Theme 1 Flashcards

Question

Inward shift of PPF

Answer 1

It is possible for the productive capacity to shift inwards. e.g. net loss of ppl due to migration, low birth rate, pandemics, natural disaster, war + conflict

Answer 2

The PPF diagram is a useful toll in economics to illustrate different types of economic efficiency. It helps demonstrate the concept of efficiency in resource allocation and provides insight into how an economy can achieve optimal production levels given its available resources. 3 types of economic efficiency are: Productive efficiency, Allocative efficiency and Dynamic efficiency.

Answer 3

Occurs when an economy is producing goods and services at the lowest possible cost given its existing technology and resources. On a PPF diagram, productive efficiency is achieved when the economy is operating on the PPF curve. Points on the PPF represent the max output attainable with given inputs, and any point inside the PPF indicates underutilisation of resources. If the economy operates inside the PPF, it is not reaching productive efficiency because resources are being wasted.

Answer 4

Occurs when an economy is producing a mix of goods and services that best aligns with consumer preferences and social needs. It represents the ideal distribution of resources among different goods to maximise overall satisfaction. On the PPF diagram allocative efficiency is achieved when the economy is producing at a point on the PPF that matches society's preferences. If the economy is producing at a point inside the PPF it is not achieving allocative efficiency because it can produce more of one good without sacrificing the production of another good. A point outside the PPF, it is not feasible and achieving such a point would require additional resources or technological advancements.

Answer 5

Refers to an economy's ability to grow and expand its production possibilities over time. This involves shifting the PPF outward through technological advancements, investments and innovations. An outward shift on the PPF indicates that the economy has achieved dynamic efficiency allowing it to produce more goods + services than before with same resources. This might have been achieved through process innovations such as lean manufacturing used in car making or innovation in farming that increases yields of particular crops each year.

Answer 6

Refers to producing what a worker, firm or country is most efficient at.

Answer 7

Adv- allows company to specialise effectively -produce efficiently by building up skills and increasing quality -charge higher prices (better quality, or charge same/lower price due to lower cost) -Increased output DisAdv- changing demand -Labour- boring -finite resources -over reliance

Answer 8

Refers to production process being broken down into separate specialised tasks/ sequences of stage. By focusing on a particular stage workers can become highly adept and thus more efficient at carrying out that task.

Answer 9

ADV -By focusing on one task that they perform well, workers become more productive -This is likely to lower costs and increase profit margins OR allow the firm to reduce the price. Lower prices are likely to increase standards of living -Training can be more cost effective as only focusing on a narrow range of skills. -Working as a team may allow more overall output to be produced. DISADV -Monotonous - this may mean workers become bored and de-motivated. * This may mean they become less productive and take less pride in their work. * Over-specialisation may lead to a lack of flexibility. Workers may find it difficult to move to other jobs. Therefore it may be difficult to cover for absent workers or find alternative employment. * More produced standardised goods may mean less choice for consumers.

Answer 10

-Higher labour productivity and rising business profits >learning by doing increases output per hour worked >higher productivity lowers costs and supply of goods +services >increased productivity =higher profits for businesses -Specialisation creates a surplus output that can be traded for mutual benefits >Businesses/ countries specialise in areas of relative advantage >trade increases the range of products we can consume -Lower Prices cause higher real incomes and GDP growth >Lower prices gives consumers greater real purchasing power. >higher productivity allows businesses to pay increased wages >successful specialisation is a key cause of economic growth

Answer 11

Before money people bartered, swapped a good for another of similar value, however there had to be a double coincidence of choice for this to happen. In the economic system nowadays this would be impossible as economy/businesses many workers and households do not make a good/ service in its entirety. So nothing to barter with. Therefore another medium exchange is required. Money is anything that is generally accepted in the settlement of debt. These days for most economies this includes notes, coins and electronic money.

Answer 12

-Medium of exchange -Store of value -Unit of account -Standard of deferred payment

Answer 13

Money serves as a standard unit of account that facilitates transactions by allowing goods and services to be exchanged for a common and widely accepted medium of exchange.

Answer 14

Money allows individuals to save for future consumption by maintaining its purchasing power over time.

Answer 15

Money serves as a standard unit of measurement for the value of goods, services, and financial assets, enabling individuals and businesses to compare prices and make informed decisions.

Answer 16

Money enables individuals and businesses to make deferred payments, such as loans, mortgages, and insurance contracts, by providing a means of transferable credit.

Answer 17

What goods should be produced? How? How should the productive resources of the economy be used to produce various goods and services For whom? Once produced how should they be allocated among the population for consumption

Answer 18

-Free market -command -mixed

Answer 19

Free market economy allows market forces to guide the allocation of resources through the price mechanism. In a free market there is a very limited role for the government. Adam Smith argued that in such a system resources would be allocated effectively through the operations of an ’Invisible hand’. For example: Singapore, Switzerland, Luxembourg. Price is dependent on the interaction between demand and supply components of a market. Benefits of a market economy includes increased efficiency, production and innovation. Greater economic freedom from lower government size increases inequality.

Answer 20

The factors of production are all owned by individuals and free for them to allocate the resources how they want without government intervention Entrepreneurs use profit as an incentive as they're in control of how they operate to gain a profit. Employees can have higher incomes when the business decides but also if their productivity leads to growth it would likely increase more.

Answer 21

-An efficient allocation of scarce resources factor resources tend to go where the expected profit is highest. -Competitive prices for consumers as suppliers look to increase and then protect market share. -Competition drives innovation & invention bringing higher profits for businesses and better products for consumers. -The profit motive stimulates investment which encourages economies of scale and lower prices for consumers. -Competition through trade in goods and services helps to reduce domestic monopoly power and increases choice.

Answer 22

-Free markets can fail to achieve an economically and socially efficient and equitable allocation of resources- there are numerous potential causes of market failure that may require government intervention -Free market activity can lead to a rise in the scale of income and wealth inequality as shown by rise in the Gini coefficient -Businesses can develop monopoly power which leads to higher prices and damage to consumer welfare -Under or non-provision of pure public goods (e.g. defence – goods which are non-rival and non-excludable) -Under-provision of merit goods such as health and education – which many cannot afford – leading to lower social welfare -Free markets may fail to address negative externalities from production and consumption – unsustainable growth -Deregulated financial markets often prone to bouts of instability – the fall out from which affects millions not directly involved

Answer 23

Where the government undertakes the coordination role, planning and directing the allocation of resources. The government is likely to own most of the countries scarce resources. They will tell businesses what to produce, how much to produce and who to sell to and at what price. The government regulates economy completely. For example Russia, Cuba and North Korea. Command economies were often associated with the political system of Communism. It was Karl Marx, in the Communist manifesto who argued for ‘common ownership of the means of production.’ Prices in the economy must be set by government officials, so they cant arise naturally. Because a command economy is centrally planned, its pros theoretical equality between citizens (lack of inequality),

Answer 24

Command economy approach to ownership - requires that the central government own and control the factors of production. Incentives for employees and entrepreneurs - wades are set centrally for employees and profits are eliminated. This leads to no incentive to increase production or be more efficient. Factors of production being centrally owned leads to a lack of incentive too

Answer 25

Production in command economies is notoriously inefficient as the government feels no pressure from competitors or price-conscious consumers to cut costs or streamline operations. They also may be slower to respond—or are even completely non-responsive—to consumer needs or changing tastes.

Answer 26

-Supporters of command economies argue that it enables the government to overcome market failure, inequality and create a society that maximises social welfare rather than maximises profit -Command economies can prevent abuse of monopoly power -Command economies can prevent high unemployment, sometimes a feature of capitalist economies -Command economies could produce goods which benefit society and ensure everyone has access to basic necessities -Command economies may be more equitable

Answer 27

-Government agencies usually have poor information about what to produce. Centralisation means that decisions are taken by people who may have no access to what is actually happening. This may mean over or underproduction of goods and services and a waste of scarce resources -Unable to respond to consumer preferences -Lack of incentives for both workers and businesses ie no incentive to earn more profit/wages set therefore no incentives to work harder -Inefficient firms are protected and kept going; making it harder for resources to move to dynamic and efficient firms -Bureaucratic: Command economies tend to be very bureaucratic with decisions help up by planning and committees. -Price controls invariably lead to shortages and surpluses

Answer 28

Famous for his book, "The wealth of Nations" (1776). Seen as an advocate of free market economics and laissez-faire government (leaving markets to regulate themselves wherever possible). He explained how the "invisible hand" would allocate resources everyone's advantage. He argued that individuals would act in their own self interest and that this would lead to an economy that maximised benefits. However, he also recognised that the state also had a part to play. To be wary about businesses that become too large and have too much power (over prices.). * The state needed to provide goods and services which the free market would otherwise not provide (roads, bridges, defence etc). The role of government to regulate financial markets. There needed to be law enforcement of property law, patents and copyright (to protect invention). Despite recognising the need for some government intervention, Smith is regarded as the founder of free market economics.

Answer 29

Best known as a proponent of the 20th century Austrian School of economics in which there is a strong belief in the role and importance of the individual in the economy rather than any collective group or government. Hayek believed in the liberty and freedom of the individual. Hayek disagreed with Smith in terms of financial markets, seeing Iess of a role of government. The only role of government was for law and order. He also argued against command economies citing the problem of economic calculation. He saw that a small group of central planners was responsible for determining how much of every product should be produced and delivered. In his view it would be impossible for them to ever have enough information to properly meet people's needs. Hayek believed that markets alone would have the information needed to make these decisions.

Answer 30

-Price of product/ service -Price of other products/ services (opportunity costs) -Your income- how much can you afford -Preferences

Answer 31

In a nutshell you make decision to get maximum satisfaction. Economists refer to satisfaction in this context as Utility. The assumption economists make is that rational customers set out to maximise their utility. The corresponding assumption for firms is that they aim to make as much profit as possible. Maximise profits.

Answer 32

- Identify problem -Outline pros and cons of choices -Weigh up pros and cons -Any other alternatives? -Evaluate all options -Select the best options Not always best or most realistic way for firms to make decisions, takes significantly longer to decide which is not practical in a firm with strict time constraints.

Answer 33

Assumptions are necessary in order to analyse how consumers or firms will act. Economists assume that firms and individuals will behave rationally when making decisions. If we know consumer sets out to maximise satisfaction, then economists can build a model to show under what conditions they would achieve this. It helps economists understand human and business behaviour and to identify situation in which people or firms depart from rationality.

Answer 34

Describes a situation where an individual gains less additional utility from consuming a product the more of it is consumed. The margin is one additional unit. Concept of demand and supply rooted in: -Individuals maximising their satisfaction- utility -Firms maximising satisfaction/ reward- profit

Answer 35

defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Answer 36

this is the combination of desire for a product or service with the ability and readiness to pay.

Answer 37

this suggests that consumers control resources by deciding what to buy

Answer 38

states that there is an inverse relationship between price and quantity.

Answer 39

States that the demand curve is downward sloping, 2 types of changes in demand: -movement along the demand curve -shifts in the demand curve( any other factor leading to an increase or decrease in demand)

Answer 40

A change in price of the product will cause a movement along the demand curve. Other factors remaining constant (ceteris paribus) there is an inverse relationship between the price of a good and demand therefore: A fall in price of the good results in an extension of demand (quantity demanded will increase). Whilst an increase in price causes a contraction in demand (quantity demanded will decrease)

Answer 41

Products which are bought and used together. A fall in good x will lead to an extension in quantity demanded for x. And this might lead to higher demand for the complement Good Y. Complements are said to be in joint demand. The cross price elasticity of demand for 2 complements is negative. Examples include, fish and chips, pasta sauce and pasta, shoes and polish and flights and taxi services.

Answer 42

Substitute goods are two alternative goods that could be used for the same purpose. They are goods that are in competitive demand. A rise in Price of Good x will lead to a contraction in demand for Good x. This might then cause some consumers to switch to a rival product Good y. This is because the relative price of Good y has fallen. The cross price elasticity for 2 substitutes is positive. Examples include: tea and coffee, smartphone brands, supermarket chains, cereal brands.

Answer 43

Goods that experience an increase in demand due to an increase in consumer income, e.g. clothing, holidays, electronics.

Answer 44

A good whose demand decreases when peoples income rises when real incomes rise during economic growth, demand for inferior goods will fall curing an inward shift of demand curve. Examples include, own label discounters, economy class travel, public transport, cigarettes.

Answer 45

Shift in demand curve is caused by a change in any factor other than price. The curve can shift to the right(increase) or left(decrease) . These are known as the conditions/ determinants of demand. Determinants of Demand: -price of substitutes -price of complements -taste and preferences -advertising -income -population- changes in size/ age distribution PPP.TAI

Answer 46

defined as the quantity of a product that a producer is willing and able to supply into the market at a given price in a given time period.

Answer 47

2 types of changes in supply: - Movement along the supply curve - Shifts in the supply curve

Answer 48

Positive relationship between price and quantity supplied. As price rises, quantity supplied rises.

Answer 49

Causes by a change in price of the good or service. An increase in the price of the good results in an extension of supply (quantity supplied will increase). A decrease in price causes a contraction of supply (quantity supplied will decrease)

Answer 50

Shifts in supply curve caused by a change in any non price determinant of supply. Curve can shift right or left- Demand curve must also be included. Determinants of Supply: -technology -legislation -taxes placed by government on products/ services -subsidies -weather/natural disaster -changes to number of firms in an industry -cost of production

Answer 51

A 19th Century German thinker and writer, his most famous book is Das Capital (1867). He developed many of Adam Smith's ideas on capitalism/free market economics, but mostly considered the negative consequences. He saw that there was a great gulf between the economic fortunes of the owners of property and workers in 19 century Europe Marx believed that the drive for profit in the capitalist system would push workers wages to the bare minimum. He said that exploited workers, would come together and overthrow capitalism, being replaced by socialism. A new democratic society would arise which would lead to equality and where property would be owned by everyone collectively. The distribution of the goods made would be to each according to contribution.

Answer 52

This is the mechanism through which price is determined in a market system. Basically, the price will adjust until supply equals demand, at which point we have the equilibrium price. Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes there in. It is the buyers and sellers who actually determine the price of a commodity. Its responsible fro the allocation of resources in a free market economy. The decisions of consumers and producers are all responsible for how the price mechanism work through demand and supply.

Answer 53

Equilibrium basically means 'a state of rest'. In a D & S diagrams the market is at rest when supply = demand - the point where the 2 points meet. This is the point where amount consumers demand at a given price is exactly the same as the amount businesses are prepared to supply at a given price

Answer 54

when the market does not clear/ when there is excess demand or excess supply.

Answer 55

when demand for product is higher than the amount firms wish to supply. Stock will be sold very easily. The price could possibly be raised on a good like this given the popularity. This could be done until demand equaled supply. Can occur when a ceiling price (or max price) is placed on an item so it's more affordable for everyone. Usually done as part of government intervention- ie in housing market that might impose a rent cap. When price is too low

Answer 56

Excess supply is when price is above market rate, when price is too high. Excess supply can occur when a min price is placed on a product. It is usually done by the government to reduce consumption of a particular item. One recent example is the min price for alcohol is Scotland.

Answer 57

*How do shifts in demand affect equilibrium price? The original equilibrium price is lower p1 and at this point q1 is demanded and supplied. Say a business increases its advertising this is likely to increase demand shown by the shift in the demand curve right to D2. If the price remains at PI there is excess demand. * As before this is likely to cause the price to go upwards and this will keep going until we reach the new equilibrium price where the new demand curve crosses the supply curve (at higher Q2/P2). * Note that there has been a shift in the demand curve, but only a movement along the supply curve (to reflect the increase in price). None of the determinants of supply have changed.

Answer 58

Suppose that a new pasta-making machine is produced, enabling dried pasta makers to produce at a lower cost than before. This is likely to reduce a firms costs and incentivise them to supply more pasta. The supply curve will shift to the right. * If the price remained at P(higher) there would be excess supply. However the market is likely to adjust to a new equilibrium price of PI(lower). * Not there has been a movement along the demand curve as the price has changed an extension of demand.

Answer 59

A- allocate scarce resources R- rationing excess S- signals sent I- incentive The market will allocate scarce resources as effectively as possible at equilibrium. By rationing away excess demand/ supply. This is through signals that are sent to the producer to lower or increase price. This is because there is an incentive to increase profit.

Answer 60

Due to scarcity not everyone is able to buy everything they want, when demand is greater than supply, prices will rise so that the good/service is rationed out only to those who can afford to pay for the items

Answer 61

When the price of a product rises it creates an incentive for firms to shift production towards products that help generate higher profits. Likewise falling prices may create an incentive for firms to move away from the production of a product.

Answer 62

When the price of a product rises it signals to producers that the demand for that product is probably high and firms should increase production. Prices are helping to determine where and how resources should be allocated.

Answer 63

The value consumers gain from consuming a good or service over and above the price paid. It is the difference between the maximum consumers are willing and able to pay for a good or service and the total amount they actually do pay. In most markets all consumers face the same prices for goods and services. Some may just be willing to pay the market price ( the marginal customer). However some may be willing to pay more and some significantly more. Consumer surplus is derived whenever the price a consumer actually pays is less than they are prepared to pay. It is below the demand curve but above the price line.

Answer 64

An economic concept measuring the amount of satisfaction gained from consuming an extra unit of a good or service ; generally the level of marginal utility declines as additional units of a product are consumed.

Answer 65

Difference between price the producer is willing to charge and the price they actually receive. It is above the supply curve and below the price line.

Answer 66

the economy is made up of producers, consumers and government. We can see both the producers and consumers benefit when demanding and selling goods. Economic welfare is the total benefit received from an economic transaction. It is calculated by the area of producer surplus and consumer surplus added together. it is important when considering the effects of government policies which could affect either producer or consumer surplus.

Answer 67

The responsiveness of demand to a change in price. When price rises demand falls but by how much? Elasticity is measuring the extent to which demand will change.

Answer 68

Demand is responsive or sensitive to a change in price. A change in price will lead to a more than proportional change in quantity demanded.

Answer 69

Demand is not very responsive to a change in price. A change in price leads to a less than proportionate change in quantity demanded

Answer 70

The percentage change in quantity demanded is equal to the percentage change in price.

Answer 71

Consumer demand is unlimited at that price. No firm has an incentive to drop price, however an increase in price by even a penny would mean demand drops to zero. Rare and usually occurs in markets where producers can instantly and costlessly adjust production. The coefficient is infinity. E.g. Suppose there are many farmers selling an identical type of wheat. If one farmer raises the price of their wheat by even a small amount, consumers will immediately buy from other farmers who are offering the wheat at the original price. As a result, the demand for the higher-priced wheat falls to zero. An extreme that in reality doesn't exist.

Answer 72

In the case of perfect inelasticity, quantity supplied does not respond to price changes. Producers are unable or unwilling to adjust supply in response to price fluctuations. The coefficient is zero. E.g. Life-saving medications may have perfectly inelastic supply; their production cannot be immediately increased, regardless of price changes. An extreme that in reality doesn't exist.

Answer 73

the formula used to calculate PED is % change in quantity demanded (QD) / % change in price (P) to work out % change - difference / original x 100

Answer 74

If answer <1 the relationship in inelastic ( consumers do not react much to a change in price) perefectly inelastic = 0 If answer >1 the relationship is elastic (consumers do react to a change in price) perfectly elastic = infinity If value is 1 then it is unitary

Answer 75

Income received from selling goods and services = P x Q

Answer 76

Response to a rise in price- % change in QD is larger than % change in price PED coefficient - >1 Impact on total revenue if price Increases/ decreases - Increase in price = decrease in revenue decrease in price = increase in revenue

Answer 77

Response to a rise in price- % change in QD is same as % change in price PED coefficient - 1 Impact on total revenue if price Increases/ decreases - Increase in price = no change in revenue decrease in price = no change in revenue

Answer 78

Response to a rise in price- % change in QD is less than % change in price PED coefficient - <1 Impact on total revenue if price Increases/ decreases - Increase in price = increase in revenue decrease in price = decrease in revenue

Answer 79

Firms who have products that are price elastic would benefit from a price cut to increase their revenue. However it is important to note that this does not mean there will be an increase in profit. Where there are extra sales, there is likely to be an increase in costs, therefore total costs will rise as well as total revenue. If costs actually rise more than revenue , profits will fall

Answer 80

( Demand will fall if prise rises ) -Goods with close substitutes ( e.g. spaghetti ) -Luxuries -Longer time period

Answer 81

( Demand won't fall despite price rise) -Shorter time period -Necessities -Addictive goods - cigarettes, alcohol -Goods with no clear alternative - e.g apple iPhone

Answer 82

S- substitutes P- proportion of income L- luxury or necessity A- addiction T- time

Answer 83

- Existence of close alternatives or substitutes, will increase PED (become more elastic). Where there are close substitutes including other brands it is important for firms to differentiate their products to make their products less price responsive because substitutes become less attractive in comparison.

Answer 84

Income elasticity of demand (YED) is the responsiveness of quantity demanded to changes in income. The basic formula for calculating the coefficient of income elasticity is: % change in quantity demanded / % change in income

Answer 85

Have a positive income elasticity of demand. As consumer income rises, more is demanded at each price level. I.e there is a right shift of the demand curve. Normal goods can be separated into 2 groups: -(Normal) Necessities. Coefficient = 0 -> 1. E.g. Fruit and veg -(Normal) Luxuries. Coefficient = 1-> infinity. E.g. holidays, sports car, designer clothes.

Answer 86

Inferior goods have a negative income elasticity of demand. Demand falls as income rises. Typically inferior goods or services tend to be products where there are superior goods available if the consumer has the money to be able to buy it. However in a recession the demand for inferior goods may actually increase. Coefficient = -infinity -> 0. Examples include tinned food and public transport

Answer 87

Inferior goods can benefit from an increase in sales during a recession as consumers tend to consider their spending. In a boom producers of inferior goods will feel the need to diversify. They need to increase their range of products to include some with growing markets. They may need to find new ways of adding value to their products. Whereas producers of luxury products tend to see the sales of their products fall significantly during a period of recession. Finally when interpreting YED not all consumers will view goods in the same way. A good that is regarded as a luxury to one person might be viewed very differently by someone else who has a higher level of income/ wealth

Answer 88

Below -1 = Income elastic inferior good Below -1 and 0 + income inelastic inferior good 0 = No relationship between income and QD 0 and +1 = Income inelastic normal good/necessity Greater than +1 = Income elastic normal good/ luxury

Answer 89

(XED) : Measures the responsiveness of a change in demand of one good to a change in price of another good. The Factors: - Substitutes -Complements -No correlation % change in quantity demanded X / % change in Price of Good Y

Answer 90

Co- efficient Strong substitutes: +1 -> infinity Weak substitutes: 0 -> +1 Explanation of change in price for one good on the demand for the other: Increase in price causes an increase in demand for the other Decrease in price causes an decrease in demand for the other ( significant change for strong)

Answer 91

Co- efficient Strong Complements: -1 -> -infinity Weak Complements: 0 -> -1 Explanation of change in price for one good on the demand for the other: Increase in price causes an decrease in demand for the other Decrease in price causes an increase in demand for the other ( significant change for strong)

Answer 92

Co- efficient- 0 Explanation of change in price for one good on the demand for the other: If there is an increase or decrease in price there is no change

Answer 93

PED will help firms judge the impact of a change in price. YED will help to forecast changing demands if real incomes are increasing / decreasing. XED helps anticipate changes in demand based on changes in prices of other products. From the prospective of Government, knowing the PED will help inform them of the impact of imposing/ increasing indirect taxes on the revenue received. Similarly the impact of introducing a subsidy can be estimated.

Answer 94

PES measures the responsiveness of QS of a good or services to a change in price of that good/ service % change in quantity supplied / % change in price

Answer 95

The supply curve is upward sloping - price elasticity of is positive An increase in the market price is likely to encourage firms to supply more If PES is between 0 and 1 then supply is inelastic If PES is more than 1 then supply is elastic When = 1 it is unitary

Answer 96

A change in price causes a smaller proportionate change in quantity supply Firms can't increase supply easily, it can be expensive and/or take a long time Grapes- Harvest is once a year, so in short term, supply would be very inelastic

Answer 97

A change in price causes a bigger proportionate change in supply Firms can increase supply at little cost Taxi Services- easy for people to work as taxi drivers, licence and car.

Answer 98

A unitary elastic supply has a change in supply which is equal to the change in price E.g. 10% change in price leads to a 10% change in supply.

Answer 99

-Supply fixed, so if there is a change in demand, it can't be met, not straight away anyways PES = 0, supply is perfectly price inelastic

Answer 100

- How willing and able firms are to respond to a change in price -Spare production capacity: if there is plenty of spare capacity, a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. - Stocks of finished products and components and perishability. If stocks of raw material and finished products are high, then a firm can respond to a change in demand - supply will be elastic - perishable goods are often harder / more expensive to store - this makes supply less elastic. -Ease and costs of factor substitution / factor mobility : if capital and labour are occupationally mobile then the elasticity of supply is higher as resources can be mobilised to supply extra output e.g. reallocation of workers to new tasks -Time period and production speed : supply is more price elastic the longer the time that a firm is given to adjust their production levels.

Answer 101

P- production lag S- stock S- spare capacity S- substitutability of factors of production (CELL) T- time B- carries to entry

Answer 102

- If there is spare capacity in the factory - If there are stocks available - In the long run, supply will be more elastic, because capital can be varied -If it is easy to employ more factors of production

Answer 103

-In the short term, capital is fixed in the short term .e.g. firms do not have time to build a bigger factory -It is difficult to employ factors of production e.g. if highly skilled labour is needed -With agricultural products, supply is inelastic in the short run, because it takes at least 6 months to grow new crops. In September the farmers cannot suddenly produce more potatoes if the price goes up. - Firms operating close to full capacity

Answer 104

- How willing and able firms are to respond to a change in prices - A firm that has high levels of stock / running at below capacity is likely to be able to respond very quickly to a change in price - Where as a firm who will need to pay overtime / rent new buildings or machinery may be less responsive to a change in price

Answer 105

A charge or fee that a government imposes on a citizen or business is called a tax

Answer 106

Governments may intervene in markets to influence demand/ supply of particular goods An indirect tax is put on expenditure for goods and services- it is imposed on producers. An element of this is likely to be passed on to the consumer (as opposed to a direct tax which is charged directly on an element of income / wealth or profit. It is paid directly by a business or individual to government) Indirect taxes are imposed by the government and they increase production costs for producers.

Answer 107

-VAT -Cigarettes, alcohol, fuel and sugar levy (excise duty) -Landfill -Insurance premium tax

Answer 108

- Ad valorem taxes- are percentages ,such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK -Specific tax - a set tax per unit, such as the 58p per litre fuel duty on unleaded petrol

Answer 109

Shifts the supply curve to the left.

Answer 110

Who pays tax? Although the seller is responsible for the mechanics of paying the tax, it is effectively divided between the buyer and the seller. Part of the tax can be passed on the buyer in the turn of a higher price. This is called incidence of tax The price elasticity of demand determines the incidence of tax. If the co-efficient of price elasticity of demand >1 (elastic) , then most of the burden of an indirect tax will be absorbed by the supplier If the co-efficient of price elasticity of demand <1 (inelastic), most of an indirect tax can be passed on to the final consumer

Answer 111

An Ad Valorem tax is a % of the price. Value added tax (VAT) (standard rate in UK is 20%) is an example of an Ad Valorem tax. The effect of an ad valorem tax is to cause a pivotal shift in the supply curve. This is because the tax is a % of the unit cost of supplying the product. So a good that could be supplied for a cost of £50 will now cost £60 when VAT of 20% is applied. A different good that cost £400 to supply will now cost £470 when same rate of VAT is applied.

Answer 112

Value Added Tax is an Ad Valorem indirect tax which is charged on the purchase of many goods and services. It is levied at each stage if the supply chain where value is added from initial production to the point of sale. Standard rate of VAT is 20% Reduced rate of VAT is 5%, reduced rate VAT is on goods that the government wish to encourage the consumption of, for example, Children car seats, home energy saving materials, smoking cessation products such as nicotine patches and gum. Zero rated VAT is on certain foods and beverages, exported goods, donated goods sold by charity shops, equipment for disabled, prescription medicine, water, child clothing.

Answer 113

The government may wish to encourage production of a particular good or service. A subsidy is a form of government intervention, it usually involves a payment by the government to suppliers that reduce their costs of production and encourages them to increase output of a good or service.

Answer 114

-Encourage infant industries/ prop up industries that are struggling to compete -Strategic industries ie foods or defence -Encourage consumers to buy products and services that have positive benefits for individuals/ society .i.e. ~Fresh fuit and Veg ~Solar panels ~Electric Cars

Answer 115

-Shift in the supply curve to the right -Fall in Price -The Price fall is less than the total subsidy

Answer 116

- Size of Subsidy is the vertical distance between the 2 supply curves - A subsidy per unit of output causes an outward shift of the market supply curve leading to a lower equilibrium price -Benefit of subsidy to consumer is bottom area- consumer now paying less -Benefit of subsidy to producer given by top area and represents the fact they earn more revenue per item -Total cost of subsidy to government will be sum of the benefits to both consumers and producers or the total areas of the 2 rectangles

Answer 117

-If demand is price inelastic, the subsidy will have a large effect on the equilibrium price. This gives a greater consumer gain than when demand is elastic -If demand is price elastic, the subsidy will have a large effect on quantity and therefore benefit producers more

Answer 118

-Habitual Behaviour- Always done it e.g. buying Heinz, smoking- addictive even though we know it's bad for us. This could also be due to inertia ie in the last 6 months I have watches 2 films but still keep paying as I cant be bothered to go unsubscribe.

Answer 119

- Other People can influence how the consumer acts (how they behave and their choices)

Answer 120

Self control can be difficult with some decisions. The law of diminishing marginal utility suggests that every extra unit consumed provides a smaller benefit to the consumer. Consumers may consume past the optimal benefit point because of their weakness in identifying optimal benefit or self control.

Answer 121

Biases stop individuals acting in a rational way due to: -rule of thumb- mental shortcut. Given range of prices we take the one in the middle. -Anchoring- the tendency to rely too much on a single piece of information, frequently the 1st piece of information when making decisions. -Availability of bias- people make judgements about the probability of events by how easy it is to recall examples of such events for example due to recent occurrences. -A social norm is a belief that is held by the group or groups of people with whom we associate about how we should behave in a given situation -Habitual behaviour- refers to a rigid pattern of behaviour followed by a person

Answer 122

A term that means that people ability to make rational is severely restricted. It's why consumers don't act rationally and why people tend to satisfy rather than spend ages trying to make a rational decision that maximises utility. Three main reasons are often identified: -The human mind has limited ability to process and evaluate information -The information available is invariably incomplete and often unreliable -The time available in which to make decisions is limited.

Answer 123

Suggests consumer behaviour can be influenced by small suggestions and positive reinforcement. Proponents of nudge theory suggests that well placed nudges can reduce market failure, save the government money, encourage desirable actions and help increase the efficiency of resources used.

Answer 124

Rational behaviour is the cornerstone of rational choice theory, a theory of economics that assumes that individuals always make decisions that provide them with the highest amount of personal utility. These decisions provide people with the greatest benefit or satisfaction given the choices available.

Answer 125

Irrational behaviour happens when people make choices and decisions that go against the assumption of rational utility-maximising behaviour.