Unit 1

Question 1

Reasons for an increase in demand

Answer 1

• Income change
• population changes
• trends/ advertising
• changes in the price of other goods (complimentary, substitute goods)

Question 2

Reasons for a shift in the supply curve

Answer 2

• Natural factors (flood, drought)
• Technology
• Government (Taxes, Drought)
• Cost of production (Wages, Raw materials)

Question 3

Positive Statement

Answer 3

A statement which is objective and based on value judgment (based on fact)

Question 4

Normative Statement

Answer 4

Subjective and based on opinion

Question 5

Total utility

Answer 5

Total satisfaction from a given level, of consumption

Question 6

Price elasticity of demand

Answer 6

PED = % △QD / % △P

Question 7

Elastic value and Inelastic values

Answer 7

• where % change in demand is greater than % change in price = elastic ( greater than 1)
• where % change in demand is less than % change in price = inelastic ( less than 1)

Question 8

Derived demand

Answer 8

Where the demand for a product or service is derived from the demand for another product or service. Eg. More builders because more houses are needed.

Question 9

Inelastic and elastic demand curve

Answer 9

Inelastic = steep curve (quantity demanded is less impacted by price)
Elastic = gradual curve (quantity demanded is greatly impacted by price)

Question 10

Determinants of elasticity of demand

Answer 10

• Time period ( longer the time under consideration the more elastic a good will be)
• Number of and closeness of substitutes ( greater no of subs more elastic)
• the proportion of income taken up by the product ( smaller proportion more Inelastic)
• luxury or necessity
• habit forming

Question 11

Determinants of elasticity of supply

Answer 11

• Four factors of production (Land, Labour, Enterprise, Capital)
• Time
• Spare capacity
• Spare stock and components

Question 12

Normal good vs inferior goods

Answer 12

Normal good = Demand rises as income rises and vice versa eg. Holidays (positive value)
Inferior good = Demand falls as income rises and vice versa eg. Aldi (Negative value)

Question 13

Luxury goods

Answer 13

A value greater than 1 is a luxury good
Have a high income elasticity and see greater sales volatility than necessities.

Question 14

Cross elasticity

Answer 14

The responsiveness of demand of one good to changes in the price of a related good.
- some goods are substitutes for each other (positive value)
- some goods are compliments of each other (negative value)

Xed = % △ QD of good A / % △P of good B

Question 15

Production possibility frontiers

Answer 15

The maximum possible output combinations of two goods or services an economy can achieve when all resources are fully used.

Question 16

Capital good vs consumer good

Answer 16

Capital goods are man made products used by a business to produce consumer or other capital goods.

Question 17

Advantages and disadvantages of specialisation

Answer 17

Advantages:
- higher productivity and efficiency per worker
- lower unit costs leads to higher profits

Disadvantages:
- can ask for a higher salary if only they can complete a job
- decreased motivation as they only complete one job (repetitive)

Question 18

Absolute advantages vs comparative advantage

Answer 18

Absolute advantage: being able to produce more of something than another country. (Assuming both have the same amount of resources / FOP available)

Comparative advantage: being able to produce something at a much lower opportunity cost than another country.

Question 19

Flat tax

Answer 19

Imposed on firms, but can be passed through higher prices. Eg. 5p per L of fuel

Question 20

Ad valorem

Answer 20

Unit tax (% tax) eg. VAT 20%

Question 21

Consumer surplus

Answer 21

The difference between the total amount that consumers are willing to pay and the total amount they actually pay. (Market price)

Question 22

Producer surplus

Answer 22

Producer surplus is the difference between the amount the producer pays and the actual amount they receive.