Micro LS(6-10)

Question 1

Define planning

Answer 1

The process by which a government allocates its resources this is funded through taxation

Question 2

Define market and price mechanism

Answer 2

• The market is anywhere buyers and sellers, exchange, goods and services. This can be physical or digital.
• A price mechanism is the process by which the market allocate resources

Question 3

What are the different types of economy?

Answer 3

• Command economy: an economy in which resources are allocated solely by the state
• Mixed economy: an economy in which resources are allocated by the state and the price mechanism
• A free market economy: an economy in which resources are solely allocated by the price mechanism

Question 4

What are the different sectors of the economy?

Answer 4

• Private sector: the part of an economy which is controlled or owned by the individual/group of individuals
• public sector: the part of an economy which is controlled or owned by the government

Question 5

What are the advantages and disadvantages of a free market/ mixed economy?

Answer 5

advantages:
- firms have a profit motive which increases efficiency (more efficient allocation of resources)
- profit motive also means wider choice for consumers (as firms are incentivised to develop new products and meet consumer demand) (innovative dynamism)
- competitive prices for consumers
- more rapid economic growth and improvements in living standards

disadvantages:
- this can lead to a rise in income and wealth inequality (because owners of capital and land, accumulate wealth over time and pass this privilege onto their children)
- businesses can develop into monopoly powers
- under-provision of pure public goods in a free market economy
- under-provision of merit goods which leads to lower social welfare
- failure to address or internalise negative externalities can lead to unsustainable economic growth

Question 6

What is a concentrated market/oligopoly/monopoly?

Answer 6

Wear one or two big firms dominate the market they own over 25% of market share. This will lead to limited choice and potential exploitation of the market

Question 7

Define efficiency

Answer 7

Efficiency is the optimal production and distribution of scarce resources

Question 8

What are the advantages of command economies?

Answer 8

Advantages:
- higher equality due to central planning
– More stability
– Prioritisation of public goods for example goods and services related to improvements in the environment or employment rates

Disadvantages:
– Complex bureaucracy and administrative costs
– In a command economy, there is still a lack of equitability in terms of opportunity and access to public services
– Lack of incentives (profit motives) leading to inefficiency
- Imperfect information (also government failure ) can lead to allocation of resources

Question 9

What is a state made up of and what is its role in a mixed economy?

Answer 9

The state is made up of territory, citizens and the government

It’s role is to:
- provision of public goods/services
- to redistribute income through welfare spending/taxation
- to regulate consumers and firms
- economic planning (resource allocation) and stabilisation policies

Question 10

What are the two ways economists make assumptions?

Answer 10

Buy deduction, where they start with a hypothesis or via induction where they collect evidence

Question 11

In economics, decision makers are assumed to be what?

Answer 11

They are assumed to be rational, which means they buy products that maximise their utility. utility is the satisfaction or benefit, derived from consuming a good

Question 12

What does maximising utility look like for firms?

Answer 12

For firms utility is profit. To maximise profit they produce as efficiently as possible and make things that consumers both want and can afford.

Question 13

What do economic agents require to make rational decisions?

Answer 13

They require:
time
information
the ability to process information

Question 14

Define behavioural economics, and what does it assume?

Answer 14

Behavioural economics is a school of economic thought, which uses evidence and observations to develop assumptions of economic decision-making. Therefore an inductive approach is used.
It assumes that individuals have bounded rationality. They wish to maximise utility, but unable to do so, because of a lack of time information or ability to process information.

Question 15

What aspects of human behaviour prevent rational decision-making?

Answer 15

Cognitive biases: Habitual behaviour or consumer inertia
Bounded rationality: Being influenced by the behaviours of others
Being weak at computation / imperfect information

Question 16

Define demand

Answer 16

The quantity of a good or service purchased at a given price over a given time period

Question 17

What does the law of demand state?

Answer 17

Ceteris paribus, as the price of a good increases, quantity demanded decreases, conversely as the price of a good decreases quantity demanded increases

Question 18

What is a substitute good and what is a compliment good

Answer 18

• Substitute goods are to alternative products that can be used for the same purpose
• Compliment goods are products that are used together

Question 19

What four things can impact demand
(generally)

Answer 19

• Changes in the age structure of a population
• Changes in incomes, e.g. a general increase or decrease
• Advertising
• Changes in consumer tastes/preferences

Question 20

Define revenue
How do you calculate it?

Answer 20

The income that a government or company receives
Price X quantity

Question 21

Define supply

Answer 21

The quantity of a good or service that firms are willing to sell at a given price over a given period of time

Question 22

What does the law of supply state?

Answer 22

Ceteris paribus, as the the price of a good increases quantity supplied increases conversely as the price of a good decreases quantity supplied decreases

Question 23

What are some conditions which can impact supply?

Answer 23

• changes in the price of related goods
• Weather conditions
• Farms expectations about future prices
• Changes in production costs
• Improvements in technology or innovation
• The number of firms in the market

Question 24

What is excess demand?
What is excess supply?
What is the equilibrium price?
Why is the equilibrium price also known as the market clearing price?

Answer 24

• Excess demand is when demand exceeds supply
• Excess supply is when supply exceeds demand
• Equilibrium, price or clearing price are the same thing, and the other consumer cost assigned to a product or service, so that demand and supply are equal so all product are bought

Question 25

What does the supply diagram assume?

Answer 25

That firms are motivated to produce by profit
The cost of producing a unit increases as output increases

Question 26

what are the advantages and disadvantages of a command/choice economy (or central planning)?

Answer 26

• bureaucratic costs are added to prices
• there is an absence of a profit motive/incentives which can damage the productivity of workers and businesses. this can then lead to unemployment levels rising as well as a general decrease in the standard of living.
• the state can suffer from information gaps or endemic corruption, this would lead to a suboptimal production level
• the allocation of resources would be less efficient as there would be no competition to drive innovation
• there could potentially be less wealth and income inequality

Question 27

Define utility

Answer 27

Utility is the satisfaction or well-being derived from consuming a good or service

Question 28

What will cause an extension/contraction in demand?

Answer 28

Change in the price level (of a good or service)

Question 29

What kind of things cause a shift in the demand curve?

Answer 29

A non-price related change:
- a change in consumer incomes
- a change in consumer tastes or preferences
- A change in the prices of substitutes or compliments
- demographic changes
- Changes in the quality of the good/service
- Changes in confidence (consumer or business)

Question 30

What are the causes of a downward sloping demand curve?

Answer 30

• The wealth effect
• The trade effect
• The income effect

Question 31

What can cause an extension or contraction in supply?

Answer 31

Changes in the price of a good or service

Question 32

What things can cause a shift in the supply curve?

Answer 32

Non-price related changes:
- Changes in production costs
- Changes in technology
- Changes in government policies or regulations
- Natural disasters
- Changes in business confidence/expectations
- Government intervention in trade
- Natural resource availability