Revision Test Corrections

Question 1

Define the term ‘economic growth’

Answer 1

-An increase in real GDP

OR

-An increase in an economy’s productive capacity/potential

Question 2

Define the term ‘marginal propensity to consume’

Answer 2

The proportion of one additional unit of income that is spent

Change in total consumption over change in income

Question 3

Explain some limitations of using the CPI to measure the rate of inflation

Answer 3

CPI is not fully representative as it is a figure for the ‘average’ household.

CPI does not include mortgage interest payments/it also excludes council tax, TV licences etc, which may be a considerable expense to some households

May suffer from sampling bias, either in Living Costs and Food (LCF) Survey, or price survey

Difficult to account for the changing quality of goods and services so inflation may be overestimated

Question 4

Define the term ‘productivity’

Answer 4

Output per unit of input

Question 5

True or false:

The Keynesian LRAS curve implies that an economy may have a negative output gap in the long run

Answer 5

True

Question 6

True or false:

The Keynesian LRAS curve is perfectly inelastic at all levels of real national output.

Answer 6

False

Question 7

True or false:

The classic LRAS curve implies that an economy may have spare capacity in the long run.

Answer 7

False

Question 8

True or false:

The classical LRAS curve is perfectly elastic at all levels of real national output

Answer 8

False

Question 9

Gini coefficient

Answer 9

Measures how equally income is distributed in a society, where 0 = perfectly equal, 1 = all income goes to 1 person.

Question 10

Palma ratio

Answer 10

Ratio of the income of the richest 10% of households to the income of the poorest 40% of people

Question 11

P90/10 ratio

Answer 11

Calculated as the ration of incomes of the person at the 90th percentile and the person at the 10th percentile

Question 12

Asymmetric information

Answer 12

Where one party has more information than the other, leading to market failure

Question 13

Ceteris Paribus

Answer 13

All other things remaining the same

Question 14

Complementary goods

Answer 14

Negative XED; if good B becomes more expensive, demand for good A falls

Question 15

Consumer surplus

Answer 15

The difference between the price the consumer is willing to pay and the price they actually pay

Question 16

Cross elasticity of demand

Answer 16

The responsiveness of demand for one good (A) to a change in price of another good (B)

Question 17

Diminishing marginal utility

Answer 17

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping.

Question 18

Division of labour

Answer 18

When labour becomes specialised during the production process to do a specific task in cooperation with other workers

Question 19

Enterprise

Answer 19

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

Question 20

Externalities

Answer 20

The cost or benefit a third party receives from an economic transaction outside of the market mechanism.

Question 21

External cost/benefit

Answer 21

The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit

Question 22

Free market

Answer 22

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

Question 23

Command economy

Answer 23

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

Question 24

Free rider principle

Answer 24

People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit

Question 25

Government failure

Answer 25

When govt intervention leads to a net welfare loss in society

Question 26

Habitual behaviour

Answer 26

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

Question 27

Incidence of tax

Answer 27

The tax burden on the taxpayer

Question 28

Income elasticity of demand (YED)

Answer 28

The responsiveness of demand to a change in income

Question 29

Inferior goods

Answer 29

YED<0; goods which see a fall in demand as income increases

Question 30

Information gap

Answer 30

When an economic agent lacks the information needed to make a rational, informed decision

Question 31

Information provision

Answer 31

When the government intervenes to provide information to correct market failure

Question 32

Luxury goods

Answer 32

YED>1; an increase in incomes causes an even bigger increase in demand

Question 33

Market failure

Answer 33

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

Question 34

Mixed economy

Answer 34

Both the free market mechanism and the government allocate resources

Question 35

Model

Answer 35

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

Question 36

Negative externalities of production

Answer 36

Where the social costs of producing a good are greater than the private costs of producing the good

Question 37

Normal goods

Answer 37

YED>0; demand increases as income increases

Question 38

Normative statement

Answer 38

Subjective statements based on value judgements and opinions; cannot be proven or disproven

Question 39

Opportunity cost

Answer 39

The cost associated with the next best alternative

Question 40

Perfectly price elastic good

Answer 40

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes

Question 41

Perfectly price inelastic good

Answer 41

PED/PES=0; quantity demanded/supplied does not change when price changes

Question 42

Examples of perfectly elastic products

Answer 42

Luxury products, such as jewels, gold and high-end cars.

Question 43

Positive externalities of consumption

Answer 43

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

Question 44

Positive statement

Answer 44

Objective statements which can be tested with factual evidence to be proven or disproven

Question 45

Price elasticity of demand (PED)

Answer 45

The responsiveness of demand to a change in price

Question 46

Price elasticity of supply (PES)

Answer 46

The responsiveness of supply to a change in price

Question 47

Private cost/benefit

Answer 47

The cost/benefit to the individual participating in the economic activity

Question 48

Producer surplus

Answer 48

The difference between the price the producer is willing to charge and the price they actually charge

Question 49

Rationality

Answer 49

Decision-making that leads to economic agents maximising their utility

Question 50

Regulation

Answer 50

Laws to address market failure and promote competition between firms

Question 51

Relatively price elastic good

Answer 51

When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied

Question 52

Relatively price inelastic good

Answer 52

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

Question 53

Social cost/benefit

Answer 53

The cost/benefit to society as a whole due to the economic activity

Question 54

Social optimum position

Answer 54

Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare

Question 55

Social science

Answer 55

The study of societies and human behaviour

Question 56

Specialisation

Answer 56

The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others

Question 57

Specific tax

Answer 57

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

Question 58

State provision of goods

Answer 58

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

Question 59

Subsidy

Answer 59

Government payments to a producer to lower their costs of production and encourage them to produce more

Question 60

Substitutes

Answer 60

Positive XED; if good B becomes more expensive, demand for good A rises

Question 61

Symmetric information

Answer 61

Where buyers and sellers both have access to the same information

Question 62

Trade pollution permits

Answer 62

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

Question 63

Unitary price elastic good

Answer 63

When PED/PES=1; a change in price leads to a change in output by the same proportion

Question 64

Utility

Answer 64

The satisfaction derived from consuming a good

Question 65

Weakness at computation

Answer 65

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

Question 66

Balance of payments

Answer 66

A financial document that measures a country’s economic activities with all other countries over a period of time.

Question 67

Current account

Answer 67

An account within the balance of payments that records the trade in goods and services over a period of time

Question 68

Financial account

Answer 68

An account within the balance of payments that records all the flows of capital into and out of a country

Question 69

3 elements recorded on the current account of the balance of payments

Answer 69

Trade of Goods and Services Transfer of Investment Income Foreign Aid Transfers

Question 70

Aim of austerity measures

Answer 70

Reduces state sector and encourages the private sector to expand. Lowers budget deficits.

Question 71

Advantages of specialisation and the division of labour in organising production

Answer 71

Labour productivity increases Higher quality of goods and services (potentially) More cost effective to develop specialist tools Time is not wasted moving between jobs and getting out tools Workers only need to be trained for one task (saving time and money)

Question 72

Disadvantages of specialisation and the division of labour in organising production

Answer 72

If someone is only doing one specific task, boring, lower quality of work. You can reduce this, maybe play music. There is a reduction of craftsmanship and a much more standardised product because of mechanisation If production in one process is delayed, every other task has to stop until that problem is solved. The workforce do not have wide industrial training and could therefore suffer structural unemployment.

Question 73

Advantages of specialising in the production of goods and services to trade

Answer 73

The theory of comparative advantage: countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. Would lead to greater output.

Question 74

Disadvantages of specialising in the production of goods and services to trade

Answer 74

Countries may become over-dependent on one particular export and if this fails their economy may collapse. Manchester (ship building, structural unemployment) or developing countries (crops failing due to weather) Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country. There will be high interdependence, will cause problems if trade is prevented, through war, for example. Some say that it will cause more competition to cut costs and wages therefore fall (however this isn’t necessarily true).

Question 75

Functions of money

Answer 75

A medium of exchange (is acceptable everywhere) A measure of value (can compare value of two goods, and put value on labour) A store of value (it can keep its value for a long time, while things like fruit as a form of exchange can expire) A method for deferred payment (people can pay for things without having money in the present, loans)

Question 76

Advantages of free market economy

Answer 76

The system is automatic. Resources are moved out of production of a good when people stop wanting it or costs are too high. Consumers have freedom of choice, called consumer sovereignty. There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish. There is political freedom Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency. In general, freer market economies tend to have higher growth.

Question 77

What is allocative efficiency?

Answer 77

This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences.

Question 78

What is productive efficiency?

Answer 78

It’s concerned with producing goods and services with the optimal combination of inputs to produce the maximum output for the minimum cost. On PPF

Question 79

Disadvantages of free market economy

Answer 79

High levels of inequality Lack of merit goods and little control of demerit goods Resources could be wasted on unproductive expenses such as advertising, switching the factors of production and providing competitive services. If competition disappears then there may be monopolies, who charge high prices and offer low quality of service. There is the problem of externalities

Question 80

Advantages of a command economy

Answer 80

The state provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality. There is less wastage of resources as there is no need for competitive services nor advertising, which is very expensive. Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term. Standardised products means that they are produced cost effectively. The government are motivated by the well-being of the country, not profits.

Question 81

Disadvantages of a command economy

Answer 81

It is impossible for the state to make so many decisions correctly, which could lead to over/under supply and a waste of resources. Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption. As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living. Consumers lose their freedom and it is often led by dictators.

Question 82

The government’s role in a mixed economy

Answer 82

Creating a framework of rules (prevent monopolies, protect customers through laws, ensuring property rights, ensuring safety standards) Supplements and modifies the price system (public and merit goods) Redistributes income (income tax, for example) Stabilises the economy (the govt will attempt to manage the level of demand in the economy to prevent extremes, fiscal/monetary policy)

Question 83

Conditions affecting demand

Answer 83

``` Population Income Related goods Advertising Taste/fashion Expectations (future predictions, hard drives, chia?) Seasons Govt legislation (young children have to sit in car booster seats) ```

Question 84

Factors affecting PED

Answer 84

``` Availability of substitutes Time (more time, easier to find the substitutes) Necessity % of disposable income Addictive ```