Theme 1

Question 1

What is a positive economic statement

Answer 1

Statements that describe real world phenomenons and are objective

Question 2

What is a normative statement

Answer 2

Statements that involve judgments or personal opinions about how things should be

Question 3

What is opportunity cost

Answer 3

The cost of a decision based on the benefits of the next best alternative

Question 4

What is economic growth

Answer 4

Increase in the level of GDP or economic activity

Question 5

What is a free market economy

Answer 5

Economy based on supply and demand where prices are set by sellers and consumers. No government intervention

Question 6

What is a command economy

Answer 6

Where all resources are controlled by the government who decide what to produce and at what prices

Question 7

What is diminishing marginal utility

Answer 7

The consumption and satisfaction of a good increases but eventually decreases to the point where it reaches 0

Question 8

What is price elasticity of demand

Answer 8

A measure of how much a products demand changes in response to a change in price

Question 9

What is the formula for price elasticity of demand

Answer 9

Percentage change in quantity demanded / Percentage change in price

Question 10

What is cross price elasticity

Answer 10

When the price of one product can change the quantity demanded of another product

Question 11

What is the formula for cross price elasticity

Answer 11

Percentage change in quantity demanded of A / Percentage change in price of B

Question 12

What is the price mechanism

Answer 12

A change in price based on a shift in supply or demand

Question 13

What are the functions of the price mechanism and their meanings

Answer 13

Signalling - price signals were resources are needed

Incentive - consumers provide an incentive of what quantity and price they want

Rationing - limiting good or services at high demand or low supply

Question 14

What are the 3 reasons for market failure

Answer 14

No public goods - goods that cannot be sold and simply exists (e.g information, public parks. People can use it even though they didn’t contribute to its provision

Information gaps - buyers or sellers have little information of the market

Externalities - a cost or benefit caused by a producer that they do not receive

Question 15

What’s the difference between symmetric and asymmetric information

Answer 15

Symmetric is where all parties have the same information. Asymmetric is where parties have different levels of information

Question 16

What are subsidies

Answer 16

Money given by the government/state to incentivise production and consumption

Question 17

What is the specialisation and the division of labour

Answer 17

Specialisation - refers to a worker performing one specific task

Division - different workers performing different tasks in the making of a certain good or service

Question 18

3 advantages and 3 disadvantages of a free market economy

Answer 18

+ increased competition
+ product variety
+ resource allocation by producers and consumers
- monopolies emerge
- no government intervention to provide goods or subsidies
- wealth not distributed equally

Question 19

Factors that may shift demand curve

Answer 19

• consumer income
• consumer preferences
• price
• substitute goods (price and quality)

Question 20

What is the formula for income elasticity of demand

Answer 20

Percentage change in quantity demanded / Percentage change in income

Question 21

What is an elastic good

Answer 21

Goods where a change in price has an effect demand. PED is equal to or more than 1. (-1.5 and 1.5 are both elastic)

Question 22

What is an inelastic good

Answer 22

A good where a change in price does not affect demand. PED is less than 1

Question 23

Factors may effect supply curve

Answer 23

• production costs (factors of production)
• competition with substitutes
• tax on production
• technological advances

Question 24

Difference between private external and social benefits

Answer 24

Private - benefits that effect the buyer or seller of a good or service

External - benefits that effect people who are not the buyer or seller or a good or service

Social - the benefits for society as a whole

Question 25

Difference between non rivalrous and non excludable goods

Answer 25

Non excludable - costly or impossible to exclude/prevent others from using a good

Non rivalrous - the consumption of a good does not reduce the amount available for others

Question 26

What is the free rider problem

Answer 26

Market failure where people are benefiting from goods or services that they are not paying for

Question 27

What are the methods of government intervention

Answer 27

• indirect taxes
• subsidies
• minimum and maximum pricing

Question 28

What is an indirect tax

Answer 28

Placing an additional tax on the price of a specific good or service (VAT)

Question 29

What are the consequences of government failure

Answer 29

• deadweight loss
• reduced consumer surplus
• decreased economic welfare

Question 30

What is a deadweight loss

Answer 30

Cost or benefit to society created by the behaviour of producers or consumers (mainly negative)