Chapter 11 Flashcards by Katie Corr

response to new regulations:
entrenchment
mere compliance
full compliance
innovation

entrenchment = non-response
mere = passing on the cost of compliance to the customer
full = behaviour is changed; P+P adjusted to comply w/ regulations
innovation = behaviour exceeds regulations

= the Porter hypothesis - strict environmental regulations trigger the discovery + innovation of cleaner products/tech + environmental improvements

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Ferndale plc is a multinational company. It has been charged with collusive behaviour in its UK
operations. If found guilty, the company could, amongst other sanctions, receive a fine of:
A up to 10% of annual worldwide revenues
B up to 10% of annual UK revenues
C up to 20% of annual worldwide revenues
D up to 20% of annual UK revenues

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The government has intervened to impose a limit on businesses’ carbon emissions. This is an
example of regulation designed to address market failure caused by:
A asymmetric information
B equity
C market imperfection
D externalities

D - externality = an adverse social consequence which the private producer has no incentive to minimise - the external costs and benefits

regulation can also address:
-asymmetric info
-equity = improve social justice
-market imperfection = where monopoly power is leading to inefficiency - gov can intervene through controls on pricing + profits tf reducing effects of a monopoly

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what is demand pull inflation?

price rises resulting from a persistent excess of D > S in the economy as a whole

supply cannot grow any further once ‘full employment’ of factors of production is reached

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causes of demand pull inflation x2

fiscal - an increase in gov spending/reduction in taxes = more £ in the economy
credit - if levels of credit extended to consumers increases (decrease in IR) - expenditure rises

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what is cost push inflation?

price rises resulting from an increase in the cost of production of G + S ie increased £ imported raw materials, wage increases

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normal goods vs inferior goods = as income rises

as income rises:
normal goods - demand increases ie B+J ice cream
inferior goods - demand decreases ie Tesco value ice cream

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Potatoes are a Giffen good. An increase in the price of potatoes will cause:
A an increase in demand for potatoes
B a decrease in demand for substitutes for potatoes
C a decrease in demand for potatoes
D an increase in demand for substitutes for potatoes

giffen goods = rare! ie potatoes, rice

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A brand of cheese is an inferior good. A consultant has made two statements about the cheese.
Statement (1): Demand for the cheese will rise as incomes rise.
Statement (2): Demand for the cheese only exists because of the effects of advertising.
Requirement
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true

1 - false: inferior goods, as income rises, demand decreases (normal goods, as income rises, demand increases)

2 - not just because of advertising - could also exist due to price and the level of incomes

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which of these would cause a rightward shift in the supply of apple cider?
- a rise in the price of cider in the supermarkets
- a rise in the price of pear cider
- a fall in the price of apples
- good weather leading to a high harvest of apples
- a successful advertising campaign

a rise in the price of cider in the supermarkets = expansion of supply (up the slope) NOT a shift
pear cider now more attractive - suppliers want to produce pear cider tf apple supply decreases + shifts left
cheaper to make tf rightward shift + supply increases
more apples tf increased supply of product = rightward shift
increases demand but not supply!

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types of market structure: natural competition

lots of B + S - small tf individually cannot influence the market price
no barriers to entry or exit
perfect info (no asymmetric info)
homogenous
no collusion
suppliers earn NORMAL PROFITS
there is a single selling price

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types of market structure: monopolistic competition

many B + S
some differentiation between products w/ branding to achieve this differentiation!
some customer loyalty
few barriers to entry
significant advertising

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types of market structure: oligopoly

a few large sellers but many small buyers
product differentiation
a high degree of mutual interdependency ie big 4 supermarkets; decisions of one influences the others
price cuts copied but price increases not always copied

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types of market structure: monopoly

1 S + lots of B
barriers to entry
suppliers can set the selling price OR determine the quantity supplied (make product scarce : make demand increase)
suppliers can earn SUPERNORMAL PROFITS

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what are the barriers to entry with monopolies?

high set up costs
low marginal costs
economies of scale
patent protection
access to unique resources ie oil
unique talent
public sector monopoly
size domination of the market

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pure monopoly vs actual monopoly

pure = 1 supplier in the market

actual = 1 dominant supplier in the market

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The cross elasticity of demand between the Terra product and the Nova product is zero. The two
products are:
A complements
B substitutes
C veblen goods
D unrelated

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The UK government has recently imposed a maximum price on Pratex which is set at a lower level
than its equilibrium price. In future, therefore, it can be expected that there will be:
A excess supply of the product
B excess demand for the product
C no effect on supply but an increase in demand
D no effect on demand but a decrease in supply

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9 There has been a significant rise in factor costs for the Tempo product during recent months. It can
be expected that there will be:
A a contraction in demand and supply
B an expansion in demand and supply
C a contraction in demand and an expansion in supply
D an expansion in demand and a contraction in supply

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In the market for the Optica product competitors do not compete through price. Instead, they spend
substantial sums of money on raising consumer awareness through advertising. There is some
differentiation between products, often achieved through branding. There are many buyers and
sellers in the market for the product.
Requirement
The market for the Optica product is characterised as:
A monopolistic competition
B oligopoly
C perfect competition
D monopoly

A - large number of competing sellers

Which three of the following are associated with conditions of perfect competition?
A Suppliers are price-makers
B Suppliers earn ‘normal’ profits
C Consumers lack influence over market price
D Differentiated products
E A single selling price

B C E

Gromet plc has been able to achieve significant external economies of scale. This indicates that the
market for the company’s only product has been:
A static, so forcing the company to achieve economies of scale in production
B growing, so enabling the economies of scale to be achieved
C contracting, so enabling the company to cut costs in distribution
D volatile, meaning that internal economies of scale were unattainable

The minimum price for a good is set by the government above the current free market equilibrium
price.
Requirement
What will be the effect (if any) on demand for and supply of the good in the short term?
A Demand for the good will fall; supply of the good will rise
B Demand for the good will rise; supply of the good will fall
C Both demand for and supply of the good will rise
D There will be no effect on either demand for or supply of the good

what is the basic economic problem affecting all nations?

the basic economic problem is one of allocating scarce resources + economics is the study of how these scarce resources should be used

4 factors of production:

labour, land, capital, enterprise/entrepreneurship

what is the correct sequence in a business cycle? A Boom, Recession, Depression, Recovery B Recession, Recovery, Boom, Depression C Boom, Recovery, Recession, Depression D Recovery, Recession, Depression, Boom

recession - depression - recovery - boom

The recession phase of the business cycle will normally be accompanied by all of the following except: A a rise in the rate of inflation B a fall in the level of national output C an improvement in the trade balance D a rise in the level of unemployment

A recession + declining demand go together the trade balance is likely to improve due to a decrease in demand for imports

The government may seek to reduce the rate of demand-pull inflation by any of the following means except: A reducing interest rates B increasing VAT C applying more stringent controls over bank lending D reducing public expenditure

A reduce demand-pull inflation by: INCREASING interest rates increasing VAT = more taxation, less £ to spend apply more stringent controls over bank lending, reduced credit reducing public expenditure = less £ in the economy

3 Which of the following would lead to demand pull inflation? A Rising import prices B Increase in wages C Increases in indirect taxation D High consumer expenditure such that aggregate demand exceeds aggregate supply

D : demand pull inflation - D > S and 100% emplyoment therefore factor of demand is maximised

Which of the following are effects of reduced interest rates? (1) Consumer spending will increase (2) Business investment will be encouraged (3) Saving will increase A 1 only B 1 and 2 only C 2 and 3 only D 1, 2 and 3

spending increases = less incentives to save investment increases = less incentive to save saving will decrease B

5 Which of the following is a fiscal policy measure by government? A To raise short-term interest rates in the money markets B To support the exchange rate for the country’s currency C To control growth in the money supply D To alter rates of taxation

‘Supply side’ economics concerns: A the behaviour of the microeconomic supply curve B the supply of factors of production in response to changing levels of factor rewards C the behaviour of the aggregate supply curve in connection with the levels of prices, incomes and employment D the effect that an increase in the supply of money has on inflation

f the government wishes to increase consumer spending, it should increase the rate of: A income tax B corporation tax C import duties D social security payments

Changes in the supply of a product which arise due to reduced costs of its manufacture will be represented on the product’s supply curve by: A a shift to the right in the supply curve B a shift to the left in the supply curve C movements along the supply curve D none of these

9 Pinewood Ltd produces two complementary products, the Buggle and the Chine. Requirement Which of the following describes the cross elasticity of demand between the two products? A Negative B Indeterminate C Zero D Positive

The government of Zeeland is concerned about demand pull inflation. Requirement Which of the following statements describes the impact and cause of demand pull inflation on Zeeland’s economy? A Price rises because of persistent excess of supply over demand in the economy as a whole. B Price rises because of persistent excess of demand over supply in the economy as a whole. C Price falls because of persistent excess of supply over demand in the economy as a whole. D Price falls because of persistent excess of demand over supply in the economy as a whole.

What does quantitative easing involve? A increasing quotas for the imports of certain products B increasing government borrowing and increasing government spending C buying government bonds from the private sector to increase liquidity D issuing more bank notes and coins into the economy to increase the money supply

buying gov bonds from the private sector by the Bank of England, which issues new electronic money to pay for them : NOT coins + notes

Under what circumstances is quantitative easing most likely to be used? A interest rates are high and liquidity in the system is low B interest rates are high and liquidity in the system is high C interest rates are low and liquidity in the system is low D interest rates are low and liquidity in the system is high

C - generally used as an alternative to cutting interest rates as a form of monetary policy where interest rates are already low so further cuts are not feasible. aims to increase liquidity in the system when it is low

Which statement best reflects recent government policy in the UK over the past decade? A low inflation combined with an expansionary fiscal policy B low inflation combined with a neutral fiscal policy C high inflation combined with an expansionary fiscal policy D high inflation combined with a neutral fiscal policy

B inflation is managed by Bank of England who use interest rates to control inflation. fiscal policy has been to keep taxes relatively unchanged while containing gov spending.

when demand for a food rises as income rises but then falls back as income passes a certain point, the good is: giffen normal inferior veblan

inferior

a shift of the demand curve to the right could be caused by which of the following conditions? a rise in household income a negative change in tastes for the goods a fall in the price of a substitute a rise in the price of a complement

a rise in household income

when there is a fall in factor costs, the effect will be: - to shift the supply curve to the right so the market price falls and demand rises - to shift the demand curve to the right so supply and the market price rises - to shift the demand curve to the left so supply and the market price fall - to shift the supply curve to the left so the market price rises and demand falls

to shift the supply curve to the right so the market price falls and demand rises

when the gov imposes a maximum price on a market, when will supply be reduced? - always - if the max price is set above the equilibium - if the max price is set below the equilibrium - never

if the max price is set below the equilibrium = demand increases but supply decreases

when the gov imposes a min wages above equilibium, what happens?

increase in consumer income:

increased demand, right-ward shift expansion in supply - upwards + right - rise in market price - rise in quantity supplied

product becomes unfashionable

decreased demand, left-ward shift contraction in supply - downwards + left - decrease in market price - decrease in quantity supplied

improvement in production technology

increased supply, right-ward shift expansion in demand - downwards + right - decreased market price - increased quantity

rise in factor costs

decreased supply, left-ward shift contraction in demand - left-wards + up - increase in market price - decreased quantity

which cause shifts in the supply curve: - factor costs - changes in fashion - changes in production technology - changes in consumer income

shifts in supply curve = factor costs, production technology increase factor costs - decrease supply (leftward shift) + contraction in demand (L + up) improve technology - increase supply (rightward shift) + expansion in demand (R + down)

which cause shifts in the demand curve: - factor costs - changes in fashion - changes in production technology - changes in consumer income

changes in fashion = goes out of fashion, decreased demand, left-ward shift - contraction of supply increased consumer income = increased demand, right-ward shift - expansion in supply