Economics Unit 1 Chapter 3

Question 1

What is indirect tax?

Answer 1

Taxes on spending

- paid by the retailer/ producer so they add them onto the products they sell

Question 2

What is specific tax?

Answer 2

A tax placed on good or service which is a specific amount of money per unit brought
E.g. Excise duty

Question 3

What is ad valorem tax?

Answer 3

A tax placed on a good or service which is a percentage of the price
- VAT

Question 4

What is a subsidy?

Answer 4

A payment given to a firm

Question 5

Why are subsides given?

Answer 5

To lower price
To increase supply
Encourage locating in an area of high unemployment
Help firms produce in a more environmentally friendly way

Question 6

What is a minimum price?

Answer 6

Set above the equilibrium and the price is not allowed to go below it, can cause excess supply
E.g. National minimum wage

Question 7

What is a maximum price?

Answer 7

Set below the equilibrium and the price is not allowed to go above it, purpose is to leave demand unsatisfied
- rationing, black market

Question 8

What are some business objectives?

Answer 8

Breakeven 
Increase market share
Survive
Make returns to share holders 
Increase sales 
Provide a good service

Question 9

What are fixed costs?

Answer 9

Costs that do not vary with output

Rents, interest payments on loans

Question 10

What are variable costs?

Answer 10

Costs that vary with output

- wages and raw materials

Question 11

How do you work out total costs?

Answer 11

Fixed costs + variable costs

Question 12

How do you work out average costs?

Answer 12

Total cost\ output

Question 13

What is output?

Answer 13

The number of goods and services produced by a firm

Question 14

What is total revenue?

Answer 14

The amount a firm receives from selling its product

Question 15

How do you work out total revenue?

Answer 15

Price X quantity sold

Question 16

How do you work out average revenue?

Answer 16

Total revenue/ output

Question 17

How do you work out profit?

Answer 17

Total revenue - total costs

Question 18

What is productivity?

Answer 18

Output per worker per period of time

Question 19

What is production?

Answer 19

The process of combining scarce resources to make an output

Question 20

How can firms increase productivity?

Answer 20

Use more capital
- machines can run continually without taking breaks, this would increase the amount produced in a certain period of time
Specialising workers
Increasing human capital

Question 21

What is the benefits of competition?

Answer 21

Lower average costs
- increase in productivity means a firm will produce more in a certain amount of time this decreases average costs
Lower more competitive
price
- as average costs decrease firms can decrease the price of there product and still have a profit
Higher profits
- as average costs decrease a firm can maintain a higher profit
They can invest in new machinery

Question 22

How can firms grow?

Answer 22

Internal growth - new outlets, factories

External growth - merger and takeover

Question 23

Why do firms grow?

Answer 23

To help them increase profit
Increase brand image
Achieve economies of scale
Increase market power

Question 24

What is integration?

Answer 24

When two firms come together in either a merger or takeover

Question 25

What are the benefits of growth?

Answer 25

Increased profit
Increased market share
New ideas gained
No competition 
Economies of scale
May not need all there workers

Question 26

What are the costs of growth?

Answer 26

2 sets of managers may not agree 
different objectives and targets 
A lot of money to merge
Less choice for customers
Higher prices to pay
Job loss and insecurity 
Diseconomies of scale

Question 27

What are the economies of scale?

Answer 27

Risk bearing
Financial - banks more willing to lend money to bigger firms at a lower rate as they are more likely to pay them back
Marketing - more cost effective to advertise nationally
Technical
Managerial
Purchasing

Question 28

What is internal economies of scale?

Answer 28

When a firm grows in size and benefits from lower average costs

Question 29

What is external economies of scale?

Answer 29

Whole industries grow in size so a firm benefits from lower average costs

Question 30

What are the diseconomies of scale?

Answer 30

Loss of control
Loss of co- ordination
Lack of cooperation

Question 31

What is a wage?

Answer 31

The amount per hour, individual payments

Question 32

What is a salary?

Answer 32

Amount per year divided into twelve equal individual payments

Question 33

What is the gross income?

Answer 33

Amount person receives before all deductions are taken into account

Question 34

What is net income?

Answer 34

Take home pay

Question 35

What is nominal income?

Answer 35

Income paid to labour, unadjusted for the effects of inflation

Question 36

What is real income?

Answer 36

Income paid to labour adjusted for the effects of inflation

Question 37

Why is there a difference in wage rate?

Answer 37

Difference in productivity of workers
Elasticity of supply of labour - the more inelastic the higher the pay
Trade union power 
Difference in final demand of product
Government pay policy 
Compensating 
Discrimination 
Regional areas

Question 38

What is the national minimum wage?

Answer 38

A pay floor introduced by the government which sets a wage level below which producers cannot legally go

Question 39

What are the arguments for a NMW?

Answer 39

Higher tax revenues from increased earnings from those in low paid jobs
State benefits cost less
Fairly distributed income
Reduced poverty

Question 40

What are the arguments against NMW?

Answer 40

Too expensive to employ workers so firms cut jobs
Other workers will demand higher pay
Higher wages lead to increased inflation
Young unskilled workers loose out
Cut back on investment in worker training
Minimum wage wont ease poverty
Doesn’t take regional differences into account
- depends on price elasticity for demand for workers and supply of workers