Theme 1 (1.1)(1.2)

Question 1

What are the main determinants of supply

Answer 1

Price (p), Cost of Production (Land, Labour and Capital), Weather (for agricultural products), Natural Disasters, Technology

Question 2

What does a point on a supply curve show?

Answer 2

It shows the amount that will be supplied at each price level in a market

Question 3

What would shift the supply curve for oil to the right?

Answer 3

If minimum wage in countries with oil reserves goes down then cost of wages and therefore production for the industry will go down and so there will be a higher supply and it will shift.

Question 4

Define Price Elasticity of Supply

Answer 4

PES measures the responsiveness of supply to a change in price.

Question 5

What is meant by equilibrium

Answer 5

Equilibrium is where supply =demand, it is a steady state where there is no tendency to change, unless there is an exogenous shock that pushes the market out of equilibrium.

Question 6

what is the Market Clearing Price

Answer 6

The price at which the quantity supplied equals the quantity demanded: no excess. excess supply causes the price to drop until market clearing is reach, excess demand causes the price to rise until market clearing is reached. Adam smith called this the invisible hand of market forces.

Question 7

In a competitive market, what effect would it have on supply if a new supplier entered the market

Answer 7

supply would increase and price would fall

Question 8

what is meant by joint demand or complimentary goods

Answer 8

goods that are consumed together

Question 9

give an example of two goods in joint demand

Answer 9

razors and shaving foam

Question 10

what is the impact on complimentary goods if there is an increase in market supply of one of them

Answer 10

if there is an increase of price in one, it will be less demanded meaning the other good is less necessary and also then demanded less

Question 11

what is meant by composite demand

Answer 11

when one good is demanded for 2 or more different purposes

Question 12

give an example of 2 goods in composite demand

Answer 12

milk is used for drinking and making cheese/yoghurt/butter. Sunflower seeds used for bread and making oil/biofuel.

Question 13

what is the impact on both products if there is a rise in demand for one of the goods that something is in composite demand for e.g. milk - butter or cheese

Answer 13

if their is an increase in demand for cheese, then there is less milk available for making butter so the supply of butter will fall

Question 14

what is derived demand

Answer 14

when the demand for a good is driven by the demand for another good

Question 15

give an example of a good whose demand is derived from another product

Answer 15

labour, where the demand for apps causes demand for computer programmers as they can make apps. Similarly, the demand for steel is derived from the demand for cars and construction

Question 16

what is the impact on both goods (reference derived demand) if there is an increase in market demand of the good

Answer 16

if the demand for cars increases then there will be more demand for steel used to make cars

Question 17

what is joint supply

Answer 17

when one good is a by-product of another good

Question 18

give an example of two products in joint supply

Answer 18

beef and leather

Question 19

what is the impact on both products (reference joint supply) if there is an increase in supply of one of the goods.

Answer 19

In order for the supply of either beef or leather, more cows must be killed which increases the supply of the other. So an increase in the supply of one of the goods increases the supply of both goods

Question 20

What are the three functions of the price mechanism and explain what each means

Answer 20

1. Rationing - When goods become more scarce, the price rises, this acts to dampen down demand for this good, so that only people who can afford it will continue to demand it, this is a from of rationing as now the product will not run out (Ceteris Paribus)
2. Incentives - As the price of a product rises, the supply also rises as a higher price means more of a profit margin for producers so there is more incentive for them to produce as much as they can
3. Signalling - A price rise sends a signal to a market to produce more of that good as it is becoming relatively scarce. This signal diverts factors of production from other goods to reduce scarcity in another area.

Question 21

Define consumer surplus

Answer 21

consumer surplus is the difference between the price a consumer is willing to pay and the price they actually pay (the area above market price and below demand)

Question 22

Define producer surplus

Answer 22

producer surplus is the difference between the price a producer is willing to accept and the price they actually do accept (the area below market price and above the supply curve)

Question 23

Where on a supply and demand diagram is consumer surplus

Answer 23

below the demand curve (negative gradient curve) and above the market price. the area is a triangle with the hypotenuse facing upwards

Question 24

where on a supply and demand diagram is producer surplus

Answer 24

above the supply curve (positive gradient curve) and below the market price. the area is a triangle with the hypotenuse facing downwards.

Question 25

What happens to producer surplus if demand rises, reference a diagram

Answer 25

As you go from P1 to P2 (Market price has risen to expunge excess demand), the area illustrating producer surplus rises in size and therefore producer surplus rises as the supply curve stays the same but the market price has risen which enlarges the boundaries of the area

Question 26

define indirect tax

Answer 26

an indirect tax is one where the liability can be passed on to a third party

Question 27

give 2 examples of indirect taxes

Answer 27

VAT and Excise Duty tax are paid by the producer, but they can pass on some of the liability for the tax onto consumers in higher prices. VAT therefore indirectly affects consumers and is known as consumption tax

Question 28

describe through use of a diagram the impact on supply of an increase in VAT

Answer 28

An increase in VAT will increase the cost of production for the firm which shifts the supply curve of the product to the left. because VAT is a % of the selling price, the amount of tax paid per product increases as the price of the product increases. This is why the shift makes the new supply curve steeper rather than just a parallel shift (the shift is skewed). The vertical difference between the old and the new supply curve at the new equilibrium gives you the unit cost of the tax. This amount multiplied by the units sold gives you the tax revenue to the government. At the new equilibrium, the tax revenue would be the area worked out by vertical height between the supply curves X the horizontal length up toward the new quantity. (see diagrams on slides for help)

Question 29

what is the impact on supply of excise duty

Answer 29

excise duty is paid at the same rate regardless of what the selling price is. this is why the shift is parallel rather than skewed

Question 30

where on a supply and demand diagram is producer and consumer incidence

Answer 30

The area above the old equilibrium price and below the new equilibrium price is the consumer tax burden.
The area between the old equilibrium price and the price that the producer gets to keep is the producer tax burden (see slides for help)

Question 31

where is the area on a s+d diagram representing tax revenue to the government

Answer 31

the consumer and producer tax burden added together= total tax revenue. or new quantity supplied x unit cos of tax = total tax revenue

Question 32

what happens to producer incidence if demand is elastic and VAT increases.

Answer 32

if the demand is elastic and VAT increases then the burden of tax falls mainly on the producer. this is because consumers in the market will not accept a price rise, so price will not rise significantly following an increase in tax. Nevertheless the tax must be paid so producers must pay it by cutting profit margins.

Question 33

what happens to consumer incidence if demand is inelastic and VAT increases

Answer 33

if the demand is inelastic and VAT increases then the burden of tax falls mainly on the consumer. as the consumers in the market will accept a price rise, and increase in VAT means the producer can continue passing this burden on to the consumer therefore the consumer incidence will increase.

Question 34

define subsidy

Answer 34

A subsidy is a payment from the government to a producer, subsidies are usually paid as an amount per item produced e.g. £1 per tonne produced of wheat

Question 35

what is the impact on supply of a subsidy

Answer 35

there will be increased supply and the supply curve will shift to the right

Question 36

where on s+d diagram is the cost to the government of a subsidy

Answer 36

the area worked out by the new quantity X the vertical height between the old and new supply curves at the new equilibrium.

Question 37

how are consumers affected by a subsidy

Answer 37

price falls so consumers benefit from an increase in consumer surplus. the benefit to consumers can be calculated as the decrease in price multiplied by the new quantity supplied

Question 38

how are producers affected by a subsidy

Answer 38

producers also benefit as the price they receive + the unit subsidy means that they effectively take home an even higher price per unit sold. The benefit is the difference between the price originally received and the new price multiplied by the number of units sold.

Question 39

how is the government affected by a subsidy

Answer 39

there are significant costs to the government of a subsidy. Governments usually subsidise products and services that benefit society in some way and which help achieve their own goals. However subsidies have an opportunity cost and they are also frowned upon by the WTO (world trade organisation) as they give British producers an unfair advantage over international competitors. They are known as Non-Tariff Barriers so they must be used with caution.

Question 40

How might other people’s behaviour alter a consumer’s choices

Answer 40

-social/peer pressure= in a situation where you are part of a society you may make consumption decisions based on peer pressure (e.g. alcohol/ legal highs, fashion purchases) rather than your inherent utility from consuming a good.

Question 41

how might a habitual consumption be irrational

Answer 41

You might always buy the same order from a fast food place for example, even when there is seasonal offers that you may enjoy better and sometimes as well for a cheaper price, just to not break a habit.

Question 42

give an example of where a consumer cannot make a rational choice due to lack of information or computer skill.

Answer 42

bounded rationality is where consumers are rational to a point but these lacks limit them. They will use heuristics or rules of thumb to make decisions instead

Question 43

is giving to charity rational

Answer 43

It may seem irrational as it is a form of consumption that results in no utility gain to the donator. It is only rational when giving to charity provides more pleasure (through helping others) than consuming the sacrificed goods would have provided, or if peer pressure is such that a refusal would ostracise someone from society. In the first way, giving to charity or seemingly altruistic behaviour is not irrational.

Question 44

What is meant by asymmetric information

Answer 44

The buyer and seller have different levels of information

Question 45

Give 3 examples of markets with asymmetric information

Answer 45

Doctors/ dentists
Second hand car sale
Luxury watches
Restaurants

Question 46

How does info gaps lead to market failure

Answer 46

Consumption or production will be based on not all the facts, leading to mistakes that mean it is over or under produced/consumed so there is an inefficient allocation of resources

Question 47

How does asymmetric information give rise to adverse selection

Answer 47

Adverse selection is when ‘good’ consumers drop out of the market as the behaviour of others in the market makes prices rise beyond the price at which good consumers are willing to pay. This is due to asymmetric information as for example insurance, seller doesn’t know how safe a healthy customer will actually be as buyer has more information, so the seller will set the price too high for the peaches to want to buy it leaving only lemons in the market, this is inefficient as some people don’t then have insurance

Question 48

How does asymmetric info give rise to moral hazard

Answer 48

Moral hazard is when the free market gives incentives for people to behave in a sub-optimal way. E.g. if someone knows they are covered for insurance against theft, then they will be less careful with their belongings which leads to more burglaries. Same with healthcare

Question 49

Give 3 reasons governments intervene in markets

Answer 49

To correct market failure
To improve the performance of the UK economy, especially in relation internationally
To address politically and morally unacceptable situations like some countries not providing free healthcare

Question 50

How can government intervention lead to an increase in economic welfare

Answer 50

By correcting market failure, e.g. taxing a good with negative externalities, this encourages the market to provide the socially optimum quantity of the good rather than over producing which is what the free market equilibrium would have

Question 51

Name the 4 main methods for governments to intervene in markets

Answer 51

Regulations
Price control
Direct provision
Taxes and subsidies

Question 52

Name 3 kinds of price control

Answer 52

Buffer stocks
Max price
Min price

Question 53

Draw a diagram and explain how max prices work

Answer 53

A max price keeps a good affordable, it will be below the equilibrium, this also creates excess demand e.g. rent prices in New York

Question 54

Draw a diagram and explain how min prices work

Answer 54

Min price will be above the equilibrium, and as producers will get a definite price they will over produce causing excess supply. E.g, national minimum wage

Question 55

Draw a diagram and explain how buffer stock systems work

Answer 55

A price ceiling and a price floor are introduced to make the prices fluctuate only between these two points. Government buys the product when the price is getting too low and sells when it’s getting too high

Question 56

Advantages and disadvantages of buffer stock schemes

Answer 56

Good: keeps income stable, keeps output and employment stable, encourages investment and can be a profit making scheme if they buy low sell high.
Bad: price floor often set too high so the government are always betting never selling, this would make the cost of buying too much and not worth it, the gov cannot control the international price unless govs cooperate on it, cost of storing products is high and some perish, most schemes break down long term

Question 57

Give 4 examples of government regulation

Answer 57

Restrictions on where product can be sold e.g. liquor license
Age limit for alc and cigarettes and weapons
Coverage of cigarettes in store
Legislation controlling info on packaging
Where the product can be consumed e.g. smoking areas
Maximum purchase quantities

Question 58

Give 2 reasons for direct provision of goods by the gov

Answer 58

If the good is a public good or quasi public good that has no profitability. If the good is a human right like healthcare and therefore also is a merit good.

Question 59

Draw a diagram to illustrate the effect of subsidies on a market and what they are

Answer 59

Acts to offset the costs of production and encourages greater supply and lower prices for consumer, often merit goods. Shifts supply to the right. Total spending on the subsidy is equal to the subsidy per unit multiplied by the level of output.

Question 60

What could be appropriate intervention for a merit good

Answer 60

Subsidy
Maximum price
Possibly direct provision
Possibly regulations to make consumption compulsory e.g. car insurance

Question 61

What is appropriate intervention for a demerit good

Answer 61

An indirect tax
Minimum price
Regulations and legislation
Possibly total ban

Question 62

What’s an appropriate intervention for a negative and positive externality in production

Answer 62

Negative: and indirect tax, a carbon emissions trading scheme
Positive: subsidy

Question 63

What would be appropriate intervention where there is asymmetry of info

Answer 63

Food package info
Calorie requirement on menus
Trade descriptions act etc which protect consumer
Requirement for a license e.g. dentists and BmA

Question 64

What would be a good gov intervention where there is a missing market

Answer 64

State schools (state provision)
Paying a private sector to provide it

Question 65

How do pollution permits work

Answer 65

Polluting up to the specified permit point is free, heavily increases the cost of production as they have to buy more permits

Question 66

What is meant by internalising an externality

Answer 66

Where the third party cost is transferred to the buyer or seller, in this way it is less or not anymore a third party cost.

Question 67

impacts of tax on consumer and producer

Answer 67

It internalises externalities, socially optimum output can be achieved.
The more elastic Demand is or the more in elastic supply is, the greater the producer tax burden vice versa
If the demand is perfectly in elastic then the burden falls entirely on consumer vice versa

Question 68

what is an economic model

Answer 68

a simplified representation of reality used to provide insight into economic decisions and events, with a limited number of variables (using ceteris paribus)

Question 69

why can’t scientific experiments be done in economics

Answer 69

because there are too many inconsistent variables which cause inconsistent results e.g. consumer preferences.

Question 70

what is an example of opportunity cost for each of the economic agents

Answer 70

households: which tv to buy
firms: which employee, method of production or good/ service to produce
government: where to allocate benefits/ subsidies, how to regulate markets etc.

Question 71

what is a PPF

Answer 71

a PPF indicates the various production possibilities at maximum efficiency of two commodities when resources are fixed, given the current state of technology.

Question 72

what causes a PPF to shift left or right

Answer 72

a change in the quality or quantity of any of the factors of production.

Question 73

what would cause a steeper or shallower ppf curve

Answer 73

a change in the productivity of one of the goods

Question 74

what is the difference between capital and consumer goods

Answer 74

consumer goods satisfy consumers directly, while capital goods provide the means to produce consumer goods.

Question 75

what are the functions of money

Answer 75

a medium of exchange, a method of deferred payment, store of value, measure of value.

Question 76

one advantage and disadvantage of artisans in production

Answer 76

will be high quality due to the sense of ownership, need much more in depth and rigorous training.

Question 77

one advantage and disadvantage of a production line

Answer 77

cheaper training as they only need to train in one area, if one part fails then no products can be produced

Question 78

1 + and - of free market and economist associated

Answer 78

+businesses have the profit motive and consumers aim to maximise satisfaction (the invisible hand- concept by Adam Smith) who said in his book Wealth of Nations that when individuals follow their self interest they indirectly promote the good of society. - the problem of missing or failing markets also inequality and externalities. smith said government could intervene in financial markets sometimes yet Hayek said this was the main cause of failure and they should not at all

Question 79

command economy + and - and who is associated

Answer 79

Karl Marx said capitalism is unstable as workers are exploited by the bourgeoisie. + no exploitation and monopolies and full employment. - absence of profit motive reduces incentives for investment and also no competition means inefficiency.

Question 80

what is the role of the state in a mixed economy

Answer 80

• to internalise externalities
• provision of public goods
• redistribution of income to create equality.

Question 81

underlying assumptions of rational decision making

Answer 81

• firms aim to maximise profits

- consumers aim to maximise utility

Question 82

5 factors that cause a shift in the demand curve

Answer 82

1 income
2 change in preferences
3 advertising 
4 price of competing goods
5 time/ seasons

Question 83

diminishing marginal utility

Answer 83

as one consumers more units of a good, beyond a certain point the marginal utility gained each unit wanes. This causes the demand curve to be downwards sloping with a inverse relationship with price.

Question 84

what do price, income and cross elasticities of demand show

Answer 84

price shows how sensitive demand is to a change in price, income shows how sensitive demand is to a change in income, and cross shows how sensitive demand is to a change in the price of another good either a substitute good or a complimentary good.

Question 85

what are the formulae for the three elasticities of demand

Answer 85

PED= %change in demand/ %change in price.
YED= %change in demand/ %change in income.
XED= %change in demand for good A/ %change in price of good B.

Question 86

price elasticity of demand numerical values meaning

Answer 86

(0 =perfectly inelastic) / (0 to -1 = relatively inelastic) / (-1 = unitary elastic) / (-1 to -infinity =relatively elastic)

Question 87

income elasticity of demand (YED) numerical values meaning

Answer 87

positive= normal good
negative= inferior good
luxury= YED above 1
necessary good = 0-1

Question 88

cross elasticity of demand numerical values meaning

Answer 88

postive - substitute
negative - complimentary
0 - unrelated

Question 89

factors influencing elasticities elasticities of demand, mainly PED and YED

Answer 89

1 proportion of income spent on product.
2 availability of close substitutes.
3 whether it is luxury or necessary.
4 time, in long term it is easier to find subs and adjust behaviour.

Question 90

significance of PED for firms and gov

Answer 90

firms- if demand for good is inelastic they can safely raise price for higher revenue and if demand is elastic then revenue can be increased by lowering price.
Gov - if the produce’s demand is elastic then the gov can maximise tax revenue on it, but the tax burden will fall on consumers. So the gov might decide to tax goods with elastic demand so the producers will bear a larger proportion of the tax burden.

Question 91

supply definition

Answer 91

the quantity a producer is willing and able to purchase at the given price and time.

Question 92

conditions of supply which can cause a shift of the curve

Answer 92

1. A fall in the price of imported commodities and raw mats
2. the entry of a new producers into the market
3. advances in production technology
4. taxes, subsidies and regulations
5. weather conditions and exogenous shocks likke a drought or earthquake.

Question 93

what is the PES formula with its numerical values

Answer 93

PES = %change in QS/ %change in price

0-1 relatively inelastic
1 unitary elastic
1- infinity relatively elastic

Question 94

factors influencing price elasticity of supply

Answer 94

availability of producer substitutes e.g. if one of their products is in joint supply with another, time, spare capacity, availability of stock.

Question 95

what would cause a change in the equilibrium price or output

Answer 95

if one of the conditions of demand or supply changes A.K.A. if one of the curves shifts

Question 96

3 functions of price mechanism and what they are

Answer 96

signalling, rationing and incentives.
Rationing- the price serves to ration scarce resources when demand outstrips supply.
incentives - supply will rise when the market price rises due to the prospect of greater profits
signalling - how prices adjust to illustrate to producers where resources are required and where they are not.

Question 97

consumer and producer surplus defs and where they are on the diagram

Answer 97

consumer surplus is the difference between the price the consumer is willing and able to pay and the price the consumer actually pays - between the demand curve and market price. Producer surplus is the difference between what the producers were prepared to sell the product for, and the price they actually received - between the supply curve and the market price.

Question 98

disadvantages of price mechanism

Answer 98

the price mechanism especially rationing function ignore equality, as it does not consider the wealth distribution and therefore those with money have plenty buying power while those with less don’t have a choice. Also, public goods will not be provided and therefore there will be missing markets as the incentive function shows no incentive to producers for these goods.

Question 99

3 reasons why consumers may not behave rationally

Answer 99

1. computational weakness, e.g. not being able to work out the best deal or being swayed by the way a choice is presented. 2. habitual behaviour, habits are hard to change without increased incentive e.g. plastic bags now costing 5p. 3. behaving in line with social norms, e.g. wearing clothes that are trending.