primary product

Question 1

Oil is a primary product, and the oil and gas sector accounts for approximately 50% of Saudi Arabia’s Gross Domestic Product. A change in the price of oil does not have a significant effect on the demand for oil in Saudi Arabia.

Answer 1

Oil is a primary product, so it has an inelastic price elasticity of supply. This is because there is a limited amount of oil, so it is difficult to find new oil reserves in order to increase supply. It takes time to find new reserves and to extract the oil from them. So, even if price increases, it will take a long time for supply to respond.
An inelastic supply curve should be steep and upward sloping. An increase in price will only cause a small increase in quantity as shown below.

Question 2

Bananas take approximately 9 to 12 months to grow and must be should within 8 days of being picked
to?

Answer 2

The supply of bananas is price inelastic, which means that a change in price will not have a large effect on quantity supplied. According to the information given, there are two main reasons for this:
1. They take a long time to grow. If the price increases today then it will take 9 to 12 months for the supply to respond. This means that they are price inelastic in the short run and they become more elastic in the long run.
2. They cannot be stored for long. This means that firms can’t stockpile lots of bananas ready for a price increase as they will go off. This means that supply cannot easily respond to a change in price.

Question 3

Complete the following statement: The demand for most primary products does not _____ very much to a change in the income. This means that it is income _____.

Answer 3

Change
Inelastic

Question 4

Which of the following shows an impact of very inelastic supply and demand ?

Answer 4

The supply and demand curves for primary products are very steep. This means that any change in supply or demand leads to a very large change in price as shown below.

Question 5

Complete the following statement: Unstable prices make it much harder for _____ to predict future prices. This makes it harder for them to predict their future revenue and, therefore, their future ______ .

Answer 5

Complete the following statement: Unstable prices make it much harder for investors to predict future prices. This makes it harder for them to predict their future revenue and, therefore, their future profit .

Question 6

How do low levels of investment affect aggregate supply and demand ?

Answer 6

Low levels of investment will keep AD to the left as investment is a component of AD.
Low levels of investment will also keep LRAS to the left as low investment will keep productivity low, which will keep the productive capacity of the economy low.
Both of these will keep real GDP low.

Question 7

Which of the following shows a likely impact of low profits in Chile ?

Answer 7

Corporation tax is paid as a percentage of a company’s profits. If Chilean companies are making low profits then they will pay low corporation tax.

Question 8

Which of the following explains why price instability can constrain growth and development ?

Answer 8

Unstable prices make it much harder for investors to predict future prices. This makes it harder for them to predict their future revenue and therefore their future profit. This means that investment will decrease

Question 9

Which of the combinations below shows the impact of low investment ?

Answer 9

Unstable prices -> Low levels of investment -> Keeps AD left -> Limits real GDP -> Limits economic development



Unstable prices -> Low levels of investment -> Decreases productivity -> Left shift of LRAS -> Decrease real GDP -> Limits economic development



Unstable prices -> Low levels of investment -> Decrease productivity -> Increase unit costs -> Increase prices -> Less competitive -> Less profit -> Less corporation tax revenue -> Less government spending on development