD, National output)

Question 2

Individual vs market demand

Answer 2

Individual - how much I buy at specific price?

Market - shows total demand for all consumers

Question 3

Expansion vs contraction

Demand-price relation is result of_____ (2)

Answer 3

Expansion- demand up & price fall
Contraction-demand fall & price rise

•substitution effect
•income

Question 4

What are conditions of demand ?

Answer 4

Income
Tastes
Price of other goods(car-tyres,substit.)
Population(increase=market grows)

Question 5

How price change affect demand ?

How change of COD affect demand ?

Answer 5

Price - contraction or expansion

COD - shift in demand

Question 6

PED

Answer 6

% change in Q. / % change in price

If <1 price is inelastic

If revenue increase after price cut d. Price is elastic

Question 7

PED is influenced by______ (6)

Answer 7

Proportion of income spent on goods
Substitutes
Necessities
Habit
Time
How market is defined

Question 8

XED

Answer 8

How demand for one good change when price of another changes

%change inQ. Good A / % change in price of good B

Question 9

What min/max price set by gov can lead to ?

Answer 9

Min. Above Eq cause excess of supply, waste

Max. Price benefits those with low income, controls inflation. Misallocation of supplies, black market

Question 10

What factors and how affects cost of production ?

Answer 10

Indirect tax - increase

Tech. Innovation, cheaper materials - decrease

Question 11

Explain cost behaviours over time U shaped

Answer 11

Short term -law of diminishing return

Long term -diseconomies of scale ( business grows but lacks control, less efficient)

Question 12

Outline types of markets

Answer 12

Perfect market (lot of suppl and customers, no barriers and dominance)

Monopoly(1 supplier)

Monopolistic competition(different products , high adv. cost, no barriers)

Oligopol(difficult to enter, influence over price)

Question 13

Outline FoP

Answer 13

Labour-wages
Land-rent
Capital-interest
Entrepreneurship-profit

Question 14

Through policies gov can_____(4)

Answer 14

Increase economy
Keep prices stable
Get ppl to work
Manage trade with other countries

Question 15

What are key factors of business activity in economy ?

Answer 15

AD -total demand for national output (High demand>more output>growth)

Consumer confidence- how optimistic about economy and fin state(high confidence>more $pent)

Capital- more available=business expansion(up AD>investments)

Gov policy-adjusting fiscal (spending &tax, rise in tax>lower confidence)

Ex. Rate movement (currency-import/export)

Use of resources (new tech., high education improve)

Question 16

Outline trade cycles

Answer 16

Fall in demand starts recession >unemployment >lower household income > lower demand > low confidence no invest > slump&raquo_space; confidence restoration > war, new invention > income up > more spending > expansion > boom

Question 17

Key economic issues

Answer 17

•stagnation & growth - problems- gap rich/poor, rise demand for imported goods, if demand rise too fast= prices also(inflation)

•inflation -problems-less spending> no growth or investments confidence low

•Unemployment- if high loss of income tax and vat, may benefit firms

•balance of payments (all trans. With foreigns) 1current acc.(import export) 2capital acc.(assets & loans) 3 Fin. Acc.(cash flow)

Question 18

What are economic policy options ?

Answer 18

1. Fiscal (gov tax and spending)
2. Monetary policy

Question 19

Outline fiscal options

Answer 19

-balanced budget (income from tax match expense)

-Budget deficit: gov borrows to fund deficit, inject more than take to boost AD ( insufficient to lead employment)

-budget surplus (income>spending): AD is reduced ( inflationary gap)

Question 20

Monetary policy options

Answer 20

Expansionary- increase money to help invest./unemployment

Contractionary- less $ in economy to reduce demand/inflation

Question 21

How money supply in economy can be regulated ? (4)

Answer 21

-interest rates (high reduces invest/AD)
-reserve req.(banks have less to lend)
-open market operations (bonds)
-quantitative easing (digital $ gov. Releases)

Question 22

What are economic theories? (3)

Answer 22

Classical -gov does nothing, economy adjust itself

Keynesian- EQ= full employment, borrow/inject $ into economy to stimulate growth or increase taxes to slow down

Monetarist(supply side) - EQ is where supply=demand & market imperfections (inflation, price fixing) prevent it. easy access to prod. Factors to grow, (cheap materials, labour training)

Question 23

Types of unemployment and how to counter it

Answer 23

Cyclical, frictional (short term), structural (economy change), seasonal, real wage (unions)

Gov funding, tax breaks, retrain, loans, reduce union powers.

Question 24

Types of inflation and how to counter

Answer 24

Demand-pull - reduce AD, cut spending

Cost-push - when cost of FoP rise so do prices

Imported - weak currency>cost of import raise

Monetary - (money will boost demand eventually) - IR up to slow

Expectation effect - measures to protect

Question 25

How to avoid deficit in BOP ?

Answer 25

Exp.-reducing - shrink economy with budget surplus

exp.-switching -increase export, control import through tariffs, devaluation