The Economic Environment of Business and Finance

Question 1

Why does quantity demanded increase when price falls

Answer 1

Lower prices make goods more affordable

Lower relative prices make the goods more attractive

Question 2

What are some determinants of demand

Answer 2

Price of the good itself
Price of other goods
Substitutes 
Complements 
National income
Fashion
Population size
Credit terms

Question 3

What factors can cause the demand curve to shift

Answer 3

Increase in household income
Increase in price of substitutes
Decrease in price of complements

Question 4

What factors can cause the demand curve to shift

Answer 4

Increase in household income
Increase in price of substitutes
Decrease in price of complements

Question 5

What is price elasticity demand (PED) and how is it calculated

Answer 5

The degree to which demand is affected by changes in the selling price

PED = (%change in demand / %change in price)

Question 6

What are the factors affecting PED

Answer 6

Readily available substitutes = more elastic
Short run demand = more elastic
Competitors differing prices = more elastic
Luxuries = more elastic
High proportion of income = more elastic

Question 7

What PED values characterise Elastic, Inelastic and Unitary Elastic demand

Answer 7

PED < 1 for Inelastic
PED > 1 for Elastic
PED = 1 for Unitary

Question 8

What effect does elasticity have on revenue

Answer 8

Inelastic: Increasing price will increase total revenue even though fewer units are sold

Elastic: Increasing price will decrease total revenue and fewer units will be sold, price must be cut to increase revenue

Question 9

What is income elasticity of demand (YED) and how is it calculated

Answer 9

Looks at the degree to which demand is affected by changes in household income

YED = (%change in demand)/(%change in household income)

Question 10

What YED values characterise normal, inferior and luxury goods

Answer 10

YED > 0 for normal goods
YED < 0 for inferior goods
YED > 1 for luxury goods

Question 11

What is cross elasticity of demand (XED) and how is it calculated

Answer 11

XED looks at the degree to which demand is affected by changes in the price of other products

XED = (%change in demand for product A)/(%change in price for product B)

Question 12

What XED values characterise substitutes, complementary goods and unrelated goods

Answer 12

XED > 0 for substitutes
XED < 0 for complementary goods
XED = 0 for unrelated goods

Question 13

What is price elasticity of supply (PES) and how is it calculated

Answer 13

PES looks at the degree to which supply is affected by changes in the price

PES = (%change in supply)/(%change in price)

Question 14

What are the meanings of perfectly inelastic and elastic supply

Answer 14

perfectly inelastic: supply remains constant at all prices

perfectly elastic: supply is infinite at a particular price

Question 15

What are some determinants of supply

Answer 15

Price of the good
Price of other goods
Costs
Change in technology
Weather/Harvests/etc.

Question 16

What is the equilibrium price

Answer 16

The price at which supply and demand are equal

Question 17

What happens if the price is too high on a supply vs demand graph

Answer 17

Supply will exceed demand causing a surplus
Retailers would have unwanted goods, returns, reduced orders
Supplier will respond by lowering prices

Question 18

What happens if the price is too low on a supply vs demand graph

Answer 18

Demand will exceed supply causing a shortage
Retailers will have empty shelves, queues, increased orders
Suppliers will increase prices to reduce shortage

Question 19

Why might the government intervene and try and regulate prices to either a maximum or a minimum

Answer 19

Setting a maximum price:
To ensure that essential goods are affordable
To limit inflation

Setting a minimum price:
To protect suppliers

Question 20

What are the four factors that affect GDP

Answer 20

Land
Labour
Capital
Entrepreneurship

Question 21

What are the four stages of the business/trade cycle

Answer 21

Recession
Depression
Recovery
Boom

Question 22

What are the characteristics of a recession

Answer 22

Consumer demand falls
Businesses sell fewer goods
Business failure occurs
Production and employment fall

Usually happens quite quickly due to the speed at which declining demand is felt by businesses

Question 23

What is inflation and deflation

Answer 23

Inflation: Is the increase in price levels and decline in purchasing power
Deflation: falling prices, associated with low rates of growth and recession

Question 24

Why is inflation a problem

Answer 24

Fewer people can afford goods
Exports fall as imports appear cheaper
Consumers may stockpile fearing price increases

Question 25

What are the two types of inflation

Answer 25

Cost-push inflation: Resulting from increases in costs of production
Demand-pull inflation: Resulting in persistent excess of demand over supply

Question 26

What are the two main causes of demand-pull inflation

Answer 26

Fiscal: Government spending increase or a reduction in tax
Credit: Levels of credit to customers increased

Question 27

What are the effects of a rise of interest rates

Answer 27

Price of borrowing in the economy will rise
Reduced borrowing and investment in non-current assets
Increase in saving and reduce in spending
Reduces the aggregate demand in the economy

Question 28

What is a government expansionary fiscal stance

Answer 28

Government spending > taxation = increased borrowing

Question 29

What is a government contractionary fiscal stance

Answer 29

Government spending < taxation = reduced borrowing

Question 30

What are government macroeconomic policies and what are some examples

Answer 30

Policies used by the government to grow the economy and control inflation

Monetary policy (interest rates)
Quantitative easing
Fiscal policy
Supply side

Question 31

What is fiscal policy

Answer 31

The government’s policy on government spending, taxation and borrowing

Question 32

What is quantitative easing

Answer 32

Using the central bank (Bank of England) to buy financial assets using electronically generated money

Question 33

What is monetary policy

Answer 33

Government policy on interest rates, exchange rates and money supply

Question 34

What is supply-wide economics

Answer 34

Policies designed to encourage suppliers to produce more goods at a lower price

Question 35

What are the four main types of market structure

Answer 35

Perfect competition
Monopolistic competition
Oligopoly
Monopoly

Question 36

What are the characteristics of a perfect competition market

Answer 36

Large number of buyers/sellers all unable to influence market price
Identical cost structures and products
Single selling price across market

Question 37

What are the characteristics of a monopoly

Answer 37

One supplier and many buyers
High barrier to entry
Suppliers can fix price or quantity

Question 38

What are the characteristics of monopolistic competition

Answer 38

Many buyers and sellers
Some differentiation of products/prices
Some customer loyalty

Question 39

What are the characteristics of an oligopoly

Answer 39

Few large suppliers
Differentiation of products but price wars
Collusion to form cartels