Microeconomics year 1

Question 1

what is the basic economic problem

Answer 1

how to allocate scarce resources when there are unlimited wants but finite needs

Question 2

another word for resources

Answer 2

factors of production

Question 3

what are the four factors of production

Answer 3

• land - areas where goods can be produced
• labour - human resources which can produce goods and services
• capital - man made aids to production like machinery, schools
• enterprise - risk takers who are innovative in order to make profit

Question 4

what choices are made in order to scarce resources

Answer 4

manufacturers choose:
- what to produce
- how to produce
- for whom to produce for

Question 5

what is opportunity cost

Answer 5

the cost of the next best alternative forgone when a choice is made

Question 6

what does a PPF tell you

Answer 6

the maximum possible production of all goods and services that can be produced with the level of the factors of production in the economy

Question 7

labels on a macro ppf

Answer 7

• Goods, services

Question 8

what does the shape of ppf show

Answer 8

the law of increasing opportunity cost,as we move further along the curve, factors of production are more suitable towards one thing than they are towards another thing

Question 9

what does a linear PPF show

Answer 9

a constant oppurtunity cost

Question 10

what is demand

Answer 10

the quantity of a good/service consumers are willing and able to buy at a given price in a given time period

Question 11

what is the law of demand and what does it mean

Answer 11

there is an inverse relationship between price and quantity demanded, meaning that as price increases, Qd decreases

Question 12

what do we assume when looking at a demand curve

Answer 12

ceteris paribus - meaning all other factors remain unchanged
- meaning when we increase price, we MOVE along the curve

Question 13

whats it called when we MOVE along the curve

Answer 13

a contraction of demand, as price increases

Question 14

whats it called when we decrease price

Answer 14

there is an extension of demand

Question 15

what explains the inverse relationship between price and demand

Answer 15

the income effect - as prices go up, income cant stretch as far, therefore we are less able to buy, maybe our income doesn’t allow us to purchase the quantity of goods and services we couldve before

substitution effect - as prices go up, other goods and services become more price competitive, so we switch consumption to buy those goods and services instead, which is why demand contracts

Question 16

what do non price factors do to the demand curve

Answer 16

they SHIFT it

Question 17

examples of non price factors which will shift demand to the right

Answer 17

• population - higher population = higher demand for a particular good or service
• good advertising
• price of substitutes - eg if the price of pepsi goes up, more ppl are gonna be willing and able to buy coke
• income(normal and inferior goods)
• fashion/taste - if fashion moves towards a particular good/service, demand for it will be higher
• interest rates - if consumers need to borrow before buying it, lower IR make it cheaper for consumers to borrow, increasing demand for these items
• complements price - if the price of one of the complementary goods increase, the demand for both the goods shift left and vice versa

Question 18

what is a substitute

Answer 18

a good that is a rival good to something else

Question 19

what are normal goods

Answer 19

goods where, as incomes rise, demand for them will increase, eg fine dining and vice versa

Question 20

what are inferior goods

Answer 20

goods where, as incomes rise, demand for them decrease and vice versa, eg fast food, public transport

Question 21

what is a complementary good

Answer 21

a good which is often bought with another

Question 22

what is supply

Answer 22

the quantity of a good or service producers are willing and able to produce at a given price in a given time period

Question 23

what is the law of supply

Answer 23

there is a direct relationship between price and quantity supplied. as price increases, Q increases and vice versa, ceteris paribus

Question 24

explain the law of supply

Answer 24

private producers have a profit motive
- as price increases for a good/service, there is more profit to be made if they can produce and sell more, so there’s a stronger need incentive to produce more when prices go up

• when quantity goes up, cost of production goes up. therefore suppliers want a higher price to cover the cop to allow them to maintain their profit margin

Question 25

non price factors that may shift supply

Answer 25

productivity (output per worker) - if workers become more productive, they produce more, this will reduce cost of production and shift supply to the right

indirect tax - increased tax like corporation tax may increase cost of production and shift supply left

number of firms - the more firms that enter the market, the more supply in a market, supply shifts left

technology - improvements in technology may reduce cop, eg robotics ai , increasing supply
subsidy - reduced cop and shifts supply right

• weather - good weather shifts supply, for example if it’s sunny, more crop
• cost of production - oil, transport, regulation

Question 26

how would cost of production impact supply

Answer 26

lower cost of production = high willingness to supply more at the same price
higher = less willing to supply at the same price when it’s more expensive to produce

Question 27

what is a subsidy

Answer 27

a money grant given by the government to producers to lower cost of production and to encourage an increase in output

Question 28

what is a free market

Answer 28

an economy where the market mechanism allocates resources so consumers and producers make decisions abt what is produced, how to produce and for whom

Question 29

what is equilibrium

Answer 29

Where demand is equal to supply - represents allocative efficiency, because the resources that firms are using to make goods and services, are perfectly following consumer demand

Question 30

What is disequilibrium?

Answer 30

Where is demand is not equal to supply

Question 31

adam smiths views

Answer 31

1. Specialisation & Division of Labour
   - Smith argued that dividing production into specialized tasks increases efficiency, as workers can focus on specific activities they excel in. This specialization allows for greater skill development and faster production.
   - Higher productivity from specialization leads to economic growth and lower costs of goods, making products more accessible to a broader population.
2. Free Market & Invisible Hand
   - Smith believed in the “invisible hand” of the free market, where individuals pursuing their self-interest inadvertently contribute to society’s economic well-being. He felt that competition and self-interest would naturally regulate markets.
   - Without government interference, resources are allocated efficiently, leading to innovation, competitive prices, and choices, thus benefiting consumers and fostering economic growth.
3. Critique of Command Economies
   - Smith argued that command economies, where governments control resources and production, are inefficient, as central planners lack the information and flexibility to meet consumer needs effectively.
   - This misallocation leads to resource waste, scarcity of goods, and a lack of incentive for innovation, ultimately stalling economic progress and reducing individual freedom.

Question 32

what do prices do

Answer 32

• allocate scarce resources efficiently
• ration scarce resources by encouraging / discouraging consumption
• signal excess demand or supply
• incentivise producers to increase or decrease output to increase profit

Question 33

When will excess demand occur? and what’s the impacts

Answer 33

If prices are below equilibrium
- long queues of ppl desperate to buy a certain good or service, eg toilet paper during covid
- huge waiting lists, eg NHS
- competition between buyers
- naturally, prices will rise because of high demand
- new firms may be attracted by the increase in price and join the market, increases supply

Question 34

When will excess supply occur? and what’s the impacts

Answer 34

• when the price level is higher than equilibrium
  
  • Warehouses and shelves would be over stocked, restaurants empty
  • prices fall
  • less need for resources in a market
  • incentivises firms to decrease their output, sell their stocks, shown by a contraction along the supply curve, firms may leave market
  • rationing of scarce resources eg by encouraging consumption

Question 35

what do price mechanisms do when there is excess demand

Answer 35

• higher prices signal the fact that there has been excess demand for both consumers and producers. they also signal the need for more resources in the market
• incentivise firms to increase their output to make more profit(shown by an expansion along the supply curve, firms could be using spare capacity etc)
• higher prices ration scarce resources by discouraging consumption (shown by a contraction along the demand curve)
  
  • consumers bid up prices
• contraction on demand curve and expansion on the supply curve achieves allocative efficiency and brings economy back to equilibrium

Question 36

what do price mechanisms do when there is excess supply

Answer 36

• signals excess supply and need for less resources
• incentivises firms to reduce output and do things like liquidate stocks to increase profit(shown by contraction along supply curve
• ration scarce resources by encouraging consumption/ demand ( expansion alond demand curve)
• move to q2, equilibrium

Question 37

what is consumer surplus

Answer 37

the difference between the price consumers are willing and able to pay and the price they actually pay. usually a triangle found BELOW DEMAND CURVE and ABOVE PRICE LINE

Question 38

What is producer surplus

Answer 38

the difference between the price producers are willing and able to supply a good/service for and the price they actually receive
- usually a triangle found ABOVE THE SUPPLY CURVE and BELOW THE PRICE LINE

Question 39

how to find society surplus

Answer 39

consumer surplus + producer surplus

Question 40

how to find surplus when there are shifts

Answer 40

take the original surplus away from the new one

Question 41

complement goods are

Answer 41

goods that are in joint demand, goods that are bought together. if the price of one of the goods go up, the demand for both the goods decrease

Question 42

substitutes are

Answer 42

• goods that are in competitive demand, eg coke and pepsi. as the price of one substitute increases, demand for the other substitute shifts left

Question 43

what is derived demand

Answer 43

when demand for a good or service comes from the demand for something else
eg - cars and aluminium, labour and goods and services

Question 44

what is composite demand

Answer 44

the idea that two goods require the same input to make them. therefor, if there is an increase in the production of one good, there will be a decrease in the supply of another, because there is less of the input available to make the other

eg bread and livestock, cheese and butter (milk needed to make these)

Question 46

karl marx views

Answer 46

1. specialisation and division of labour
   - Marx argued that these alienate workers from their work and their own potential
   - workers perform repetitive and fragmented tasks, limiting their skills
   - making their work feel monotonous and disconnected from the end product
   - this could lead to resentment and dissatisfaction and high employee turnover
2. Marx viewed free markets as exploitative , profit over ppls wellbeing
   - in a free market, competition drives down wages and increase worker exploitation, as businesses aim to maximise profits
   - this relentless drive for profit caused class divisions, incomes inequality due to overproduction and underconsumption
3. Marx advocated for a command economy
   - with centralised planning, the state could allocate resources based on societal needs rather than profit, promoting fairness and equity
   - Marx believed this would reduce inequality and alienation, ultimately leading to a classless society where workers have control over their labour and its outcomes
4. Marx labour theory of value argues that value is derived from the labour invested in goods, not from market dynamics
   - under capitalism, capitalists exploit workers by paying them less than the value of their work, pocketing the surplus as profit
   - this “surplus values is inherently exploitative and unsustainable as it widens the gap between capitalists and workers, leading to economic instability

Question 47

john Maynard Keynes beliefs

Answer 47

Specialisation and Efficiency
- Keynes acknowledged the efficiency gains from specialisation and division of labour in boosting productivity and economic growth.
- By allowing workers to focus on specific tasks, production processes become streamlined, output per worker rises, and firms can achieve economies of scale.
- This contributes to higher aggregate supply and potentially greater economic output, but Keynes was cautious about its implications on aggregate demand and employment.

Vulnerability to Economic Shocks
- Keynes highlighted that excessive specialisation could make economies vulnerable to disruptions.
- If industries are highly specialised and dependent on external trade, a decline in global demand or trade restrictions can lead to unemployment and reduced incomes.
- This aligns with Keynes’ emphasis on the importance of managing aggregate demand to prevent economic downturns and unemployment.

Division of Labour and Worker Welfare
- Keynes expressed concern over the potential social consequences of extreme division of labour.
- While it improves efficiency, it can lead to monotonous work, worker alienation, and reduced job satisfaction, ultimately harming long-term productivity and welfare.
- These issues could lower aggregate demand due to reduced worker morale and consumption, which Keynes viewed as central to maintaining economic stability.

Role of Government in Mitigating Issues
- Keynes believed that government intervention could help address the inequalities and instabilities arising from specialisation.
- Through public investment, redistribution policies, and demand management, governments could balance the benefits of specialisation with the need for stable and inclusive economic growth.
- This would ensure that the productivity gains from specialisation contribute to overall economic welfare without exacerbating inequality or cyclical unemployment.