Test 1 Review

Question 1

What is a business?

Answer 1

An organization or entity that engages in commercial, industrial, or professional activities for profit or social good.

Different types of business include sole proprietorships, partnerships, corporations, and cooperatives.

Businesses can operate in various industries, markets, and locations.

Examples of well-known businesses are Apple, Walmart, Starbucks, and Microsoft.

Question 2

What is the difference between Expenses and Costs?

Answer 2

A cost is the amount of money that is paid to acquire, produce, or maintain something.

An expense is the amount of money that is consumed or used up in the process of generating revenue.

For example, if you buy a machine for $10,000, that is a cost. The cost of the machine is an asset that can be used for future production. However, if you use the machine to make products and sell them, you incur expenses such as depreciation, electricity, maintenance, and labour. These expenses are deducted from your revenue to calculate your profit.

Costs are usually capitalized, which means they are recorded as assets on the balance sheet and depreciated over time.

Expenses are usually expensed, which means they are recorded as reductions of income on the income statement and are tax-deductible in the year they are incurred.

Question 3

How do you calculate profit? (Profit Equation)

Answer 3

Profit is the money that is left after subtracting the costs and expenses from the revenue

Profit Equation:

Profit = Revenue - Costs - Expenses

Revenue is the total income generated from selling goods or services. Costs are the direct expenses incurred in producing or acquiring the goods or services. Expenses are the indirect or overhead costs associated with running the business, such as rent, utilities, taxes, etc.

For example, suppose you sell 100 units of a product for $10 each.

Your revenue is $10 x 100 = $1000.

Your costs are $5 x 100 = $500.

Your expenses are $200 for rent, $50 for electricity, and $100 for taxes.

Your total expenses are $200 + $50 + $100 = $350

Your profit is :
Profit = $1,000 - $500 - $350 = $150

You can also calculate the profit per unit by dividing the total profit by the number of units sold. In this example, the profit per unit is

Profit per unit = $150 / 100 = $1.5

This means that for every unit you sell, you earn $1.50 in profit.

Question 4

What are goods? Give examples.

Answer 4

Goods are products that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product.

Goods are usually tangible and transferable, as opposed to services, which are intangible and non-transferable

Some examples of goods are:

• Food items, such as apples, bananas, bread, cheese, etc.
• Clothing items, such as shirts, pants, shoes, hats, etc.
• Electronic devices, such as laptops, smartphones, tablets, cameras, etc.
• Household appliances, such as refrigerators, washing machines, microwaves, etc.
• Vehicles, such as cars, bikes, buses, trains, etc.
• Books, magazines, newspapers, etc.

Question 5

What are services? Give examples.

Answer 5

Services are activities or benefits that one party offers to another, which are intangible and do not result in the ownership of anything.

Services are usually performed by people or machines, and can vary in quality, consistency, and customization.

Services can be delivered in person, over the phone, online, or through other channels.

Some examples of services are:

• Education: Teachers, tutors, coaches, and other educators provide knowledge, skills, and guidance to students or learners.
• Health care: Doctors, nurses, dentists, therapists, and other health professionals provide diagnosis, treatment, prevention, and care for physical and mental health issues.
• Entertainment: Actors, musicians, comedians, writers, and other entertainers provide amusement, enjoyment, and diversion to audiences.
• Transportation: Drivers, pilots, train operators, and other transporters provide movement of people or goods from one place to another.
• Financial: Bankers, accountants, financial advisors, and other financial experts provide money management, investment, lending, and other financial services.
• Legal: Lawyers, judges, paralegals, and other legal professionals provide advice, representation, and resolution of legal matters.
• Hospitality: Chefs, waiters, hotel staff, and other hospitality workers provide food, drink, accommodation, and other services to guests or customers.

Question 6

What are needs? Give examples.

Answer 6

Needs are the basic requirements for human survival and well-being, such as food, water, shelter, and health care.

In economics, needs are distinguished from wants, which are things that people desire but are not essential for survival.

Needs are limited and universal, while wants are unlimited and vary from person to person.

Some examples of needs are:

• Food: This is a need that provides energy and nutrients for the body. Without food, a person will starve and eventually die.
• Water: This is a need that hydrates the body and helps regulate its functions. Without water, a person will dehydrate and suffer from various health problems.
• Shelter: This is a need that protects a person from harsh weather, predators, and other threats. Without shelter, a person will be exposed to danger and discomfort.
• Health care: This is a need that prevents, diagnoses, and treats physical and mental illnesses. Without health care, a person will be vulnerable to diseases and infections.

Question 7

What are wants? Give examples.

Answer 7

Wants are desires for things that go beyond the basic necessities of life.

They are not essential for survival or well-being, but they can make life more enjoyable, comfortable, or satisfying.

Some examples of wants are:

• A new smartphone with the latest features and apps
• A vacation to an exotic destination with your family or friends
• A designer outfit that makes you look stylish and fashionable
• A subscription to a streaming service that offers your favourite shows and movies
• A gourmet meal at a fancy restaurant with a great ambiance

Wants are different from needs, which are the things you can’t get by without, such as food, water, shelter, health care, etc.

Needs are necessary for your physical and mental health, while wants are optional and depend on your personal preferences.

Question 8

Why are some products obsolete? Give an example.

Answer 8

Some products become obsolete because they are replaced by newer and more advanced alternatives that offer better functionality, quality, or convenience.

For example, VCRs became obsolete when DVDs and media-streaming services became more popular and accessible.

VCRs were bulky, had low video quality, and required tapes that could degrade over time.

Question 9

What is the difference between pricing power and purchasing power?

Answer 9

Pricing power and purchasing power are two related but distinct concepts in economics. Pricing power is the ability of a firm to change the price of its product or service without affecting the demand for it. Purchasing power is the value of a currency in terms of the amount of goods or services it can buy.

Pricing power depends on factors such as the uniqueness of the product, the availability of substitutes, the level of competition, and the elasticity of demand. A firm with high pricing power can charge higher prices and still maintain or increase its sales volume. A firm with low pricing power has to keep its prices low or risk losing customers to competitors.

Purchasing power depends on factors such as the inflation rate, the exchange rate, the income level, and the availability of credit. A currency with high purchasing power can buy more goods or services with the same amount of money. A currency with low purchasing power can buy less goods or services with the same amount of money.

For example, Apple has high pricing power because its products are innovative, differentiated, and have loyal customers. Apple can increase the price of its iPhones and still sell millions of units.

On the other hand, Zimbabwe has low purchasing power because its currency has experienced hyperinflation, which erodes the value of money. A Zimbabwean dollar can buy very few goods or services compared to a U.S. dollar.

Question 10

What are natural resources? Give examples.

Answer 10

Natural resources are resources that are drawn from nature and used with few modifications. They can be classified into renewable and non-renewable resources.

Renewable resources are those that can be replenished or regenerated by natural processes, such as sunlight, wind, water, plants, and animals.

Non-renewable resources are those that exist in a fixed amount or are consumed faster than they can be replaced, such as fossil fuels, minerals, and metals.

Some examples of natural resources are:

• Air: This is a renewable resource that provides oxygen for respiration, carbon dioxide for photosynthesis, and nitrogen for plant growth. Air also regulates the climate and weather patterns.
• Water: This is a renewable resource that hydrates living organisms, transports nutrients and wastes, and supports aquatic ecosystems. Water also shapes the landscape and forms natural features such as rivers, lakes, and oceans.
• Soil: This is a renewable resource that supports plant growth, stores water and nutrients, and hosts a variety of organisms. Soil also filters pollutants and decomposes organic matter.
• Forests: These are renewable resources that provide timber, food, medicine, and habitat for wildlife. Forests also produce oxygen, store carbon, and prevent soil erosion.
• Petroleum: This is a non-renewable resource that is used as a fuel and a raw material for various products, such as plastics, paints, and cosmetics. Petroleum also provides energy for transportation, heating, and electricity generation.

Question 11

What are human resources? Give examples.

Answer 11

Human resources (HR) is the department that manages an organization’s employees and ensures their well-being and performance.

HR professionals handle various tasks, from recruiting and compliance to benefits and training, and can specialize in different areas.

Some examples of human resources are:

• HR Manager: This is a senior role that oversees the overall HR strategy and operations of an organization. HR Managers are responsible for planning, directing, and coordinating the HR policies and programs, such as recruitment, compensation, labor relations, and employee development.
• HR Specialist: This is a role that focuses on a specific aspect of HR, such as talent acquisition, payroll, benefits, or training. HR Specialists are experts in their field and provide support and guidance to other HR staff and managers.
• HR Assistant: This is a role that performs administrative and clerical duties for the HR department, such as maintaining employee records, scheduling interviews, processing paperwork, and answering inquiries. HR Assistants are often the first point of contact for employees and candidates.

Question 12

What are capital resources? Give examples.

Answer 12

Capital resources are human-made assets that are used in the production of goods or services.

They can include physical items, such as machinery, buildings, vehicles, and tools, or intangible items, such as software, patents, and trademarks.

Capital resources help businesses increase their productivity, efficiency, and profitability.

Some examples of capital resources are:

• A factory that produces cars, using machines, robots, and conveyor belts
• A hospital that provides health care, using beds, equipment, and medical records
• A school that offers education, using classrooms, computers, and textbooks
• A restaurant that serves food, using kitchen appliances, tables, and menus
• A bank that offers financial services, using ATMs, software, and security systems

Question 13

Why are businesses and countries interdependent? How?

Answer 13

Businesses and countries are interdependent because they rely on each other for trade, investment, innovation, and cooperation.

Interdependence means that the actions and outcomes of one party affect the well-being and interests of another party.

Some examples of how businesses and countries are interdependent are:

• Trade: Businesses and countries exchange goods and services that they produce or need, creating a global market and value chains. Trade allows businesses and countries to specialize, diversify, and access new opportunities. Trade also creates interdependency, as changes in supply, demand, prices, or policies in one country can affect the trade partners and competitors of that country.
• Investment: Businesses and countries invest in each other’s assets, such as stocks, bonds, real estate, or infrastructure, to earn returns or gain influence. Investment enables businesses and countries to access capital, technology, and markets, as well as to share risks and benefits. Investment also creates interdependency, as the performance and stability of one country’s economy can affect the investors and investees of that country.
• Innovation: Businesses and countries collaborate in research and development, education, and entrepreneurship, to generate new ideas, products, and solutions. Innovation fosters businesses and countries to improve their productivity, competitiveness, and quality of life. Innovation also creates interdependency, as the diffusion and adoption of innovations depend on the networks and norms of cooperation among businesses and countries.
• Cooperation: Businesses and countries cooperate in various issues and challenges that require collective action, such as climate change, security, health, and human rights. Cooperation enables businesses and countries to address common problems, share best practices, and achieve mutual goals. Cooperation also creates interdependency, as the success and failure of cooperation depend on the trust and commitment of businesses and countries.

Question 14

What 3 major questions do economic systems have to answer?

Answer 14

Economic systems are the ways that societies organize the production and distribution of goods and services.

All economic systems have to answer three major questions:

• What to produce? This question involves deciding what kinds of goods and services to produce and in what quantities. Different societies may have different preferences and needs for various products, such as food, clothing, health care, education, etc.
• How to produce? This question involves deciding what methods and resources to use to produce the goods and services. Different societies may have different levels of technology, skills, and capital available for production, as well as different environmental and social impacts of production.
• For whom to produce? This question involves deciding who gets to consume the goods and services that are produced. Different societies may have different ways of distributing income, wealth, and access to the products, such as through markets, governments, or traditions.

Different economic systems may answer these questions differently, depending on their values, goals, and institutions.

Some examples of economic systems are capitalism, socialism, and communism.

Question 15

What is the Law of Demand

Answer 15

The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good, and vice versa.

The law of demand is based on the idea that consumers have limited income and will prioritize their needs and wants according to their preferences and budget constraints.

The law of demand can be illustrated by a downward-sloping demand curve, which shows the inverse relationship between price and quantity demanded.

Question 16

What is the Law of Supply

Answer 16

The law of supply is a principle of economics that states that as the price of a good or service increases, the quantity of that good or service that suppliers offer will increase, and vice versa.

This means that suppliers are willing and able to produce more of a product when they can sell it at a higher price, and less of a product when they can sell it at a lower price.

The law of supply can be shown by an upward-sloping supply curve, which represents the positive relationship between price and quantity supplied.

Question 17

How do you draw a supply and demand graph? Label the different parts.

Answer 17

To draw a supply and demand graph, you need to plot the supply curve and the demand curve on a coordinate system, where the horizontal axis represents the quantity of a good or service and the vertical axis represents the price of a good or service.

The supply curve shows the relationship between price and quantity supplied, while the demand curve shows the relationship between price and quantity demanded.

The point where the supply curve and the demand curve intersect is called the equilibrium point, which indicates the equilibrium price and quantity in the market.

The different parts of a supply and demand graph are labelled in the following diagram:

https://www.lucidchart.com/pages/examples/supply-demand-graph-maker

Question 18

Read the supply and demand graph, what is QD and QS at various price levels.

Answer 18

The supply and demand graph is a tool that shows how the quantity demanded and supplied of a good or service changes as the price changes.

The quantity demanded (QD) is the amount of the good or service that consumers are willing and able to buy at a given price.

The quantity supplied (QS) is the amount of the good or service that producers are willing and able to sell at a given price.

The graph has two curves: the demand curve (D) and the supply curve (S).

The demand curve slopes downward, indicating that as the price increases, the quantity demanded decreases.

The supply curve slopes upward, indicating that as the price increases, the quantity supplied increases.

The point where the two curves intersect is called the equilibrium point (E), where the quantity demanded equals the quantity supplied.

The price at this point is called the equilibrium price (P) and the quantity at this point is called the equilibrium quantity (Q).

To read the supply and demand graph, we can use the following steps:

• Identify the price level that we are interested in. For example, let’s say we want to know the QD and QS at a price of $5.
• Draw a horizontal line from the price level to the demand curve. This will show us the QD at that price. For example, at a price of $5, the QD is 40 units.
• Draw a horizontal line from the price level to the supply curve. This will show us the QS at that price. For example, at a price of $5, the QS is 60 units.
• Compare the QD and QS at that price. If QD > QS, there is a shortage of the good or service. If QD < QS, there is a surplus of the good or service. If QD = QS, there is no shortage or surplus and the market is in equilibrium. For example, at a price of $5, there is a surplus of 20 units (60 - 40).

We can repeat these steps for any price level that we want to analyze.

For example, at a price of $3, the QD is 60 units and the QS is 40 units, creating a shortage of 20 units.

At a price of $4, the QD is 50 units and the QS is 50 units, creating an equilibrium.

At a price of $6, the QD is 30 units and the QS is 70 units, creating a surplus of 40 units.

Question 19

Describe equilibrium, shortage and surplus situations. Prove using QD and QS.

Answer 19

Equilibrium, shortage, and surplus are situations that describe the relationship between the quantity demanded (QD) and the quantity supplied (QS) of a good or service at a given price.

• Equilibrium: This is the situation where QD = QS, meaning that the amount that consumers want to buy is equal to the amount that producers want to sell. At equilibrium, there is no excess supply or demand, and the market is cleared. The price and quantity that correspond to equilibrium are called the equilibrium price and equilibrium quantity.
• Shortage: This is the situation where QD > QS, meaning that the amount that consumers want to buy is greater than the amount that producers want to sell. A shortage occurs when the price is below the equilibrium price, creating excess demand. A shortage puts upward pressure on the price, as consumers compete for the limited supply and producers raise their prices to increase their profits. The price will rise until it reaches the equilibrium price, where the shortage is eliminated.
• Surplus: This is the situation where QD < QS, meaning that the amount that consumers want to buy is less than the amount that producers want to sell. A surplus occurs when the price is above the equilibrium price, creating excess supply. A surplus puts downward pressure on the price, as producers compete for the limited demand and lower their prices to increase their sales. The price will fall until it reaches the equilibrium price, where the surplus is eliminated.

To prove these situations using QD and QS, we can use the following example of the market for gasoline, based on the data in Table 1.

Table 1. Price, Quantity Demanded, and Quantity Supplied

Price (per gallon) : Quantity demanded (millions of gallons) : Quantity supplied (millions of gallons)

$1.00 : 800 : 500
$1.20 : 700 : 550
$1.40 : 600 : 600
$1.60 : 550 : 640
$1.80 : 500 : 680
$2.00 : 460 : 700
$2.20 : 420 : 720

We can plot the QD and QS data on a graph, where the horizontal axis represents the quantity of gasoline and the vertical axis represents the price of gasoline.

The QD data forms a downward-sloping demand curve, and the QS data forms an upward-sloping supply curve.

The point where the demand curve and the supply curve intersect is the equilibrium point, which indicates the equilibrium price and quantity.

In this example, the equilibrium price is $1.40 per gallon and the equilibrium quantity is 600 million gallons. This is shown in Figure 1.

Question 20

What factors can increase or decrease demand? Give examples.

Answer 20

The demand for a good or service depends on several factors, such as the price of the good, the income of the consumers, the preferences of the consumers, the prices of related goods, and the expectations of the future.

These factors can increase or decrease the quantity demanded at each price, causing the demand curve to shift right or left. Some examples of how these factors can affect demand are:

• Price: This is the most direct factor that affects demand. According to the law of demand, as the price of a good or service increases, the quantity demanded decreases, and vice versa. For example, if the price of a movie ticket increases, people will demand fewer movie tickets, and if the price of a movie ticket decreases, people will demand more movie tickets. This causes a movement along the demand curve, not a shift of the demand curve.
• Income: This factor affects the demand for normal and inferior goods. Normal goods are goods that consumers demand more of as their income increases, such as cars, clothes, and entertainment. Inferior goods are goods that consumers demand less of as their income increases, such as public transportation, used clothing, and fast food. For example, if the income of consumers increases, the demand for normal goods will increase and the demand for inferior goods will decrease, shifting the demand curves right and left, respectively.
• Preferences: This factor affects the demand for goods and services that consumers like or dislike. Preferences can be influenced by tastes, trends, advertising, and social factors. For example, if consumers develop a preference for organic food, the demand for organic food will increase, shifting the demand curve right. If consumers lose interest in a fad product, the demand for that product will decrease, shifting the demand curve left.
• Prices of related goods: This factor affects the demand for goods and services that are substitutes or complements. Substitutes are goods that can be used in place of each other, such as tea and coffee. Complements are goods that are used together, such as popcorn and soda. For example, if the price of a substitute good increases, the demand for the other good will increase, shifting the demand curve right. If the price of a complement good increases, the demand for the other good will decrease, shifting the demand curve left.
• Expectations: This factor affects the demand for goods and services that consumers anticipate to buy in the future. Expectations can be influenced by information, predictions, and uncertainty. For example, if consumers expect the price of a good to increase in the future, the demand for that good will increase in the present, shifting the demand curve right. If consumers expect their income to decrease in the future, the demand for normal goods will decrease in the present, shifting the demand curve left.

Question 21

What factors can increase or decrease supply? Give examples.

Answer 21

The supply of a good or service is the amount that producers are willing and able to offer for sale at various prices.

The supply can increase or decrease depending on several factors, such as:

• The cost of production: This includes the prices of inputs, such as raw materials, labour, energy, and machinery. If the cost of production increases, the supply will decrease, as producers will produce less or charge higher prices to cover their costs. If the cost of production decreases, the supply will increase, as producers will produce more or charge lower prices to increase their profits. For example, if the price of oil rises, the supply of gasoline will decrease, as oil is an input for gasoline production.
• The number of producers: This refers to how many firms or individuals are in the market for a particular good or service. If the number of producers increases, the supply will increase, as there will be more competition and more output. If the number of producers decreases, the supply will decrease, as there will be less competition and less output. For example, if more farmers enter the market for wheat, the supply of wheat will increase, as there will be more wheat available.
• The technology: This refers to the methods and tools used to produce a good or service. If the technology improves, the supply will increase, as producers will be able to produce more efficiently, faster, or with better quality. If the technology worsens, the supply will decrease, as producers will face difficulties, delays, or defects in production. For example, if a new machine allows a factory to produce more shoes with less labour and materials, the supply of shoes will increase, as the factory will be able to produce more shoes at a lower cost.
• The expectations: This refers to the beliefs and predictions that producers have about the future market conditions, such as prices, demand, and competition. If producers expect the price of their product to increase in the future, the supply will decrease in the present, as they will withhold some of their current output to sell it later at a higher price. If producers expect the price of their product to decrease in the future, the supply will increase in the present, as they will try to sell more of their current output before the price falls. For example, if a toy manufacturer expects the demand for its product to surge during the holiday season, the supply of its product will decrease before the season, as it will save some of its inventory for later.

These factors can cause the supply curve to shift to the right (increase) or to the left (decrease), which means a change in the quantity supplied at every price. A change in the price of the product itself will not shift the supply curve, but will cause a movement along the supply curve, which means a change in the quantity supplied at that specific price.

Question 22

How do factors create new demand or supply curves on the graph?

How do you show an increase or decrease (shifts)?.

How is price affected?

Answer 22

Factors that affect demand or supply, such as income, preferences, technology, or expectations, can create new demand or supply curves on the graph by shifting the original curves to the right or left.

A shift to the right means an increase in demand or supply, while a shift to the left means a decrease in demand or supply.

A shift in demand or supply changes the equilibrium price and quantity in the market.

To show an increase or decrease in demand or supply on the graph, we can use the following steps:

• Identify the factor that causes the change in demand or supply and determine whether it increases or decreases the quantity demanded or supplied at each price.
• Draw the original demand or supply curve and label it D0 or S0.
• Draw the new demand or supply curve and label it D1 or S1. The new curve should be parallel to the original curve and shifted to the right or left depending on the direction of the change.
• Identify the new equilibrium point where the new demand or supply curve intersects the other curve. Label it E1.
• Compare the new equilibrium price and quantity to the original equilibrium price and quantity. The difference between them shows the effect of the shift on the market outcome.

For example, suppose the demand for pizza increases due to a rise in consumer income.

This means that consumers are willing and able to buy more pizza at each price. To show this on the graph, we can use the following steps:

• Draw the original demand curve for pizza and label it D0. Draw the supply curve for pizza and label it S0. Identify the original equilibrium point where D0 and S0 intersect and label it E0. The price at E0 is the original equilibrium price (P0) and the quantity at E0 is the original equilibrium quantity (Q0).
• Draw the new demand curve for pizza and label it D1. The new curve should be parallel to D0 and shifted to the right, indicating an increase in demand. Identify the new equilibrium point where D1 and S0 intersect and label it E1. The price at E1 is the new equilibrium price (P1) and the quantity at E1 is the new equilibrium quantity (Q1).
• Compare P1 and Q1 to P0 and Q0. The increase in demand causes the equilibrium price and quantity to increase, as shown by the upward and rightward movement from E0 to E1. This means that pizza sellers can charge higher prices and sell more pizzas, while pizza buyers have to pay more and buy more pizzas.

The graph below illustrates this example:

https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/supply-curve-tutorial/a/what-factors-change-supply