Micro

Question 1

Define price elasticity of demand

Answer 1

The responsiveness of quantity demanded for a good or service to changes in its price

Question 2

What is considered inelastic price elasticity of demand

Answer 2

Anything less than 1, often goods that are necessities, don’t have many substitutes, are addictive or are a small portion of total spending. This is because people have to buy them, even if the price increases, so the quantity doesn’t change too much due to a change in price

Question 3

What is considered elastic price elasticity of demand?

Answer 3

Anything greater than 1, often goods that are luxuries, have many substitutes and represent a high portion of households total spending. This is because they can find something cheaper, and they can forgo buying it if the price increases as they don’t actually need it.

Question 4

Define the “incidence” of a tax

Answer 4

Who actually pays the tax

Question 5

What type of price elasticity of demand results in the tax falling mainly on:

a) consumers
b) producers

Answer 5

a) inelastic

b) producers

Question 6

Why does the incidence of the tax fall on consumers when there in inelastic demand

Answer 6

The producers can pass more of the tax onto their customers as it will have a less than proportionate decrease in the quantity demanded since it is inelastic.

Question 7

Why does placing a tax on an inelastic good raise higher tax revenue than on one with elastic price elasticity of demand

Answer 7

Because the quantity decreases less than proportionately due to the price rise, resulting in a relatively large number of goods and services on which the tax is imposed and therefore greater tax revenue is collected

Question 8

Define price elasticity of supply

Answer 8

The responsiveness of the quantity supplied of a good or service to changes in its price

Question 9

Describe momentary, short run and long run elasticities of supply

Answer 9

momentary - right now - they can’t change their factors much so supply is perfectly inelastic
short-run - firms are restricted in their ability to change output, so it is a little sloped but still relatively inelastic
long-run - firms have time to expand and change their factors, which means they can change their supply - it is elastic

Question 10

Define equilibrium

Answer 10

A balance between the forces involved, where quantity supplied = quantity demanded, and both parties are completely satisfied and the market is clear

Question 11

How are the equilibrium price and quantity in a market determined?

Answer 11

By the interaction of the forces of demand and supply

Question 12

what does ceteris paribus mean

Answer 12

all other things unchanged/held constant

Question 13

Where can the equilibrium be found on the graph

Answer 13

Where the demand and supply curves intersect

Question 14

Define a surplus

Answer 14

Excess supply, occurring at any point above the equilibrium where the quantity supplied by producers is greater than the quantity demanded by producers

Question 15

How will the market react to a surplus

Answer 15

Firms are willing to accept a lower price to sell unsold stock. As the price decreases, the good or service becomes less profitable for producers (decrease quantity supplied) and more affordable for consumers, making them more willing and able to buy it (increase quantity demanded). This happens until equilibrium is reached and the market is cleared

Question 16

Define a shortage

Answer 16

Excess demand at any price below equilibrium where the quantity demanded is greater than the quantity supplied

Question 17

How will the market react to a shortage

Answer 17

Consumers bid up the prices - more profitable for producers (increase quantity supplied), less affordable for consumers (decrease quantity demanded) until the equilibrium quantity is reached and the market is cleared

Question 18

Define consumer surplus

Answer 18

the difference between the maximum amount that a person is willing to pay for a good or service and its current market price. this represents the benefit consumers receive over and above what they pay for it

Question 19

Where do you find consumer surplus on a graph

Answer 19

the area above the equilibrium price paid (pe) and below the demand curve

Question 20

Define producer surplus

Answer 20

The difference between the total earnings of suppliers for a product and the total cost required to put that quantity on the market. This occurs because firms are willing to supply each unit at lower than the equilibrium price they currently receive in the market

Question 21

Where can you find producer surplus on a graph

Answer 21

Area below the price firms receive (pe) and above the supply curve

Question 22

What assumptions do we draw the production possibility frontier with?

Answer 22

There are two goods only, a fixed level of resources and a given level of technology

Question 23

What does the PPC (production possibility curve) actually show

Answer 23

the maximum output combination of two goods that can be produced given that existing resources and technology are used fully

Question 24

How can the production possibility curve shift outwards

Answer 24

By developing new resources or finding new resources

Question 25

Can you have a point outside the PPC curve and what does this mean

Answer 25

No, this is impossible given the current level of technology and resources

Question 26

Can you have a point inside the PPC curve and what does this mean

Answer 26

Yes, it means the market is producing inefficiently - resources are not being fully utilised or put to their best possible use

Question 27

Can you have a point on the PPC curve and what does this mean

Answer 27

Yes, all points on the curve are production efficient, but only one can be allocatively efficient - the position that represents what the customers actually want

Question 28

Define allocative efficency

Answer 28

This requires production efficiency, and it is not possible for one person to be made better off without making someone else worse off - the most efficient socially desirable use

Question 29

Where on a regular graph would allocative efficiency occur

Answer 29

At the free market equilibrium where the total consumer surplus and producer surplus are maximised

Question 30

Define an indirect tax

Answer 30

An indirect tax is a tax collected by firms and then passed on to the government

Question 31

What immediate effect does an indirect tax have on the market, and how is this shown on the graph

Answer 31

It will decrease supply, causing the price to rise and the quantity to decrease. Move the supply curve vertically upwards by the amount of the tax

Question 32

To what extent to consumers pay the tax

Answer 32

The amount of the price rise, and any amount not covered by the price increase has to be absorbed by the firm

Question 33

When there is a tax imposed, how do you find the price each of these groups receives/pays:

a) consumers
b) producers

Answer 33

a) the new equilibrium price
b) from the new equilibrium, dot down until you reach the old supply curve, then go across to find the price at this point

Question 34

Where and why does the deadweight loss exist when there’s a tax

Answer 34

This is the loss of allocative efficiency because part of the consumer surplus and part of the producer surplus are not picked up by the tax. It is found on the graph as the triangle to the right of the box that represents the tax. It is between the new equilibrium price and the price producers receive, as well as between the two equilibrium quantities

Question 35

What is a subsidy

Answer 35

A payment by the government to firms to keep their costs down and as a result, firms will increase supply

Question 36

How do you show the effect of a subsidy on a graph

Answer 36

Move the supply curve down by the amount of the subsidy (down because supply is increased as costs are decreased)

Question 37

To what extent do each of these groups take the impact of the subsidy

a) consumers
b) producers

Answer 37

a) to the extent of the price decrease
b) the price per item the firm receives will be higher, and their costs will be reduced. they will increase supply, meaning a quantity supplied at each and every price

Question 38

Where is the deadweight loss of a subsidy found on the graph?

Answer 38

Between the price producers receive and the new equilibrium price and between the two equilibrium quantities.

Between the two supply curves but to the right of the demand curve and in line with the new equilibrium quantity

Question 39

Where do you shade the subsidy on the graph

Answer 39

The box between the price producers receive and the new price, all the way out to the new quantity

Question 40

Where does the incidence of the subsidy fall when demand is:

a) inelastic
b) elastic

Answer 40

a) mainly on consumers, large decrease in the price paid by consumers, the consumers benefit more
b) on producers, the decrease in the price paid by the consumer is relatively small, benefits the producer or seller more

Question 41

Where on the graph can the incidence of a subsidy for consumers and producers be found

Answer 41

Consumers - the box from the left bottom corner up to the old equilibrium
Producers - the box from the bottom left corner outwards until the vertical downwards line goes through the new equilibrium, minus the consumer bit (should just be an upside down L shaped area outside of the consumer incidence area but surrounding it)

Question 42

Define a maximum price control

Answer 42

price ceiling control set by the government, prohibiting producers from charging a higher price than this

Question 43

Why would the government impose a maximum price control

Answer 43

To protect the consumers from paying unreasonably high prices for essential goods and services for example housing, petrol or certain food items such as bread and milk

Question 44

How do you show a maximum price

Answer 44

A straight line, somewhere below equilibrium, resulting in a shortage

Question 45

What happens to where you show producer and consumer surplus and deadweight loss due to a maximum price control

Answer 45

Producer surplus is the same, just underneath the maximum price but above the supply curve.

The consumer surplus is above the maximum price, and to the left of the quantity supplied

The deadweight loss is the triangle from the edge of consumer surplus at quantity supplied to the original equilibrium

Question 46

Define a minimum price control

Answer 46

floor price, a price control set by the government where the market price is not allowed to fall below a certain minimum, resulting in a surplus

Question 47

Why would the government use a minimum price

Answer 47

To protect producers in volatile markets and ensuring they are not receiving an unreasonably low price

Question 48

How do you show a minimum price

Answer 48

A straight line at the price, which will be above the equilibrium

Question 49

What happens to where you show producer and consumer surplus and deadweight loss due to a minimum price control

Answer 49

Consumer surplus is the same - above the minimum price and below the demand curve

Producer surplus is below the minimum price but above the supply curve, but only to the left of the quantity demanded

Deadweight loss is the triangle from the edge of the producer surplus until the original equilibrium

Question 50

What can arise to sell goods above a maximum price or below a minimum price in response to the shortages and surpluses these situations create

Answer 50

Black markets

Question 51

International free trade is more allocatively efficient than not trading, because the area of total surplus increases. TRUE OR FALSE

Answer 51

All very true

Question 52

Where is the producer and consumer surpluses on a free trade exports graph

Answer 52

consumer surplus is above the world price and below the demand curve

producer surplus is below the world price and above the supply curve

Question 53

Where is the producer and consumer surpluses on a free trade imports graph

Answer 53

Consumer surplus is above the world price and below the demand curve

Producer surplus is below the world price and above the supply curve

Question 54

Is there a deadweight loss in the free trade graphs (either export or import)

Answer 54

nope, trading is very allocatively efficient, the surpluses both increase

Question 55

What is protectionism, give examples

Answer 55

Government measures to limit international trade, resulting in a loss of allocative efficiency as the market equilibrium is altered. Examples are tariffs and quotas

Question 56

what happens to the surpluses, deadweight losses and tax collected areas on a protectionism graph

Answer 56

Consumer and producer are the same as in the free trade graphs, except above and below the price with the tariff

A new section is created between the free trade price, the tariff price and between the demand and supply curves, made up of three parts

There are triangles of deadweight loss on either side of this area and a rectangular area of tax collected in the centre

The tax rectangle is in between where the demand and supply curves hit the tariff price

The deadweight losses (yes two of them) are on either side of this box, out to the demand and supply curves themselves

Question 57

Where is the new price and quantity shown on the graph when a tariff has been imposed?

Answer 57

The new price is PwT at the price + tariff line

The new quantity is where the demand curve meets the tariff price, and is called QdT

Question 58

Where are the change in imports shown on the free trade graph with a tariff

Answer 58

Original imports is the whole distance from QsF (where the supply curve meets the free trade price line) to QdF (where the demand curve meets the free trade price line)

The new imports is shown between QsT (where the supply curve meets the tariff price line) and QdT (where the demand curve meets the tariff price line)

Question 59

How do you work out the total spend on that good from the free trade protectionism graph and also how do you find the imports $ amount

Answer 59

Total spend is the QdT (where the demand curve meets the tariff price) multiplied by the PwT (tariff price)

The import $ is the amount of imports (between QsT and QdT ie between where the two curves cut the tariff price) multiplied by the tariff price. This amount makes up part of the total spend calculated above