Basic Economics, Supply, Demand and Equilibrium

Question 1

Why would a PPF curve move outwards? (2)

Answer 1

• Quantity of inputs

- Quality of inputs (e.g. better technology or labour)

Question 2

Why would a PPF curve move inwards? (4)

Answer 2

• War
• Resource usage
• Migration of labour
• Natural disaster

Question 3

What does PPC/PPF stand for?

Answer 3

Production possibility curve/frontier

Question 4

What is a PPC/PPF?

Answer 4

The curve which displays the maximum output of a company of the are working at maximum capacity
- the bikes to cookies diagram

Question 5

Definition of demand:

Answer 5

Quantity of goods and services bought at a given price in a given time period

Question 6

What is the income effect?

Answer 6

As the price DECREASES we have MORE disposable income, thus we can buy MORE of a good.
Quantity demand increases

Question 7

What is the substitution effect?

Answer 7

If the price INCREASES, this means price relative to alternatives INCREASE. The quantity demand of the good DECREASES but the quantity demand of the alternative INCREASES

Question 8

What are the reasons for a shift of a demand curve? (7)

Answer 8

• Fashion/trend
• Population
• Price of alternative/substitute goods
• Price of Complimentary goods
• Legislation conditions
• Derived demand (what you need to make something)
• Incomes increase

Question 9

What is diminishing marginal utility?

Answer 9

How people value their things

The utility someone would get out of the product, constantly goes down with time

Question 10

What does the law of demand state?

Answer 10

When the price increases, the quantity demand will decrease.

When the price decreases, the quantity demand will increase

Question 11

How do you calculate the opportunity cost?

Answer 11

The amount of product A you will loose to produce x amount of B

E.g. to make 17 more computers you will loose 5 microwaves - so the opportunity cost = 5/17

Question 12

Why is it most likely that an economy’s output is inside the PPC? (2)

Answer 12

Because there is never full employment

Also it is hard to work at perfect capacity as workers aren’t 100% effective

Question 13

Definition of supply:

Answer 13

Quantity of goods and services produced at a given price in a given time period

Question 14

What are the 3 main reasons for the upwards slope of the supply curve?

Answer 14

• Profit incentive
• Covering costs of production
• Attracting new entrants to the market

Question 15

What is profit incentive?

Answer 15

When firms what to make a profit, so charge more for their goods and create more goods so that profit is maximised

Question 16

Why is covering the costs of production a reason for the supply curve being an upwards slope

Answer 16

Firms may need to make more goods at a higher price in order to cover the cost of their Costs of production

Question 17

What does opportunity cost =

Answer 17

Amount gained/amount lost

Question 18

Why are PPF’s usually curved?

Answer 18

Because certain workers are better at making x than y, and some are better at making y than x

Question 19

What is productive vs allocative efficiency?

Answer 19

Productive = what you can make
Allocative = how the demand effects where you maximise well fair, optimum supply of demand

Question 20

What is ceteris paribus?

Answer 20

“All other things being equal”

Question 21

What are the reasons for a movement along the demand curve?

Answer 21

Price or quantity

Question 22

What is perfectly competitive?

Answer 22

Lots of producers - none is able to set prices/influence the price

Question 23

What is the difference between Normative and Positive Statements

Answer 23

Normative = A value judgement
which cannot be proven true or false
Positive = a factual statement which can be proven true or false

Question 24

What is meant by ‘modeling’ in Economics

Answer 24

When economics is expressed in mathematical terms for greater precision

Question 25

What is the assumption of rationality?

Answer 25

Making assumptions of people so that it is easier for scientists to manage solving problems.

Question 26

How do you show economic growth on a PPF curve?

Answer 26

It shifts outwards

Question 27

Causes of a shift of supply?

Answer 27

• New technology
• Change in the cost of production
• Price of other goods (Joint+substitute)
• Gov. tax, subsidy and regulations
• Change in climate (agricultural industries)
• No. producers in the market
• Expectations

Question 28

Causes of Movements on the supply curve?

Answer 28

Attempts to raise profits (raising prices)

Question 29

What is equilibrium?

Answer 29

The point at which Demand and Supply meet. So the price and quantity is determined

Question 30

What is excess Demand? + how it is solved

Answer 30

A SHORTAGE
When there is too much demand for the supply to fulfil the needs of, so there is upward pressure on prices and then less consumers and more producers enter the market until equilibrium is reached again

Question 31

What is excess Supply? + how it is solved

Answer 31

A SURPLUS
When there is too much supple for the demand to consume, so there is downward pressure on prices and then less producers and more consumers enter the market until equilibrium is reached again

Question 32

What is the incentive function?

Answer 32

Consumers tell producers about changing needs and wants through what they buy. Higher prices act as an incentive to raise output because the supplier stands to make greater profit. Alternatively, lower prices act as an incentive for consumers to consume more.

Question 33

What is the Rationing Function?

Answer 33

Prices serve to ration scarce resources when demand in the market is greater than supply. e.g. When there is a shortage, higher prices mean that only those who are willing and able will purchase the good

Question 34

What is the signalling function?

Answer 34

Prices adjust to demonstrate where resources are require and where they are not. Prices rise and fall to reflect surplus or shortage. (if prices are rising due to high demand, this signals to producers to produce more)

Question 35

Define Consumer Surplus + how does it look on a graph?

Answer 35

The difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve

Question 36

Define Producer Surplus + how does it look on a graph?

Answer 36

The difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade. It is shown graphically as the area above the supply curve and below the equilibrium price.

Question 37

Where is consumer and producer surplus maximised? (on a graph)

Answer 37

Equilibrium