Micro Year 1

Question 1

Causes of an outward shift in PPF

Answer 1

• Higher productivity/efficiency - Increase the output per unit of an input used in production
• Better management of factor inputs - reduces waste and improves product quality
• Increase in the stock of capital and labour supply
• Innovation and invention of new products and resources - Improved production processes lift effeciency, we can make more with less
• Discovery & extraction of new natural resources (land)

Question 2

Causes of an inward shift in PPF

Answer 2

• Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods
• Destrction/loss of factor inputs caused by civil war and other forms of conflicts that often last many years
• Large scale outward labour migration perhaps due to an economic depression that leads to a brain drain of skilled workers
• A trend decline in productivity of inputs perhaps caused by recession which causes investment to decline

Question 3

What is a free market system

Answer 3

• Market allocates scarce resources
• Suppliers are driven by the profit motive
• Private sector is dominant
• Consumer tastes and preferences are really important

Question 4

What is a mixed economy system

Answer 4

• Mix of state and private ownership of businesses
• Government intervention in most markets
• The mix of state and market forces will vary from country to country

Question 5

What is a command economy system

Answer 5

• Most resources are state owned (nationalised)
• Government planning allocates most scarce resources
• Little role of rmarket price and the profit motive

Question 6

Advantages to free market competition

Answer 6

• Competition keeps prices low
• Competition drives invention and innovation
• Compettion between businesses stimulates investment
• Competition increases consumer choice
• Improves economic effiency
• Can lead to faster economic growth
• Efficient allocation of scarce resource - they will go where the expected profit is the highest

Question 7

Problems with command economies

Answer 7

• Expensive bureaucracy
• Deep-rooted corruption
• Weak profit incentive for businesses - little to no innovation
• System is unresponsive to consumers
• Government can suffer from information failures

Question 8

What is the role of the government in a mixed economy

Answer 8

• Merit goods - State education, NHS and social housing
• Welfare services - Universal credit, child benefit and state pension
• Public goods - national defence, public service broadcasting
• Regulation of markets - employment protection for people in work and regulation of monopoly firms

Question 9

Advantages from specialisation

Answer 9

• Higher labour productiivty and rising business profits
• Creates a surplus output that can be traded internationally for out mutual benefit
• Lower prices cause higher real incomes and GDP growth

Question 10

Disadvantages of the division of labour

Answer 10

• Alienation and then causing lower productivity
• Workers take less pride in it and quality suffers
• Increase in absenteeism
• High worker turnover —> increased hiring/training costs

Question 11

Factors affecting the price elasticity of demand

Answer 11

• Number of close substitutes available for consumers - the more there are the more price elastic is demand
• Price of the product in relation to total income - when % of budget is high, demand is price elastic
• Cost of substituting between different products - when switch costs are high demand will be price inelastic
• Brand loyalty and habitual consumption - high levels of brand loyalty make demand less price-elastic
• Degree of necessity/cluxury - necessities have a lower elasticity and vice versa

Question 12

Values for YED

Answer 12

• Normal goods - +ve
• Inferior goods -ve

Luxary goods - YED>1
Necessities - 0<YED<1

Question 13

Factors affecting PES

Answer 13

• Spare production capacity - If there is spare capacity then output can be increased with no rise in costs, so supply will be price-elastic
• Stocks of finished products and components - If there are stocks then the firm can respond to a change
• Ease and costs of factor substitution/mobility - if there is high occupational mobility of capital and labour it means that resources can be moved to accommodate a higher output, so the price elasticity of supply is higher
• Time period and production speed - over time supply become more price elastic

Question 14

What are the 4 assumptions of rational behaviour

Answer 14

• People use all of the information available
• People try to maximise satisfaction
• People make independant chouce
• Consumers have fixed and stable tastes and preferences

Question 15

What are some counters to the assumptions of rational behaviour

Answer 15

• We have a limtied ability to calcualte
• Social networks influence our choices
• Emotion often overtakes logic
• People often stick to default choices
• We often have a desire for instant rewards
• Altruism can overtake pure self-interest
• We are loss averse (losses matter more than gains)
  *

Question 16

What is adverse selection

Answer 16

Health insurance example:
Those who are high risk are more likely to buy the insurance, so the companies raise the prices. means that the average lower risk person is priced out. so the marker becomes more higher risk people, so the price is raised again. cycle contines until the market fails

Question 17

Evaluation of the effects of indirect taxes

Answer 17

Effectiveness of a tax and unintened consequences
* Effects depend on the PED
* Are there uninteneded consequences

How much revenue is raised and what is it used for
* Does it generate significant revenue
* What is it used for

What is the impact on businesses/competitiveness
* Might there be a possible loss of jobs and/or less capital investment
* Will it negatively affect global competitiveness & trade

Consequences for equity/the distribution of income
* Who are the main winners and losers from the tax
* Does it have a regressive effect

Question 18

What are behavioural nudges

Answer 18

They are subtle prompts designed to change peoples behaviour which preserves liberty and does not use large financial incentives

Question 19

Soft nudges examples

Answer 19

For tackling obesity
* Changing chouce architecture in shops and cafiteria
* Adding calorie detials on shop receipts and menus
* Changing default size of plates

Question 20

Evaluating the effect of subsidies

Answer 20

Are the subsidies effective in meeting their aims
* Will they achieve the desired stimulus to demand/consumption
* Is a subsidy enough? Might other incentives be needed as well

Will a subsidary affect productivity/efficiency
* Subsidies for investment and research can bring positive externalities
* But businesses may become dependent on aid/financial assistance

How much does the subsidy cost and who benefits
* Is a subsidy part self-financing? will it create more tax revenue
* Or does a subsidary create an expsneive extra burden for taxpayers

Does the subsidy help to correct a market failure?
* For example - do more people find work with childcare subsidies?
* Or does a subsidy lead to undesired, unintended consequences

Question 21

Pros of a Free market economy

Answer 21

• Efficiency - Only the best value products are in demand. So producers have an incentive to make the best product at the lowerst price. Innovation
• Entrepreneurship - There are high rewards for taking the risk taking and innovation of being an entrepreneur
• Choice - Lots of innovation means consumers can have a lot of choice of products

Question 22

Cons of a Free Market Economy

Answer 22

• Inequalities - Can lead to large differences in income. Viewed as unfair (gov objective). In completely free market those who are unable to work get no income
• Non- profitabel goods may not be made - Such as drugs for a rare medical condition, as they won’t sell enough for a profit to be made
• Monopolies - Successful businesses can become the onyl supplier of a product –> market dominance can be abused

Question 23

Pros of a Command Economy

Answer 23

• Maximise welfare - Goverments have conotrol so they can prevent inequality and distribute income fairly. Also ensure that goods that are produced and benficial to society
• Low unemployment - the government can try to provide everyone with a job and a salary
• Prevent monoploies - As everything is nationalised there are no private companies in a total commaned economy.

Question 24

Cons of a Command Economy

Answer 24

• Poor decision-making - Lack of information means that poor and slow decisions can be made by the government
• Restricted choice - Consumers have limited choice in what they can consume as firms are told what to make
• Lack of risk-taking and efficiency - Nationalised firms have no incentive to increase efficiency, take risks or innovate, and they don’t need to make a profit

Question 25

Adam smiths ideas

Answer 25

An ‘invisible hand will allocate resources in society’s best interests. As consumers and producers are motived by self-interest, so consumers are trying to maximise benefit and producers with profit. Consumers demand and producers supply will meet a point which is best for both
wrote on specialisation and the division of labour

Question 26

Karl Marx ideas

Answer 26

Critical of the free market - said the ruling class producers would exploited the larger working class
Said that there would be a revolution where thw working class would tke control of production and everyone would have a share in the ownership of resources
Didn’t talk about how the command economies would work

Question 27

Freidrich Hayek ideas

Answer 27

Supporter of the free market system and a critic of command economies
Said government should intervene to allocate resources as they lacked the information to allocate them in the most beneficial way for society.
Consumers have the best knowledge, so leave the allocation of resources to the price mechanism
Saw the price mechanism as a signalling device and would lead to the most efficient allocation of resources