Microeconomics Section A Flashcards
With reference to the information provided, explain one advantage of a free
market economy. [4 marks]
K + An (3)
* More choice (1) because of consumer sovreignty (1) and profit motive (1) / greater incentive (1)
* More efficient allocation of resources (1) because of allocative / productive / dynamic efficiency / x-efficiency (1) because of the profit motive (1)
* Lower prices (1) because of more competition (1) and greater incentive (1)
* Better quality products (1) because of competition (1) and profit motive (1)
* More innovation (1) because of competition (1) and profit motive (1)
Ap (1)
[Refer to given extract]
Which economic thinker supported the idea of a command economy?
Karl Marx
Which of the following would be most likely to increase the PPF of a farmer? An increase in
a. investment in milk production machinery
b. investment in modern farming technology
c. the demand for wheat
d. the price of oats
b. investment in modern farming technology
What is the likely income elasticity of demand for a luxury good?
Positive, elastic demand
> +1
Explain the likely impact of the increase in price of a season train ticket on
consumer surplus. [2 marks]
Kn (1)
* Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay (1)
* Consumer surplus will fall (1)
An (1)
* Why consumer surplus falls: the difference between the maximum price consumers are willing to pay and the actual market price falls (1)
Explain why nurses in the public sector have had lower wage rises than those in the
private sector. [4 marks]
Kn (2)
* A monopsony is where there is a sole buyer for a particular good or service (1)
* The public sector is the portion of the economy that is owned and operated by the government (1)
* Private sector is the part of the economy where firms are owned or run by individuals or businesses, who typically seek to maximise profit (1)
Ap (1)
* [Refer to stats from the extract]
An (1)
* Lack of alternative suppliers (1)
* Must accept a national pay scale (1)
* Few jobs available in private hospitals (1)
* Government objective to balance the budget / spending (1)
* Reasons for higher pay in private sector (1)
Which one of the following is most closely associated with tacit collusion?
a. overt sharing of information
b. predatory pricing
c. price wars
d. unspoken agreements
d. unspoken agreements
Explain one type of internal economies of scale that a newly merged car company may achieve. [2 marks]
Kn (1)
* Commercial / purchasing / bulk buying (1)
* Technical (1)
* Financial (1)
* Managerial (1)
* Marketing (1)
An (1)
* Lower LRAC (1)
* Cheaper steel / monopsony buying power (1)
* Larger factory space / delivery vehicles / automation (1)
* Lower interest charge on large loans to fund car factory expansions (1)
* New e-car design director / specialist managers (1)
* Discounted advertising (1)
Explain one likely concern the competition authorities may have had about mergers.
Kn (1)
* Concerns about the exploitation of consumers (1)
* Concerns about national economic interests (1)
* Concerns about increased monopoly power / reduction in competition / increased market share (1)
An (1)
Linked development, e.g.
* Lack of choice for consumers / loss of consumer surplus / forcing competitors out (1)
* Increased prices exploiting consumers (1)
* X-inefficiencies - lack of investment (1)
Explain the likely impact of outward migration on the wage level of engineers in Poland. [4 marks]
Kn (2)
* Supply of labour decreases (1)
* Wages rise (1)
Ap (1)
* Takes time to train engineers (1)
* [Refer to figures in the extract] (1)
* [Wage diagram in context of extract] (1)
An (1)
* Excess demand (1)
* Firms offer higher wages (1)
* Firms contract demand for labour (1)
* New labour market equilibrium achieved (1)
Which one of the following is necessary for a firm to be able to practise price
discrimination?
a. it has some degree of market power
b. it is able to store its product
c. its product has different features in different markets
d. the costs of supplying some customers are higher
a. it has some degree of market power
Which condition is necessary for revenue maximisation to occur?
Marginal revenue equals zero
Which condition is necessary for sales maximisation to occur?
Average revenue equals marginal cost
Which one of the following will exist in the short run if a firm in a perfect competition market makes a loss?
a. Allocative efficiency and productive efficiency
b. Allocative efficiency and productive inefficiency
c. Allocative inefficiency and productive efficiency
d. Allocative inefficiency and productive inefficiency
b. Allocative efficiency and productive inefficiency
On average, in the UK, a working-age graduate earns approximately £10000 more
per year than a non-graduate. This suggests a university degree provides a substantial __
Private benefit
Explain one likely effect of reducing the number of tradable pollution permits. [4 marks]
Kn (2)
* Pollution permits are permits that allow a firm to produce a specific amount of pollution. These permits are distributed to the companies that are the sources of pollution and, in total, represent the overall pollution cap. (1)
* Reducing permits reduces pollution because the acceptable volume of pollution for collective firms in the economy falls (1)
Ap (1)
* [Diagram showing inward shift of permits supply pushing up the price per permit]
An (1)
* Reducing the supply of permits increases the price of permits (1)
* Reducing the supply of permits reduces the pollution levels in the economy (1)
Regulation of firms that pollute is likely to be a problem because it
a. allows firms to use price signals
b. creates unintended consequences
c. fills information gaps
d. means lower administrative costs
b. creates unintended consequences
Explain what happens to total cost at output levels greater than the lowest AC point. [2 marks]
Kn + An
* Total cost rises (1) at an increasing rate (1)
* Total costs continue to rise (1) but more steeply (1)
* MC > AC, therefore AC rises (1)
* MC > AC (1), therefore TC increases at a faster rate (1)
What will happen to the average fixed costs, average variable costs and marginal costs when a firm reaches output levels beyond MC = AC?
AFC: Falls
AVC: Rises
MC: Rises
Explain one likely reason why a luxury café business would remain small. [2 marks]
Kn + An
* Owners wish to maintain control (1)
* Avoiding diseconomies of scale (1) as managerial diseconomies of scale may set in (1)
* Offering a more personal service (1)
* Acting as a regional monopoly (1) meaning they can charge higher prices (1)
* Lack of finance for expansion (1) as there is costs involved with opening new outlets (1)
Explain why a business expansion of opening 5 new branches could be described as ‘organic growth’. [2 marks]
Kn
* Growth is internal (1) opening new branches (1)
* There is no evidence that growth is external (1) through integration, merger or takeover (1)
* Reinvesting profits from customers (1) to open new branches (1)
* Borrowing from banks (1) rather than finance from a takeover (1)
* The business has grown naturally (1) without the need to takeover or merge (1)
A 2.5% increase in new build house prices in one region of the UK causes a 10%
increase in the number of houses built. Ceteris paribus, this suggests that supply
of new house builds is…
Relatively price elastic
Explain one factor that is likely to determine the price elasticity of supply of new
house builds. [2 marks]
Kn + An
* Limited availability of land (1) so supply will be inelastic (1)
* Levels of spare capacity (1)
* Time period and production speed (1)
* Availability of technology / machinery to build (1)
The UK hair and beauty industry is an example of monopolistic competition
because:
A. firms spend nothing on advertising and research
B. the industry is dominated by a few large firms
C. the products are homogenous
D. there are low barriers to entry and exit
D. there are low barriers to entry and exit
The most likely reason for demergers is to:
A. benefit from external economies of scale
B. benefit from internal economies of scale
C. focus more on its core business
D. increase its market share
C. focus more on its core business
Explain how resources are allocated in a free market economy. [2 marks]
Kn + An
* Resources are allocated via the price mechanism / market forces of supply and demand (1)
* If there is an increase in demand, prices rise to ration the good (1)
* If there is a fall in supply, prices rise to ration the good (1)
* Price changes act as a signal (1)
* Consumer sovereignty (1)
* By privately owned firms (1)
* Limited intervention by government (1)
Which one of the following statements is true?
A. Friedrich Hayek believed that the government should subsidise
inefficient firms
B. Friedrich Hayek was a key advocate of command economies as a way
of allocating resources
C. Karl Marx advocated allocating resources via the free market
D. Karl Marx criticised the private ownership of factors of production
D. Karl Marx criticised the private ownership of factors of production
Explain one advantage to a firm of using division of labour when organising its
production process. [2 marks]
Kn + An
* A benefit is that the firm only needs to train workers in one specific role (1) this means that they can lower costs (1)
* Less training needed (1)
* Faster production process (1)
* Greater output from given workforce (1)
* Less time wasted moving between jobs (1)
* Increased skill within specific role (1)
* Increased efficiency (1)
* Linked development (1)
Which is the most likely to cause an outward shift in the output of consumer goods curve of a PPF?
A. A reduction in unemployment in consumer goods industries
B. A rise in the cost of producing consumer goods
C. An increase in demand for consumer goods
D. A technological improvement in the production of consumer goods
D. A technological improvement in the production of consumer goods
Explain the likely impact of the price increase of national lottery tickets on the
demand for using gaming machines. [2 marks]
Kn + An
* The demand for use of gaming machines is likely to increase (1)
* It is a substitute for national lottery tickets (1)
* Substitutes have a positive cross elasticity of demand (1)
* [Refer to the extract] (1)
Explain one likely reason for the difference in average house prices between
London and the North East of England. [2 marks]
Kn
* differences in average income or wealth (1)
* employment or unemployment rates (1)
* migration or population change (1)
* foreign buyers (1)
* availability of land to build on (1)
An
* Higher average income in London mean people are able to obtain larger mortgages and so pay higher prices (1)
* Higher employment rate or lower unemployment rate in London mean greater demand for housing from its population (1)
* Shortage of land to build on in London, especially with green belt restrictions (1)
Changing from revenue maximisation to sales maximisation. This change will lead to:
A. a decrease in the number of customers
B. a decrease in the price of treatments
C. an increase in productive efficiency
D. an increase in the level of profit
B. a decrease in the price of treatments
Explain one likely reason for the decrease in sales of PCs between 2011 and 2015. [2 marks]
Kn
* Development of substitutes such as Tablets or iPads or iPhones (1)
* Fall in global real incomes (1)
* Fall in price of substitutes (1)
An
Linked development
* Tablets are more convenient to carry round (1)
* New technology in other personal devices so becoming more powerful in their functions (1)
* Fall in global incomes means that consumers are less likely to buy normal goods such as PCs (1)
Estimates for the demand for black tea in the UK suggest that it is an inferior
good. This implies it has a negative:
A. cross elasticity of demand
B. income elasticity of demand
C. price elasticity of demand
D. price elasticity of supply
B. income elasticity of demand
One effect of subsidies is to increase:
A. consumer surplus
B. market failure
C. public good provision
D. tax revenue
A. consumer surplus
Which one of the following is a fixed cost to Starbucks?
A. Coffee
B. Milk
C. Packaging
D. Rent
D. Rent
Explain the difference between fixed costs and variable costs. [2 marks]
Fixed costs remain the same as output increases or decreases (1)
Variable costs vary directly with output. (1)
