Micro and Macro Economics

Question 1

microeconomics

Answer 1

study of economic behaviour of individual consumers, firms, and industries

Question 2

macroeconomics

Answer 2

considers aggregate behaviour, and the study of the sum of individual economic decisions (working economy as a whole)

Question 3

what does micro focus on?

Answer 3

how individual parts of economy make decisions on how to allocate scarce resources

Question 4

Demand

Answer 4

shows how much of a product someone intends to buy at a price

Question 5

what is effective demand?

Answer 5

consumers need cash to buy product rather than just desiring it

Question 6

what do we assume when considering lvl. of demand at a price?

Answer 6

conditions of demand are held constant

Question 7

what does supply curve show?

Answer 7

how many units producers would be willing to offer for sale, at a price, over a period of time

Question 8

why does supply curve slopes upwards?

Answer 8

if price that goods can be sold at increases, each unit will make more profit for supplier, so they’ll want to manufacture more units

Question 9

what assumptions do micro-economic models make?

Answer 9

1. there is a perfect market

2. there is an imperfect market

Question 10

criteria for perfect market to exist:

Answer 10

• large no. of customers and suppliers
• products sold are identical
• perfect information available
• no barriers to entry/exit

Question 11

3 types of imperfect markets

Answer 11

• monopoly - one major supplier
• monopolistic competition - many suppliers offering differentiated products
• oligopolies - only a small no. of suppliers control market

Question 12

4 factors of production and their incomes:

Answer 12

1. labour -> wages
2. land -> rent
3. capital -> interest
4. entrepreneurship -> profit

Question 13

objectives of governments when intervening through macro policies to improve the performance of the economy?

Answer 13

• econ. growth = increasing productive capacity/output of economy
• low inflation = ensuring prices remain stable
• high employment = getting people into work
• sustainable BoP = managing trade with other countries

Question 14

4 stages of the trade cycle?

Answer 14

1. recession
2. trough
3. expansion
4. peak

Question 15

Recession (trade cycle)

Answer 15

Starts when demand begins to fall. Firms reduce output, causing decline in purchases of raw materials, increase in unemployment. Reduction in D feeds into households’ incomes which fall and further create decline in D.

Question 16

Trough (trade cycle)

Answer 16

Economy quickly moves into this with low business confidence and little incentive for investment

Question 17

Expansion (trade cycle)

Answer 17

Eventually, econ. activity picks up and with this extra investment, incomes push up. This induces more investment, reducing unemployment.

Question 18

Peak (trade cycle)

Answer 18

Economy will expand, pushing towards a boom. After time, full capacity is reached and D becomes stable. Reduction in investment starts the downward spiral again.

Question 19

Inflation

Answer 19

rise in prices of products in economy over time. it reduces purchasing power of money, meaning that each unit of currency buys fewer products.

Question 20

4 problems from high inflation:

Answer 20

• as prices rise, consumers purchase less, reducing economic growth
• employees push for higher wages, to match price rises
• people on fixed incomes find themselves off worse
• consumer confidence damaged by uncertainty in future prices of products

Question 21

unemployment

Answer 21

when people are willing and able to work, but can’t find a job

Question 22

3 problems high levels of unemployment cause:

Answer 22

• govt. suffers from loss of income from tax, increased unemployment also increases benefits payments
• leads to increased taxes on other workers, reducing spending power as well as, workers worrying about their job security, damaging consumer confidence
• unemployed individuals suffer significant reduction in their income and this affects self-image

Question 23

how do businesses benefit from high unemployment:

Answer 23

• easy to find employees
• reduce amount of wages needing to be offered
• existing staff may be willing to take lower pay increases

however, economy in general will be demanding less products

Question 24

trade deficit

Answer 24

imports > exports

Question 25

trade surplus

Answer 25

imports < exports

Question 26

trade deficits mean..

Answer 26

net outflow of cash from country, not supportable in longterm –> country will drain reserves and damage int. credit rating –> difficult for country to raise further finance

Question 27

trade surplus mean..

Answer 27

net flow into country –> increases wealth of country –> increases D for products and can lead to inflation and further problems of it

Question 28

stronger home currency

Answer 28

makes country’s exports more expensive, but imports cheaper –> reduces AD in economy

Question 29

weaker home currency

Answer 29

exports become cheaper, imports become more expensive, increases D for local products