1

Question 1

Factors of production

Answer 1

Land
Labour
Capital
Enterprise

Question 2

Command economy

Answer 2

How to produce
What to produce
For whom to produce

(Gov decides)

Question 3

Free market economy

Answer 3

Firms compete with each other without government intervention

Question 4

Positive statement

Answer 4

Statements that can be tested using evidence

Question 5

Normative statement

Answer 5

Subjective statements (ought)

Question 6

What is assumed in economics

Answer 6

• Rational consumers
• Producers/firms want to maximise profits
• Government wishes to improve economic/social welfare of citizens

Question 7

What happens in a command economy

Answer 7

• most resources are state owned
• planning allocates resources
• little role for market prices

Question 8

What happens in a mixed economy

Answer 8

• mix of state/private ownership
• gov. Intervention in markets
• mix will vary from country to country

Question 9

What happens in a free market economy

Answer 9

• markets allocate resources
• driven by the profit motive
• limited role for the state
• private sector dominates

Question 10

Utility = ?

Answer 10

Measurement of satisfaction

Question 11

What’s a free good?

Answer 11

Resources that aren’t scarce

Question 12

What’s allocative efficiency?

Answer 12

You can’t make anyone better off without making someone else worse off (like on PPF curve)

Question 13

What’s productive efficiency?

Answer 13

Producing maximum output (points along PPF curve)

Question 14

What are the 4 non price determinants of demand?

Answer 14

Price of substitutes
Price of complements
Income
Fashion/taste

Question 15

Definition of demand:

Answer 15

The quantity that purchasers are willing and able to buy at a given price in a given period of time

Question 16

How does demand relate to price?

Answer 16

Inverse relationship

Question 17

5 non price determinants of supply

Answer 17

Costs 
Firms expectations 
Technology
Legislation 
Indirect tax

Question 18

Reasons why supply slopes upwards

Answer 18

• the profit motive
• production and costs
• new entrants coming into the market

Question 19

What’s the profit motive?

Answer 19

Market price rises following an increase in demand (more profitable)

Question 20

How does production and costs make the demand curve slope upwards?

Answer 20

When output expands, a firms production costs tend to rise therefore resulting in higher prices

Question 21

How does new entrants coming into the market result in an upward sloping supply curve

Answer 21

Higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply

Question 22

What is price elasticity of demand?

Answer 22

The responsiveness of demand to a change in price (always negative but ignore the sign)

Question 23

PED equation

Answer 23

% change in QD
/
% change in P

Question 24

What do price inelastic curves look like

Answer 24

Steep

Small decrease in price results in a less than proportionate increase in quantity demand

Question 25

What do price elastic curves look like?

Answer 25

Shallow

Question 26

PED of price inelastic

Answer 26

PED < 1

Question 27

PED of price elastic

Answer 27

PED > 1

Question 28

Extreme inelastic

Answer 28

PED = 0 Vertical line

Question 29

Extreme elastic

Answer 29

PED = infinity Horizontal line

Question 30

Factors determining PED

Answer 30

- number of substitutes available - price of good compared to total income - cost of substituting between different goods - brand loyalty - degree of necessity/ luxury

Question 31

Increase price of inelastic good means....

Answer 31

Increase in revenue

Question 32

Higher up the demand curve....

Answer 32

Prices more elastic

Question 33

What is income elasticity of demand?

Answer 33

Shows how responsive the demand for a product is to a change in real income

Question 34

YED formula

Answer 34

% change in QD / % change in real income (Always put + or - )

Question 35

XED formula

Answer 35

% change in good x / % change in good y

Question 36

Positive or negative XED for substitute

Answer 36

+

Question 37

Positive or negative XED for complements

Answer 37

-

Question 38

XED of unrelated products

Answer 38

0

Question 39

What does price elasticity of supply mean

Answer 39

PES measures the relationship between change in quantity supplied and a change in price

Question 40

If supply is elastic, producers can _________ their output.....

Answer 40

Increase output without a rise in cost or time delay

Question 41

If supply is inelastic, firms ____________

Answer 41

Find it hard to change their production in a given time period

Question 42

PES > 1

Answer 42

Elastic

Question 43

PES < 1

Answer 43

Inelastic

Question 44

PES = 0

Answer 44

Perfectly inelastic

Question 45

PES = infinity

Answer 45

Perfectly elastic

Question 46

Factors affecting PES

Answer 46

1. Spare production capacity 2. Stocks of finished products/components 3. Ease and cost of factor substitution/factor mobility 4. Production speed

Question 47

What is consumer surplus

Answer 47

The difference between the total amount that consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually pay (market price)

Question 48

Where is consumer surplus on a demand curve

Answer 48

The area under the demand curve and above the market price

Question 49

What does elastic demand mean for consumer surplus

Answer 49

Relatively low

Question 50

What does a low PED mean for consumer surplus

Answer 50

High consumer surplus

Question 51

If demand is inelastic, what happens to consumer surplus

Answer 51

Greater consumer surplus as some buyers are willing to pay a high price to continue consuming the product

Question 52

Where is producer surplus on a supply curve

Answer 52

The area above the supply curve and below the current market price

Question 53

4 functions of the price mechanism

Answer 53

1. Allocate 2. Rationing 3. Signalling 4. Incentives