Microeconomics 2

Question 1

What are the three types of economy?

Answer 1

Command economy
-Government makes the production decisions

Free Market
- The people and companies make production decisions

Mixed Economy
-Government make decisions in certain areas such as public services, but in other areas the people and companies can make production decisions

Question 2

What are the factors that can affect demand?

Answer 2

1. Prices of goods
   - as prices rise, demand falls

Prices of other goods
- Substitute or complementary goods

Income
- If people have less disposable income demand for inferior goods may increase.

Taste/Fashion
- Demand rises if the product/service is fashionable

Other factors
- Population size and available credit

Question 3

What is a contraction in a demand curve?

Answer 3

This is where prices increase, demand will decrease and will show an upward movement on the demand curve.

Question 4

What is a expansion in a demand curve?

Answer 4

This is where prices are getting lower, demand will increase causing a downward movement on the curve

Question 5

What is demand elasticity?

Answer 5

Refers to how responsive the market is to price

Question 6

What does it mean if a products demand is elastic?

Answer 6

This means it is responsive, so if the price changes there can be a large movement in the demand for the product.

Question 7

What does it mean if a products demand is inelastic?

Answer 7

Not very responsive, so if a price changes there will not be much change to the demand.

Question 8

What is the ARC Method - non-average in demand and how is it calculated?

Answer 8

This is how you calculate Price Elasticity of Demand for particular goods/services.

Change in demand(%)/change in price(%)

Question 9

How do you calculate the ARC Menthod in demand - Average

Answer 9

change in demand(%) - Versus average/Change in price(%) - Versus average

Question 10

What are the factors affecting PED?

Answer 10

Substitutes - Availability of subs = more elasticity

Necessity or habit = Less elastic

Time frame = Things can be less elastic in the shirt term

Brand Loyalty = Less elastic

Proportion of income = If it is a small proportion of your income the product can be inelastic

Definition of the market - if there is fewer alternatives it will be less elastic.

Question 11

What does values <1 mean in Price elasticity of demand?

Answer 11

Means the Product is inelastic or that its demand is relatively sensitive too price

Question 12

What does values >1 mean in Price elasticity of demand?

Answer 12

Means the Product is elastic or that its demand is relatively sensitive too price

Question 13

What are the factors that affect Supply?

Answer 13

Price
Price of other goods
Cost changes
Success of harvests

Question 14

What does Expansion mean on a supply curve?

Answer 14

High prices = high supply and an upwards movement on the curve

Question 15

What does contraction mean on a supply curve?

Answer 15

Low Prices = Low supply and a downward movement on the curve

Question 16

What do positive changes in supply cause on a supply curve?

Answer 16

Rightward shift on the curve

Question 17

What do negative changes in supply cause on a supply curve?

Answer 17

Shift to the left on the curve

Question 18

What is the ARC Method - non-average in supply and how is it calculated?

Answer 18

Price Elasticity of Supply (PES)

Change in supply(%)/change in price(%)

Question 19

What is the ARC Method - average in supply and how is it calculated?

Answer 19

change in supply(%) - Versus average/Change in price(%) - Versus average

Question 20

What are the factors that influence responsiveness in price?

Answer 20

Time frame - harder to make change to supply in the short term

Factors of production - If more factors are required it is more difficult to make changes

Inventory levels

Competition

Question 21

What happens if prices are above the equilibrium?

Answer 21

Creates more supply as companies will try make more profit, but will inevitable cause less demand causing a contraction in the demand curve.

Question 22

What happens if prices are below the equilibrium?

Answer 22

Increases high demand but reduces the supply.

Question 23

What is a market failure?

Answer 23

Market failure is the inability of a market to allocate resources in a way that maximises utility

Question 24

What is the problem with public goods when it comes to market failures?

Answer 24

Problem – some goods (e.g. street lighting, police force) may not be produced
under a market system due to
– Non-excludability (“free-rider” problem)
– Non-rivalry
 Solution – provided by the state, which hopefully benefits from economies of
scale. (Major argument for the need for taxation)

Question 25

What is the problem with externalities when it comes to market failures?

Answer 25

Problem – important issues may be ignored by the free market – Negative externalities, social costs – e.g. pollution – Positive externalities, social benefits – e.g. merit goods below: healthcare, education, development of renewable energy sources  Solution – make externalities internal – e.g. “polluter pays” policies, tax on supply (shift supply curve to the left), regulation on externality levels  Solution – discourage demand – e.g. indirect taxes on consumption, subsidise purchase of goods/services that don’t generate negative externalities or that do generate positive ones  Direct provision – the government provides the goods/services themselves to control the externalities generated

Question 26

What are demerit goods?

Answer 26

Problem – goods are produced that are considered unhealthy, degrading, or otherwise socially undesirable.  Solution – state regulation – e.g. gambling, junk food, underage drinking

Question 27

What are Merit goods?

Answer 27

Problem – goods with positive social benefits may not be consumed/available toall – in particular, the poor may not be able to afford them  Solution – state provision – e.g. healthcare, education

Question 28

Why would a government set minimum prices?

Answer 28

To protect suppliers and can also be used to fight poverty (minimum wage cap)

Question 29

Why would a government set maximum prices?

Answer 29

To protect consumers

Question 30

What are the types of economies of scale?

Answer 30

Technical economies - Where a company has the financial means to invest in new tech. Financial economies - Where a company has the financial capability and size to be able to access fund or access lower interest rates on borrowing Trading economies - Bigger you are the easier it is to negotiate Managerial economies - More time and money to invest in your managers to create good leadership. External Economies - where companies of the same profile are localised in one area creating an advantage.

Question 31

What are the types of diseconomies of scale?

Answer 31

Technical diseconomies - Too big to make quick decisions and can be less cost efficient Trading diseconomies - Harder to make decisions quickly when market trends change Managerial Economies - More bureaucracy