Microeconomics Test 3

Question 1

Define Specialisation.

Answer 1

Specialisation is the production of a limited range of goods or services by an individual or firm or country in co-operation with others, so that together a complete range of goods is produced.

Question 2

Define Specialisation.

Answer 2

Specialisation is the production of a limited range of goods or services by an individual or firm or country in co-operation with others, so that together a complete range of goods is produced.

Question 3

Using an example explain how specialisation can occur between countries.

Answer 3

Specialisation can occur between countries, for example a country like Honduras specialises in bananas and trades them for cars with the USA.

Question 4

Using an example explain how specialisation can occur within countries.

Answer 4

Specialisation can occur between different regions within the same country, for example in the UK, Cornwall specialises in tourism while London specialises in financial services.

Question 5

What is the concept of the division of labour? Reference Adam Smith

Answer 5

The division of labour is specialisation of tasks by individuals. Adam Smith explained that one pin worker might be able to make 20 pins a day, if he were to carry out all the processes himself, but ten workers together each specialising in a smaller number of processes could, he estimated make 48,000 pins.

Question 6

Give five disadvantages of specialisation.

Answer 6

1) Unrewarding, repetitive work that requires little skill can lower motivation and eventually causes lower productivity.
2) Workers may take less pride in their work and the quality suffers.
3) Dissatisfied workers become less punctual at work and the rate of absenteeism rises.
4) There is high worker turnover.
5) Some workers receive little training and may not be able to find alternative jobs, they may suffer structural unemployment or occupational immobility.

Question 7

Using an example explain how specialisation can occur between countries.

Answer 7

Specialisation can occur between countries, for example a country like Honduras specialises in bananas and trades them for cars with the USA.

Question 8

Using an example explain how specialisation can occur within countries.

Answer 8

Specialisation can occur between different regions within the same country, for example in the UK, Cornwall specialises in tourism while London specialises in financial services.

Question 9

What is the concept of the division of labour? Reference Adam Smith

Answer 9

The division of labour is specialisation of tasks by individuals. Adam Smith explained that one pin worker might be able to make 20 pins a day, if he were to carry out all the processes himself, but ten workers together each specialising in a smaller number of processes could, he estimated make 48,000 pins.

Question 10

Give three advantages of the division of labour.

Answer 10

1) Division of labour allows workers to specialise in a narrow range of tasks, this means that workers become very skilled at their particular tasks, and so they are far more productive than if they had to complete many different tasks.
2) The division of labour makes it cost effective to provide workers with specialist tools. So that individual workers have only the tools they need to complete their particular task, rather than every worker having a full set of tools.
3) Division of labour saves time because a worker doesn’t have to change tasks, move around from place to place or use different machinery and tools.

Question 11

Explain using an example the possible disadvantage of over-specialisation.

Answer 11

If there is over-specialisation, a breakdown in part of the chain of production can cause chaos within the system. For example specialisation led to high unemployment in some areas of the north of England due to the outsourcing of heavy industries, that were not replaced.

Question 12

Give three advantages of Specialisation.

Answer 12

1) Higher labour productivity and business profits.
2) Specialisation creates surplus output that can then be traded internationally.
3) Lower prices, higher real incomes and GDP growth.

Question 13

What is real income?

Answer 13

Real income is the quantity of goods and services you can buy with money income taking into account inflation.

Question 14

What is money income?

Answer 14

Money income is wage/salary before or after tax.

Question 15

Give the four functions of money.

Answer 15

1) A medium of exchange
2) A measure of value
3) A store of value
4) A method of deferred payment

Question 16

Explain how money performs its function as a store of value.

How does high inflation affect this and why?

Answer 16

Money acts as a store of value, a worker who receives wages may defer spending because it is more convenient to spend the money later, and under normal circumstance the money will be worth the same in the future.

High inflation destroys this function because money in the future has lower value than money in the present.

Question 17

Explain the problems with a barter economy.

Answer 17

There is no money in a barter economy, exchange is conducted directly by swapping one good with another. This requires a double coincidence of wants, each party to the transaction must want what the other has to trade. This is costly and difficult so trade is discouraged, without trade there can be no specialisation, without specialisation there is little or no increase in living standards.

Question 18

Explain how money performs its function as a measure of value.
How does high inflation affect this and why?

Answer 18

Money acts as a unit of account, for example if a dress costs £30 and a skirt £15, we know that the value of one dress is equal to the value of two skirts.
High inflation destroys the ability of money to perform this function, as in times of price rise it is difficult for consumers to know the value of goods and services.

Question 19

Why is it difficult to establish an agreed unit of account in a barter system?

Answer 19

It is very difficult under a barter system to establish an agreed unit of account, as people’s opinions of the value of certain items differ greatly.

Question 20

Explain how money performs its function as a method of deferred payment.

Answer 20

Money has the ability to link different time periods when it comes to borrowed as well as saved money. If people lend money today, they will only decide to do so, if they think that they will be able to buy roughly the same amount of goods and services when it is paid back.

Question 21

What is demand?

Answer 21

Demand is the quantity of goods or services that will be bought over a given time period at any given price.

Question 22

How is a change in price shown on the demand curve?

How is a change in any other variable affecting demand shown on the demand curve?

Answer 22

A change in price is shown by a movement along the demand curve.
A change in any other variable affecting demand, such as income is shown by a shift in the demand curve.

Question 23

What is consumer surplus?

Answer 23

Consumer surplus is the difference between how much buyers are prepared to pay for a good and what they actually pay.

Question 24

What is a contraction of demand?

Answer 24

A contraction of demand occurs when the quantity demanded of a good falls because its price rises, it is shown by a movement up the demand curve.

Question 25

What is the demand curve?

Answer 25

The line of a price/quantity diagram which shows the level of effective demand at any given price.

Question 26

What is a shift in the demand curve?

Answer 26

A shift in the demand curve is a movement of the whole demand curve to the right or left of the original caused by a change in any variable affecting demand other than price.

Question 27

What is an extension of demand?

Answer 27

An extension of demand is where the quantity demanded of a product increases because its price falls, it is shown by a movement down the demand curve.

Question 28

What is the law of diminishing marginal utility?

Answer 28

The value or utility that individual consumers gain from the last product consumed falls, the greater the number consumed.

Question 29

What is the shape of the demand curve?

What does this say about the relationship between price and quantity demanded?

Answer 29

The demand curve slopes downwards from left to right, showing that there is an inverse relationship between quantity demanded and price.

Question 30

Explain how the price of other goods can affect the quantity demanded of a product.
Give an example.

Answer 30

When the price of one product rises, there can be a rise in the demand for another product, usually a close substitute.
For example: During the Great Drought, the price of potatoes rose greatly, which lead to consumers buying more bread and pasta to replace the potatoes.

Question 31

What is the demand function?

Answer 31

Qn = f(Pn, Y1, (P1... Pn-1), T
Where:
Q is the the quantity demanded of a product n
Y1 is income
Pn-1 is the price of all other products
T is other factors

Question 32

Explain how the price of other goods can affect the quantity demanded of a product.
Give an example.

Answer 32

When the price of one product rises, there can be a rise in the demand for another product, usually a close substitute.

Question 33

What are normal goods?

What are inferior goods?

Answer 33

Normal goods are products, the demand for which rises as income rises (e.g. executive cars).
Inferior goods are products where demand falls as income rises (e.g. rye bread).

Question 34

In what circumstance would you say there has been a rise or fall in quantity demanded?

Answer 34

You would only that there has been a rise or fall in the quantity demanded, when writing about the effect of a change in the price of the product itself.

Question 35

In what circumstance would you say there has been a rise or fall in demand?

Answer 35

You would only say that there has been a rise or fall in demand, when writing about the effect of a change in one of the conditions of demand other than the price of the product itself.

Question 36

How would a change in population size and structure affect the demand for a product?

Answer 36

A rise in population size is likely to lead to an increase in demand for goods, e.g. an increase in the demand for bread as population size increases.
A change in the age or gender structure of the population will also lead to a change in demand, e.g. an increase in demand for walking sticks in the UK due to an ageing population.

Question 37

How can changes in tastes and fashion affect demand?

Answer 37

The demand for items such as white kitchen units rises and falls as they go in and out of fashion.

Question 38

What are conditions of demand?

What are they? (5)

Answer 38

Conditions of demand are factors that affect the demand for a product other than the price of the product. Such as:

1) Changes in income
2) Changes in population size and structure
3) Changes in tastes and fashion
4) Advertising campaigns
5) Government legislation

Question 39

How can government legislation affect demand?

Answer 39

Demand for items like seatbelts changes with regard to the latest government legislation.

Question 40

What are conditions of demand?

What are they?

Answer 40

Conditions of demand are factors that affect the demand for a product other than the price of the product. Such as:

1) Changes in income
2) Changes in population size and structure
3) Changes in tastes and fashion
4) Advertising campaigns
5) Government legislation