Micro Part 2- Margin, Opportunity of cost, specialisation and trade, resource allocation

Question 1

What is the concept of margin

Answer 1

1. The concept thinking about the effect of an additional action, how a change in one variable affects another variable
2. Allows consumers to think ahead, preventing them from thinking about economic decisions in the past and instead focus on ones in the future
3. Can increase productivity since actions that maximise utility are the ones prioritised

Question 2

Explain how consumer rationality is assumed in the concept of margin

Answer 2

1. Assumes all economic agents seek to maximise utility. To do this they must act rationally. Nothing else will affect their decision
2. Different agents have different ways of maximising their utility (limitation)
3. Incentives are what agents respond to, which can allocate resources to provide highest utility to each agent. If incentives not allocated properly then resources are misallocated
4. Consumers – consume a good until MU = P. If MU falls with extra consumption then price willing to pay falls (diminishing marginal utility). Explains why the demand curves slopes downwards

Question 3

How is the concept of margin used

Answer 3

1. For employers in a competitive market they will employ workers up to where MC = wage
2. Consumers consume a good up to where MU = price
3. For governments the social optimum level of consumption/production is where MSC = MSB

Question 4

What is opportunity cost

Answer 4

1. every choice has a range of alternatives and a rational economic agent will choose the best one, but then all the other choices will have to be given up.
2. The value of the next best alternative forgone when making an economic decision.
3. Occurs because of finite resources

Question 5

What is a Trade off

Answer 5

1. when one thing is lost to gain something else

Question 6

What is Production Possibility Frontiers

Answer 6

1. PPF – a graphical representation of opportunity cost of using scarce resources, showing the maximum productive potential of an economy, with two goods.
2. Assumes there is a fixed amount of resources used and a constant state of technology.

Question 7

What are the changes that may occur in a PPF

Answer 7

1. Economic growth is shown on PPF (shift outwards). Occurs when there is an increase in the quantity and quality of resources.
2. Moving along occurs when resources are diverted to produce different goods, incurring an opportunity cost.

Question 8

Why is there an opportunity cost of moving along a PPF

Answer 8

1. Capital is better at producing some things over others
2. Land has changing quality
3. Labour has varying levels of human capital
4. Factors of production have different properties

Question 9

What is the usefulness of concept of opportunity cost

Answer 9

1. Useful in ensuring an efficient allocation of resources

Question 10

What are the problems with the concept of opportunity cost

Answer 10

1. Not all alternatives are known/may not have any alternatives
2. Some factors e.g. land can be hard to switch to alternative uses
3. Opp. cost can relate to future events, which are hard to put a monetary value on. Or may be hard to quantify some alternatives

Question 11

What is specialisation

Answer 11

1. when an individual/firm/country focuses it factor endowment (stock of resources or factors of production) on producing a certain g/s.
2. Can only occur when there is a system of trading

Question 12

What is division of labour

Answer 12

1. the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.

Question 13

What are the advantages of specialisation

Answer 13

1. Increase output/quality since production focuses on what workers are best at producing. Same amount of effort means increased labour productivity. Occurs because workers gain more skills in a narrow range of tasks meaning they become more productive at this
2. Less time spent between switching tasks
3. Achieve economies of scale so size of the market is increased
4. Lower prices for consumers as lower unit costs due to increased productivity
5. Increased output creates economic growth

Question 14

What are the disadvantages of specialisation

Answer 14

1. Work is repetitive which could lower the motivation of workers, harming productivity and quality
2. Could create structural unemployment since skills may be untransferable as they’ve been focused on one task for so long. Vulnerable to changes in demand
3. Size of the market limits division of labour
4. Countries become less self-sufficient as rely on others for trade

Question 15

How does specialisation encourage trade

Answer 15

1. Regions specialise where they have absolute advantage meaning increased output in this sector
2. Everywhere has a comparative advantage in something so when all produce in this way it is more efficient so global output increases
3. Specialisation means some countries don’t produce some goods so trade out of necessity
4. Money facilitates trade since people know what they’ll get from selling their g/s

Question 16

Why are Barter systems are inefficient

Answer 16

1. double coincidence of wants
2. no set value so increased time on reaching agreement
3. no guaranteed store of value

Question 17

What are 4 functions of money

Answer 17

1. Medium of exchange – no double coincidence of wants so people know they can use money for future exchanges
2. Unit of account – is a measure of value, show relative values of g/s
3. Store of value – money holds its value and won’t expire. Yet the quantity of g/s that can be bought with money fluctuates due to the forces of demand/supply
4. Means of deferred payment – allows for debts to be created. Relies on it keeping its value

Question 18

What is resource allocation

Answer 18

1. how to best use scarce resources to meet competing wants/needs.
2. How resources are distributed among producers and g/s among consumers
3. Economic agents respond to incentives, which can allocate scarce resources to provide the highest utility to each agent

Question 19

Describe the Price mechanism

Answer 19

1. Allocate – distribute resources among competing uses
2. Rationing – prices serve to ration resources where demand outstrips supply
3. Signalling – prices adjust to show where resources are required
4. Incentives – price increase then supply increases as profit increase. Price decrease then demand increase as greater consumer surplus gained

Question 20

What is the Motivator, Allocator and Regulator of a planned economy

Answer 20

1. Societal welfare
2. Government
3. Government

Question 21

What is the Motivator, Allocator and Regulator of a market economy

Answer 21

1. Self interest
2. Price
3. Perfect competition

Question 22

What is the Motivator, Allocator and Regulator of a mixed economy

Answer 22

1. Self interest/common good
2. Government/price
3. Gov. intervention/competition

Question 23

Describe pros and cons of a Planned economy

Answer 23

1. Increases allocation of merit goods
2. Inequality can be reduced, and society might maximise welfare over profit
3. However govs have imperfect info so can’t set correct equilibriums
4. Increased inefficiency

Question 24

What is maximisation

Answer 24

1. for consumers it is when they aim to generate the most utility possible from an economic decision, for firms to generate most profit

Question 25

What are the 3 economic agents

Answer 25

1. Firms
2. consumers
3. Government

Question 26

What are the objectives of firms

Answer 26

1. profits in order to remain in business, pay better rewards to shareholders, reinvest into the firm to make even more profits later
2. sales in order to gain market share to have some monopoly power
3. ethical objectives e.g. set P=MC to maximise societal welfare

Question 27

What are the objectives of consumers

Answer 27

1. utility whilst not spending more than their income (but utility will mean different things to different people).
2. May act as workers; assumed to maximise wages but may try to maximise other aspects e.g. leisure time

Question 28

What are the objectives of Government

Answer 28

1. societal welfare, including;
2. economic growth, employment, B of P equilibrium, low inflation.
3. In reality these are competing objectives (hard to achieve all)

Question 29

What causes differences in access to resources

Answer 29

1. The differences in access are due to the causes of poverty e.g. lack of human capital reduces access to education which reduces income and reduces access to healthcare
2. Significance is relevant on a national/regional scale
3. unemployment may sometimes be more important than unequal distribution of income – better to make everyone better off through more jobs