Price mechanism in action

Question 1

Give an example of a market where the price is volatile due to changes in supply.

Answer 1

agriculture, so eg wheat, as very dependent on weather

Question 2

Give an example of a market where the price is volatile due to changes in demand.

Answer 2

commodities, eg bauxite (used in production of aluminium), demand for which tends to follow economic cycle

Question 3

Give an example of an event effecting oil supply and therefore oil price

Answer 3

war in Ukraine

Question 4

Give an example of an event effecting oil demand and therefore oil price

Answer 4

Covid-19, due to reduced travel and production of goods

Question 5

Give an example of a market which tends to operate at a local level, with large regional differences,

Answer 5

housing

Question 6

How do interest rates affect house prices?

Answer 6

higher interest rates mean higher mortgage cost so reduce demand so reduce prices

Question 7

How does unemployment affect house prices?

Answer 7

reduced demand
(as can’t afford deposit / mortgage / rent)

Question 8

Give two examples of derived demand.

Answer 8

• foreign exchange, as £ wanted for the goods and services they can buy
• labour, as wanted for the goods and services they can produce

Question 9

Define indirect tax.

Answer 9

tax levied on on expenditure on goods or services

Question 10

Define specific tax.

Answer 10

a sales tax set at a constant amount per unit of sales

Question 11

Given two examples of UK indirect taxes.

Answer 11

• VAT
• excise duty on alcohol and tobacco

Question 12

Who pays the indirect tax in the UK?

Answer 12

The seller of the good/service is responsible for paying it, but the incidence of the tax is split between buyer and seller (as price increases, but not by amount of tax).

Question 13

Give an example of a specific tax in the UK.

Answer 13

excise duty on alcohol and cigarettes

Question 14

Define incidence of tax.

Answer 14

the way the burden of paying the sales tax is divided between buyers and sellers

Question 15

Define ad valorem tax.

Answer 15

sales tax set at % of price

Question 16

Give an example of a UK ad valorem tax.

Answer 16

VAT

Question 17

Define subsidy.

Answer 17

grant given by government to producers to encourage production of a good or service

Question 18

Define habitual behaviour.

Answer 18

When consumers persist in acting in a particular way even when conditions change.

Question 19

Define herding.

Answer 19

where people take decisions based on actions of others rather than a rational evaluation of the situation

Question 20

Give two examples of common habitual behaviour.

Answer 20

• buying cigarettes (or other addictive products)
• gym membership (or other subscriptions) due to inertia

Question 21

Define nudge theory.

Answer 21

analysis that suggests behaviour can be influenced by making desirable decisions easy to make

Question 22

Give examples of use of nudge theory.

Answer 22

• opt-out legislation, eg organ donation or workplace pensions
• signs saying “take your litter home as others do”
• signs saying “CCTV cameras are watching you”