ECONOMICS IGCSE

Question 1

when does a market fail? Write 5 points

Answer 1

+ When demerit goods are overused
+ when public goods are not used at all
+ when merit goods are underused
+ when resources are not allocated efficiently
+ when companies do not care about negative or positive spillover effects.

Question 2

Functions of stock exchange? (4 Functions)

Answer 2

1. It allow to raise finance for limited companies by selling their shares
2. It allows limited companies to grow i.e. some companies sell shares to facilitate growth.
3. Facilitating sale of government bonds . Government bond are issued to business and general public when government needs a loan
4. safety of transaction- all the share dealings are done in accordance with the country’s legal framework.

Question 3

What happens to Production Possibility Curve when resources increase abruptly or decrease abruptly?

Answer 3

When resources increase the Production Possibility curve shifts outwards as increased resources mean that a greater combination of goods can be produced However, if resources reduce then the production possibility curve shifts inwards as there a re fewer resources now fewer combination of two goods can be produced.

Question 4

What are the limitations of a production possibility curve?

Answer 4

1. All resources are employed. no resource is left unemployed
2. there is no imports or exports in the economy.
3. Every resource has an alternative use.
   4- Only two types of goods can be produced

Question 5

What are the problems associated with bartering(FOUR TO FIVE POINTS) that have been overcome by money.

Answer 5

1. Double coincidence of wants. i.e. one looking to sale apples for bananas should look for someone willing to buy bananas for apples.
   2- Divisibility- Half an apple or quarter bananas is useless.
   3- Storage- it is hard to store some products until you find someone willing to buy it. e.g apples cannot be stored as they would soon rot.
   4- Portability- Some goods are not portable. Money is very portable

Question 6

What are the four functions of money?

Answer 6

1- It is a medium of exchange- Today, anything can be bought for/ exchanged for money.
2- it acts as a store of value- Money stores its value overtime. i.e. it can be stored today and used at a later date. this means money must be able to hold its purchasing power.
3- It acts as a measure of value. Anything can be measured in terms of money. It is therefore more efficient to express value of products in form of money rather than in form of other goods.
4- It acts as a standard of deferred payment. i.e. money can be used to pay off the debts at a later date. e.g. money is used to pay of the loan we take in the foreseeable future.

Question 7

How is the equilibrium price decided?

Answer 7

Where the demand and supply curve meet/intersect on the demand and supply graph is the equilibrium price

Question 8

What factors affect demand? Tell 9 points

Answer 8

1- Change in population- an increase in population will cause demand of products to rise.
2- Change in price of substitute goods.- If price of substitute good decreases demand for that good would increase.
3- Change in price of complementary goods- An increase in price of complementary good will decrease the demand of the good.
4- Price of the good- If the price of the good is high demand tends to be lower however, if price is low demand would be high.
5-Weather- Demand for different goods is different in different months. For example demand for fizzy drinks is high in summer but low in winter.
6- Trends- if something is in trend or fashionable its demand would be higher.
7- Income- in a country where income is higher demand for products would be high. however, if incomes are low demand for products would be low. This is only true for normal goods. However, it is opposite for inferior goods.
8- Income tax- In a country where income tax is higher people have lower disposable income. Therefore, demand for goods would be lower.
9- Advertising- effective advertising can increase demand for goods.

Question 9

What are demerit goods?

Answer 9

demerit goods are goods that are harmful to human health for instance alcohol, cigarettes. These types of goods have inelastic demand

Question 10

What is demand?

Answer 10

demand is the ability and willingness of a consumer to buy a product.

Question 11

What is ineffective demand?

Answer 11

ineffective demand is when a consumer is willing to buy a product but is unable to buy it. He is unable as he does not have the money to buy it.

Question 12

What factors affect supply(write 6 points )

Answer 12

1- Price of the good- If the price of the good rises it becomes more profitable to produce that good and suppliers start to use resources to make that good.
2- Cost of production- If the cost of production falls due to some reason the supply would increase as it becomes more profitable to produce that good.
3- Weather- Some goods are produced more in some weather conditions. For e.g. Rice supply increases in particular season.
4- Taxes- If government places an indirect tax on a good suppliers have to bear it. Therefore, taxes increase cost of production. Increased cost of production makes that good less profitable to produce. Therefore, supply of that good reduces.
5- Subsidies- Subsidy is provided by government to suppliers to reduce cost of production. This means that the good us profitable to produce and its supply increases.
6- Business optimism and expectations- If a business believes a product will be high in demand in the future it will increase its supply.

Question 13

What is the formula for calculating price elasticity of demand

Answer 13

Percentage change in quantity demanded divided by percentage change in price

Question 14

Define the ceteris parabus rule.

Answer 14

Ceteris parabus states that there is contraction or extension in demand curve when price of product changes and all other factors are constant.

Question 15

What are the advantages of a free market economics system?(write 6 points )

Answer 15

1- There is incentive of profit. Therefore, managers work hard to maximize the profits.
2- A great variety of goods are available.
3- Goods that are high in demand are provided.
4- There is no taxes.
5-It is very efficient as there is incentive.
6- There is minimal wastage of resources during production to keep costs low.

Question 16

What are the disadvantages of free market economic system( Write5 points )

Answer 16

1- Resources are not employed is unprofitable to do so.
2- Goods not produced if unprofitable to do so.
3- No provision of merit or public goods.
4- Businesses do not care about externalities which can cause market failure.
5- Demerit goods are freely produced and sold.

Question 17

Write some features of money(write 5 points)

Answer 17

1- Durability- Money should be durable to last for a period of time
2- Acceptability- Money is acceptable in the entire world
3- Portability- Money is extremely portable as it is very lightweight.
4-Scarcity- Money should always be scarce to avoid inflation.
5- Divisibility- Money should be in smaller value notes to give change and to allow small amount transaction to occur.

Question 18

What factors affect the price elasticity of demand (write 5 6points)

Answer 18

1-Basic necessity- If a product is basic necessity like water, without which survival is impossible its demand will be price elastic.
2- The proportion of income spent on that product.-If higher proportion of income is spent on that product
3- Number of substitutes available- If a product has many substitutes then its demand will be price elastic
4- Time- In the long run it is likely more substitutes will be found therefore demand tends to be price elastic in the long run
5- Brand loyalty- Products of recognizable brands have inelastic demand as people would buy it at any price.
6- Addictions- Some goods are addictive like cigarettes. Therefore, their demand is price inelastic as people are badly addicted to it and would purchase it at any price.

Question 19

What are the functions of a central bank?

Answer 19

The main bank in an economy, responsible for managing the stability of its national currency and money supply, and for regulating its banking system.

Functions include:

Issuing notes and coins for the nation’s currency
Managing payments to and from the government
Managing the national debt
Supervising the banking system, regulating the conduct of banks, holding their deposits and transferring funds between them
‘Lender of the last resort’
Managing the nation’s gold and foreign currency reserves
Operating the government’s monetary policy

Question 20

Define a subsidy.

Answer 20

A subsidy is provided by the government. It is a financial aid to suppliers to reduce cost of production. Subsidies can increase supply of a good as reducing cost of production means that the good is profitable to produce.

Question 21

Define external cost

Answer 21

External cost is the cost bared by third party. i.e. those people who were not involved in the making of that decision.

Question 22

Define private cost

Answer 22

Private cost is the cost bared by the person or entity involved in the making of that decision.

Question 23

Define external benefit

Answer 23

External benefit is the benefit gained by third party. i.e. by the person not involved in the making of that decision.

Question 24

Define private benefit.

Answer 24

Private benefit is the benefit gained by the entity that was involved in the making of the decision.

Question 25

Define social cost

Answer 25

Social cost equals private cost plus external cost

Question 26

Define social benefit.

Answer 26

Social benefit is private benefit plus external benefit.

Question 27

What are the benefits of planned economic system(write 4 points )

Answer 27

1- There is social equality
2-Resources are not unemployed if profitable to do s0. Resources are employed to the maximum
3-Demerit goods not produced
4-Pollution is reduced and controlled.

Question 28

What are the drawbacks of planned economy(write points)

Answer 28

1- No incentive of profit. This can reduce quality and efficiency
2- Wastage of resources. As they do not have incentive they do not avoid wastage. If they had incentive of profit they would minimize wastage to keep costs low.
3- People have to consume the products made by the government as they have no choice rather than using the products given by government.

Question 29

Write three reasons why some assets are nearer to cash.

Answer 29

1-Some assets fulfill the functions of money better than others
2-Some assets can be converted into cash more quickly than others
3-Some assets retain their value on conversion to cash better than others

Question 30

Define financial assets.

Answer 30

Non-physical assets, such as bank deposits, shares, bonds and other financial claims that have value.

Question 31

Define liquid assets.

Answer 31

Financial assets that are ‘near money’, such as bank deposits, which can be converted into cash easily and quickly.

Question 32

Define physical assets

Answer 32

Non-financial assets or physical products, such as commercial and residential properties, that have value and therefore contribute to wealth.

Question 33

Define velocity of circulation

Answer 33

The number of times the fixed amount of notes and coins in an economy are exchanged between different people and firms on average over a given period of time.

Question 34

What are three ways in which bank earn revenue.

Answer 34

1-Charging interest on loans (the interest rate represents the cost of borrowing money)
2-Charging fees for the provision of other financial services
3-Making investments- Banks buy shares in limited companies and if the share value rises they sell it for higher prices and earn revenue.

Question 35

What are the four types of loan.

Answer 35

1-Overdraft: short-term loan with interest
2-Personal loan: repaid with interest over a fixed period
3-Commercial loan: loan to business for operating costs and purchase of materials and machinery; repayable with interest over fixed period of time
4-Mortgage: long-term loan used to buy property

Question 36

What factors affect price elasticity of demand(write 2

points )

Answer 36

1- Time- In the long run Price elasticity would be price elastic as by the time more resources would be obtained
2- Productive capacity- If a supplier is supplying t its full he cannot produce further. Therefore if the productive capacity has been reached then the supply would be price inelastic.

Question 37

What are consumer goods?

Answer 37

Consumer goods are goods that directly satisfy the need or wants of the consumer.

Question 38

What are capital goods?

Answer 38

Capital goods are goods that do not directly satisfy needs or wants but are used to produce consumer goods. For example machinery is a capital good.

Question 39

What is the return for land?

Answer 39

Rent

Question 40

What is the return for labor?

Answer 40

Wages

Question 41

What is the return for capital?

Answer 41

Interest

Question 42

What is the return for enterprise?

Answer 42

Profit

Question 43

Describe some features of Mixed economy(write 6points)

Answer 43

1- Private sector and public sector both are involved.
2- Demerit goods are taxed.
3- There is provision of public and merit goods as both provided by government from taxes collected.
4- Some goods are subsidized to increase their consumption.
5-Government fines or shuts down polluting industries.
6- There is incentive of profit here in private sector.

Question 44

Define public sector.

Answer 44

Public sector is owned and controlled by the government.

Question 45

Define the private sector.

Answer 45

Private sector is owned and controlled by the general public and businesses.

Question 46

What are the three economic systems?

Answer 46

1- Free market economic system
2- Planned economics system
3- Mixed economic system.