MicroEconomics Revision Demand and Supply Mr. Samson

Question 1

Define Specialisation

Answer 1

When individuals or businesses concentrate in producing a particular good or service in which they have a comparative advantage

Question 2

Explain the Pros and Cons of Specialisation

Answer 2

Advantages
Workers become quicker at producing goods (more productive) (1)

Working as a team leads to increased output (1)

Disadvantages
Quality may suffer if workers become bored or demotivated by lack of variety in the job (1)

Repetitive leading to job motivation and decreased job satisfaction for workers (1)

Question 3

Define Division of Labour

Answer 3

Each individual or group of workers focus on a specfic aspect of the production process

Question 4

Explain the three sectors of economies

Answer 4

Primary Sector (1) - Raw materials are extracted and food is grown e.g. agriculture

Secondary Sector (1) - raw materials are transformed into goods e.g., Food processing

Tertiary/service sector (1) - services are produced e.g., education

Question 5

Define Market

Answer 5

Any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

Question 6

Explain how consumers, firms, and government interact in a market economy like the UK

Answer 6

Consumers and firms interact through voluntery exchanges in the markerplace where gods and services are bought and sold

Government interatact by setting and enforcing rules providing public goods and influencing economic conditions through policies

Question 7

Explain the functions of Money

Answer 7

Medium of Exchange (1) - In a barter system direct exchange is challenging but money simplifies transactions

Measure of Value (1) - the value of something depending on how much it costs

Store of value (1) - money can be stored in an account and spent later

Question 8

Explain the two ways resources have been allocated

Answer 8

The market mechanism (1) - brings buyers and sellers who agree on a price for the product or resource being sold

Planning (1) - administrative decisions and occurs within families when individuals make decisions about who in the family is to get what

Question 9

List and Describe the different types of economy (3)

Answer 9

Free market economies (1) - economic decisions are made by private individuals and firms

Mixed economies (1) - government or central authority makes all economic decisions

Command economies (1) - Most resources are allocated by the state and the market mechanism only plays a small part

Question 10

Explain the Advantages and Disadvantages of Free market economies

Answer 10

Advantages
Consumers have a wide range of choices in products and services (1)

Competition incentivizes firms to produce efficiently and innovate (1)

Disadvantages
Some essential services may be unprovided without government intervention (1)

Income and wealth disparities can be significant (1)

Question 11

Explain the Advantages and Disadvantages of Mixed economies

Answer 11

Advantages
Public Goods (1) - the government can provide essential public goods and services that might be unprovided in a purely free market such as education

Disadvantages
Dependency (1) - reliance on government intervention may create a sense of dependency reducing individual and corporative initiative

Question 12

Explain the advantages and disadvantages of command economies

Answer 12

Advantages
Central control can provide stability during crisis (1)

Resources can be directed toward public services and social welfare (1)

Disadvantages
limit consumer choices as decisions about what to produce are made centrally (1)

Central planning may discourage innovation and individual initiative (1)

Question 13

Explain what it means for a country that is a planned economy to move in a more market orientated direction (3)

Answer 13

This would lead to a shift of many principles such as competition (1) where it would increase as markert-oriented economies encourage competition among businesses (1) leading to greater responsivness to consumer demands (1)

Question 14

Define Utility/economic wealthfare (1)

Answer 14

The satisfaction or bnefit derived from consuming a good or a set of goods

Question 15

List and Explain some of the key assumptions of the neo classical theory (2)

Answer 15

Utility Maximisation (1) - individuals seek to maximise their utility or well being given their preferences and budget constraints

Profit Maximization (1) - firms are assumed to seek profit maximization for analysing production, costs, and market behaviour in neo classical economic models

Question 16

explain one reason why consumers may not maximise their own utility when shopping for fast food

Answer 16

One reason could be because of limited information. consumers are often faced with numerous choices regarding menu items, prices, nutritional content, and other factors. Limited time, attention, and cognitive resources can hinder consumers from fully evaluating all available options and making the best decisions for their preferences and well-being. As a result, individuals may make choices that do not align with their long-term health goals or overall utility

Question 17

Explain one economic effect as a result of the government setting an indirect tax on cigarettes

Answer 17

A decrease in Cigarette conusmption would occur as the overall price the consumer would pay increases and this reduces the quantity consumers are willing to pay

Question 18

Define indirect tax

Answer 18

Type of tax imposed on goods and services rather than directly on income or profits

Question 19

Explain the impact of government subsidies on the profits made by Chinese solar panel producer

Answer 19

Competitive Advantage: Reduced costs can enhance the competitiveness of Chinese solar panels in the global market. Lower production costs may allow Chinese producers to offer lower prices than competitors, potentially increasing market share and overall sales volume.

Trade Disputes: Government subsidies can also lead to trade disputes, especially if other countries perceive these subsidies as providing unfair advantages. This could result in the imposition of tariffs or other trade barriers, affecting the profitability of Chinese solar panel exports.

Question 20

Define Supply (1)

Answer 20

How many goods firms are willing and able to put on the market at any given price (1)

Question 21

List factors affecting Supply

Answer 21

Costs of Production, Technology & Productivity, Government Policies

Question 22

Define Market Equilibrium (1)

Answer 22

Demand and Supply are equal (1)

Question 23

Define Excess Supply (or a surplus) {1}

Answer 23

Quantity supplied exceeds quantity demanded {1}

Question 24

Define Excess Demand ( or a shortage)

Answer 24

Quantity demanded exceeds quantity supplied

Question 25

Define Price Mechanism

Answer 25

Free markets allocate resources through the interaction of demand and supply

Question 26

Explain the three functions of Price allocating resources

Answer 26

Signalling - price in market provides information to consumers & producers (1)

Incentive - Price in market encourages change in behaviour by consumers (1)

Rationing - Price in a market determines who can afford good or service (1)

Question 27

Define Consumer surplus (1)

Answer 27

difference between what consumers are willing and able to pay for a good/ what they actually pay (1)

Question 28

Define Producer Surplus (1)

Answer 28

difference between market price firms receive and the price they are willing & able to supply (1)

Question 29

Define Specific or unit tax (1)

Answer 29

Fixed amount of tax set on a particular good/service regardless of its price (1)

e.g.,. tax on alcohol

Question 30

Define Ad Valorem Tax

Answer 30

Tax imposed as a percentage of the value of a good or service (1)

e.g., (VAT)

Question 31

Explain the difference between an ad valorem tax and a specific tax (2)

Answer 31

Ad valorem taxes are based on a percentage of the items value (1).
Specific taxes are a fixed amount per unit regardless of the items price (1)

Question 32

Explain two microeconomic effects of an increase in ad valorem taxes, such as VAT

Answer 32

Increase in Ad valorem taxes causes higher prices for goods/services. This affects consumer purchasing power/behaviour

As prices rise, consumers may adjust spending patterns opting for alternatives or reducing overall consumption

Question 33

Equation for Total Tax Revenue

Answer 33

Tax Rate x Tax Base

Question 34

Define Subsidy (1)

Answer 34

Sum of money paid by governments to producers to encourage production & reduce price (1)

Question 35

explain the economic effect of subsidies for bus companies on the UK government

Answer 35

allocating funds for subsidies means diverting resources from other potential uses such as infrastructure