Paper 1

Question 1

How do you structure a supply side policy 20 marker?

Answer 1

• Define supply side policy and terms in the question
• Use extract to explain there may be a shift in Long run AS curve and refer to the extract.
• Draw LRAS curve
  -Explain the impact on the main economic objectives
• give drawbacks of supply side policy and government failure
  conclusion- is the policy effective? can we question the benefits? should we pursue a more market based or interventionist approach? should the policy go ahead?

Question 2

What are the 5 economic objectives?

Answer 2

Full employment
price stability
economic growth
redistribution of income
balance of payments

Question 3

define supply side policies ?

Answer 3

Policies implemented by the government to increase productivity and efficiency in the economy.

Question 4

define merit good.

Answer 4

A merit good is a good that benefits third parties as well as the buyer and seller such as a gym membership or education.

Question 5

define demerit good

Answer 5

A demerit good is a good that can cause an affect on a third party as well as the buyer such as cigarettes or alcohol.

Question 6

define externalities.

Answer 6

Positive or negative side effects that affect a third party who is neither a buyer or seller.

Question 7

What are 3 drawbacks of supply side policy?

Answer 7

1. It can take a long time to see an effect
2. There is a wide level of disagreement with how to increase LRAS and if supply side policies are effective
3. Most supply side improvements have to come from the private sector.

Question 8

What are the 5 types of government failure?

Answer 8

• Excessive administration costs
• Incomplete information
• unintended consequences
• public choice theory
• price distortion

Question 9

name 3 examples of a market based approach to supply side policies?

Answer 9

• cut corporation tax
• cut welfare benefits
• privatisation

Question 10

name 3 examples of interventionalist based approaches to supply side policies?

Answer 10

• Subsidise Research and development
• Invest in infrastructure
• subsidise training

Question 11

How do you structure a wider economic environment question?

Answer 11

• Definition
• Impact on revenue
• Impact on cost
• conclusion (Price elasticity and income elasticity)

Question 12

Define Inflation

Answer 12

A sustained increase in the average price level

Question 13

Define exchange rates

Answer 13

The price of one currency expressed in terms of another.

Question 14

Define unemployment

Answer 14

The number of people actively seeking work but cannot obtain suitable employment

Question 15

Define interest rates

Answer 15

The cost of borrowing and the return on savings

Question 16

Define Indirect taxation

Answer 16

Taxes charged on expenditure such as VAT and sugar tax.

Question 17

Define direct taxation

Answer 17

Taxes paid directly by the tax payer such as those on earnings e.g. income tax.

Question 18

how do you calculate gross profit?

Answer 18

Revenue - cost of sales

Question 19

how do you calculate operating profit?

Answer 19

gross profit - other operating expenses

Question 20

how do you calculate net profit?

Answer 20

operating profit - interest

Question 21

how do you work out profit margins?

Answer 21

0 Profit / revenue x 100

0 = gross, net or operating

Question 22

define specific tax.

Answer 22

An indirect tax which has a fixed amount a firm has to pay for every unit sold

Question 23

define subsidy

Answer 23

Payments by the government to the suppliers that reduce costs

Question 24

what are the effects of a tax? (5 step analysis chain)

Answer 24

• Leads to increased costs
• Higher costs lead to a lower profit margin this decreases the firms incentive to produce leading to a decrease in supply
• To maintain it’s profit margin the business will increase prices and pass the cost on to consumer
• Consumers will switch to cheaper goods leading to a fall in quantity demanded
• Without government intervention the demerit good or negative externality will be over produced and over consumed. By reducing the amount sold the tax will move the level of production and consumption to a more socially optimum level, correcting market failure.

Question 25

What are 2 drawbacks of indirect taxation?

Answer 25

• They can have unintended consequences such as being regressive .
• If the good is relatively price inelastic then the tax will not be very effective in reducing consumption

Question 26

What happens to the supply curve on a tax diagram?

Answer 26

decrease in supply, leftward shift

Question 27

define segmentation?

Answer 27

Breaking up the market into different groups of customers e.g. demographics (age, gender, location)

Question 28

Define market segment

Answer 28

A group of customers with similar wants

Question 29

what are 2 benefits and disadvantages of primary research?

Answer 29

+ specific to the business
+ competitors don’t have access to the data
- Expensive
- Time consuming

Question 30

what are 2 benefits and disadvantages of secondary research?

Answer 30

+ easy to collect
+ quick to collect
- not specific to the business
- may not be accurate

Question 31

What are 5 factors that can change demand?

Answer 31

• tastes and preference
• real income
• prices of substitutes
• branding
• population

Question 32

What are 5 factors that can change supply?

Answer 32

• costs
• change in technology
• indirect tax
• increase in competition
• external shocks