Economics Test

Question 1

What is the division of labour and why do firms use it?

Answer 1

• When the production process is broken down into many separate tasks.
• It raises the output per person, as people become pro-efficient through constant repetition of the task and learning by doing.

Question 2

What is learning by doing?

Answer 2

Acquiring knowledge, skills and expertise through hands on experience

Question 3

How does Adam smith relate to division of labour?

Answer 3

• He proposed it took 10 workers to make a pin, but on their own they could make 20 pins a day.
• 200 pins could be made if 10 workers worked the same way the lone workers did - but if the process was broken down into ten stages for each worker they could produce 48000 pins a day.

Question 4

What are the disadvantages of division of labour?

Answer 4

• Could create boredom which would lead to quicker staff turnover
• Lack of responsibility between workers
• Changes in taste may put workers out of work.

Question 5

What is specialisation?

Answer 5

When individuals, firms or regions concentrate their efforts on producing a narrow range of services in which they have comparative advantage.

Question 6

What is comparative advantage?

Answer 6

Production should be focused on the production of goods in which they are relatively more efficient or have lower opportunity costs compared to others.

Question 7

What are the advantages of specialisation?

Answer 7

• Mass production can occur
• there is lower unit costs
• reduced cost of training workers.

Question 8

What are the disadvantages of division of labour?

Answer 8

• workers will get bored
• over reliance on one good or item
• finite resources may become depleted

Question 9

What is a barter system?

Answer 9

the trading of goods or services directly for other goods or services without the use of money

Question 10

What are the issues with a barter system?

Answer 10

• needs double coincidence of wants
• it lacks a common measure of value
• it is difficult to make deferred payments
• goods cannot be divided
• goods cannot store value

Question 11

What is money?

Answer 11

a legal tender generally accepted as a method of payment when trading goods or services.

Question 12

What is a legal tender?

Answer 12

Only central bank of country has authority to print it and it cannot be refused in transactions.

Question 13

What are the uses of money?

Answer 13

• a measure of value
• a medium of exchange
• a store of value
• a standard for deferred payment

Question 14

How is price determined?

Answer 14

where price intersects demand - this is market equilibrium

Question 15

What is it if the price is where supply and demand intersect?

Answer 15

equilibrium price

Question 16

What does it mean if the market is at equilibrium?

Answer 16

the market has been cleared and is in balance

Question 17

What happens if there is excess supply?

Answer 17

• surplus
• the price is higher than equilibrium so firms supply more to earn more profit

Question 18

What happens if there is excess demand?

Answer 18

• shortage
• price is lower than equilibrium so firms supply less so they don’t lose profit

Question 19

What is elasticity of supply?

Answer 19

The degree of responsiveness of supply to a given price change.

Question 20

What is the formula for PES?

Answer 20

%change of quantity supplied/%change in price

Question 21

What does a relatively elastic supply curve look like?

Answer 21

flat

Question 22

What does a relatively inelastic supply curve look like?

Answer 22

steep

Question 23

What is the change in relative supply curves?

Answer 23

proportional

Question 24

What does a unitary elastic supply curve look like?

Answer 24

equal

Question 25

What does a perfectly inelastic supply curve look like?

Answer 25

vertical

Question 26

What does a perfectly inelastic supply curve look like?

Answer 26

horizontal

Question 27

What factors affect price elasticity of supply?

Answer 27

- spare production capacity - stocks of finished products, components and perishability - ease and cost of factor substitution/ factor mobility - time period and production speed

Question 28

what is spare production capacity?

Answer 28

- plenty of spare capacity means businesses can increase output without increased costs - supply will be elastic to change demand

Question 29

what is stocks of finished products, components and perishability?

Answer 29

- if stocks of raw materials and finished goods are high, firms can respond quickly to change in demand - elastic supply - perishable goods wont store so supply is less elastic or inelastic

Question 30

what is ease and cost of factor substitution/factor mobility?

Answer 30

- if capital and labour are occupitally mobile, elasticity is high as resources can be mobilized to supply extra output involving reallocation of workers to new tasks

Question 31

what does time period and production speed mean?

Answer 31

- supply is more price elastic, the longer firms are given to adjust production levels.

Question 32

what is ped?

Answer 32

the responsiveness of the quantity demanded of a good or service in response to a change in its price

Question 33

what is the formula for ped?

Answer 33

%change in quantity demanded/%change in price

Question 34

what does the graph for relatively elastic demand look like?

Answer 34

flat

Question 35

what does the graph for relatively inelastic demand look like?

Answer 35

steep

Question 36

what does perfectly inelastic demand look like?

Answer 36

vertical

Question 37

what does perfectly elastic demand look like?

Answer 37

horizontal

Question 38

what does unitary elastic demand look like?

Answer 38

equal

Question 39

what factors influence ped?

Answer 39

- no. of close substitutes - cost of switching between products - degree of necessity/whether the good is a luxury - peak and off peak demand - method of payment

Question 40

if the price of an elastic good decreases what happens to total revenue?

Answer 40

total revenue increases

Question 41

if price of inelastic good decreases what happens to total revenue?

Answer 41

total revenue decreases

Question 42

if price of inelastic good increases what happens to total revenue?

Answer 42

total revenue increases

Question 43

if price of elastic good increases what happens to total revenue?

Answer 43

total revenue decreases

Question 44

what is yed?

Answer 44

the responsiveness of the quantity demanded towards a change in consumers income

Question 45

what is the formula for yed?

Answer 45

%change in quantity demanded/%change in price

Question 46

what does a positive yed graph look like

Answer 46

up to down \

Question 47

what good increases on a positive yed graph?

Answer 47

normal goods

Question 48

what does negative yed graph look like?

Answer 48

down to up

Question 49

what good decreases on negative yed graph?

Answer 49

inferior goods

Question 50

what does elastic yed graph look like?

Answer 50

flat

Question 51

what does inelastic yed graph look like?

Answer 51

steep