Defintions

Question 1

Positive statement

Answer 1

A positive statement is a statement of fact. It may be right or wrong, but its accuracy can be tested by apealing to the facts.

There are data, statistics or facts such as “ “ to support the statement / The validity of the statement can be proven with “ “

Question 2

Normative statement

Answer 2

A normative statement is a statement of value, point of view or opinion expressing value judgement.

There are no data, statistics or facts to support the statement / The validity of the statement cannot be proven.

Question 3

Scarcity

Answer 3

Scarcity occurs when there is excess of human wants due to unlimited wants, over what can actually be produced due to limited resources to fulfil these wants.

Question 4

Opportunity cost

Answer 4

Opportunity cost refers to the value of the next-best alternative forgone as a result of a decision made.

Question 5

Points PPC

Answer 5

Points on the PPC are attainable output combinations and show efficient resource utilisation, meaning there is no wastage or unemployment of resources.

Points inside the PPC are attainable but inefficient output combinaations as the economy does not make efficient use of available resources and there is wastage of resources.

Points beyond the PPC are desired but unattainable output combinations because of scarcity of resources.

Question 6

Curve PPC

Answer 6

The PPC is concave to the origin, as to get more of one good, the economy needs to give up increasing amounts of the other good. This implies existence of the increasing opporunity cost due to the resources being imperfect substitutes for each other.

Question 7

PPC shift

Answer 7

The PPC shifts inwards when quantity and quality of resources have declined or technology fails.
The PPC shifts outwards when quantity and quality of resources have increased or technology improves.

Partial shift along Y-axis/X-axis because technology improves in production of “ “

Question 8

What is illustrated by PPC?

Answer 8

Scarcity is illustrated by the downward/negative slope of the PPC (to produce one good, need to produce less of other good) and also by the unattainable points beyond the PPC.

Choice is illustrated by the various points inside and on the PPC. Movement along PPC means change in choice.

Oppotunity cost is illustrated by the negative slope of the PPC where some units of goods have to be forgone in order to have an extra unit of another good. Increasing opporunity cost is illustrated by the concave shape of the PPC, where its increasingly negative gradient shows that more and more units of one good have to be given up to obtain an additional unit of another good.

Actual growth is shown by outward shift in point on PPC

Potential growth is shown by outward shift of the PPC.

Question 9

Factors affecting demand

Answer 9

1. Change in consumer’s income (increase, Price of normal good go up, price of inferior good go down)
2. Change in price of related goods (substitutes, complements (used tgt), goods in derived demand (one used to make the other))
3. Change in consumer’s tastes and preferences
4. Change in government economic policies
5. Expectations of future price changes

(EGYPT)

Question 10

Factors affecting supply

Answer 10

1. Change in price of factor inputs
2. Change in production of related goods (Goods in competitive supply, joint supply)
3. Change in state of technology
4. Change in government policy
5. Expectations of future price changes
6. Change in number of suppliers
7. Change in weather conditions

(WET PIGS)

Question 11

Definition and factors affecting PED

Answer 11

Price elasticity of demand measures the responsiveness of quantity demanded of a good due to a change in its price, ceteris paribus.

1. Number and closeness of substitues in the same price range
2. Proportion of income spent on the good
3. Degree of necessity
4. Habit of consumers
5. Time period

(HINTS)

Question 12

Definition and factors affecting PES

Answer 12

Price elasticity of supply measures the responsiveness of quantity supplied of a good due to a change in the price of a good itself, ceteris paribus.

1. Time period
2. Mobility of factors of production
3. Spare capacity of firms
4. Levels of stock or inventories

Question 13

Price ceiling, price floor, black market, quotas

Answer 13

A price ceiling is a legally established maximum price. It is binding when set below the market equilibrium price - creates shortage

A price floor is a legally established minimum price usually set above the market equilibrium price (minimum wage) - creates surplus

The more elastic the demand/supply, the greater the shortage/surplus

Encourages the formation of a black market. A black market is one that exchanges goods at a price well above the legally established maximum price. It exists because of the existence of unsatisfied buyters willing to pay higher prices to otain the good.

Quality controls (Quotas) are an upper limit on the quantity of a good that can be bought or sold

Question 14

Public goods

Answer 14

Public goods are goods that can be collectively consumed and are both non-rivalry in consumption and non-excludable.

Non-rivalry in consumption means that the consumption of the good does not reduce the total supply available to others. This means the marginal cost of providing for another user is zero, implying there is no effective supply.

Non-excludable in consumption means that once the good is made available, it is difficult or costly to exclude non-payers from consuming it. This gives rise to the free-rider problem, as consumers know that is almost impossible or very costly for firms to exclude them from enjoying the benefits without paying. and hence would not be willing to pay for the good, and hence there will be no effective demand

As public goods are characterised by two important features - non-rivalry in consumption and non-excludability - they will not be provided by the price mechanism due to not having an effective supply or demand. A market price is unable to be established, resulting in a missing market of a good that provides benefits. Therefore, it leads to market failure.

Free provision or demand is made by government.

Question 15

Externalities and Imperfect information

Answer 15

A negative externality is when there are spill over negative effects on a third party due to consumption or production, without the latter being compensated for.
(taxation, permits, quotas, ban, providing alternatives, education)

A positive externality is when there are spill over positive effects on a third party due to consumption or production, without the latter having to pay for them.
(Subsidies, free provision, legislation(compulsory))

Imperfect information occurs when buyers and/or sellers have incomplete, inaccurate or misunderstood information of the true benefits and costs relevant to the transaction.
(specific product standards, education)

Question 16

GDP/GNP

Answer 16

Gross domestic product refers to the total monetary value of all final goods and services produced within the geographical boundary of a country within a period of time, regardless if they are nationals or foreigners.

Gross National Product refers to the total monetary value of all final goods and services produced by the residents of a country during a given time period.

Question 17

SOL and difficulty in measuring

Answer 17

Material SOL measures the quantity and quality of goods and services accruing to each person in the country

Non-material SOL measures the intangibles and focus on quality of life.

1. Inflation or deflation rates (nominal gdp havent been adjusted for changes in general price levels, real gdp has)
2. Population size (GDP per capita)
3. Distribution of income (Gini coefficient, lower the better)
4. Qualitative changes in consumer goods (quality might have increased, or quantity might have increased at expense of quality, so even tho gdp change, cant represent this change in quality which might affect SOL)
5. Changes in statistical coverage and reliability of data (increase in gdp may be due to them adding more products to the
   “final” products used for gdp calculation, and thus no relation to SOL)
6. Only market activities included (housewives, DIY work, payments in kind)
7. Leisure time
8. Presence of negative externalities like pollution. (when gdp rise, show production rise, so likely pollution from production also rise)

Question 18

HDI

Answer 18

Human development index

Measures non-material sol by taking into account life expectancy at birth, education attainment (adult literacy and years of schooling), and gdp per capita (measured using purchasing power parity exchange rates.)

Question 19

What contributes to AD and AS

Answer 19

AD contributors are consumer expenditure, government expenditure, investment investiture and net exports (Export revenue - import expenditure) (C+G+I+(X-M))

SRAS contributors are anything that changes cost of production (resources, FOP, wages, taxes)

LRAS contributors are anything that changes maximum quality and quanitty of factors of production

Question 20

Growths

Answer 20

Actual growth is the percentage annual increase in national output.

Potential growth is the rate at which the economy could grow if it were to use all its resources.

Sustained growth is non-inflationary economic growth that can be maintained and it is achieved by having both actual and potential growth.

Sustainable growth indicates a rate of growth that can be maintained without creating other significant economic problems.

Inclusive growth indicates a rate of growth that is sustained over a period of time, is broad-based across economic sectors and creates productive employment opporunities for majority of the country’s population.

Question 21

Costs of economic growth

Answer 21

Trade off with low unemployment (rapid growth leads to structural changes in economy, leading to structural unemployment)

Trade off with price instability (inflationary pressure due to demand pull inflation)

trade off with sustianability

trade off with inclusiveness

trade off between present and future consumption (need to invest more in advancing technology and accumulating capital instead of producing goods and services for present consumption

social costs (more greedy and selfish and less caring society -violence, crime, loneliness, stress, mental health)

Question 22

Unemployment

Answer 22

Cyclical unemployment is caused by inadequate foreign or domestic demand for a country’s goods and services due to fluctuations in the business cycle. The fall in foreign demand may be brought by global economic downturns while fall in domestic demand is characteristic of a downturn in domestic economy.

Structural unemployment occurs due to the mismatch between skills possessed by the retrenched or unemployed workers and the skills required by the new industries.
caused by changes in demand conditions and supply conditions
geographical and occupational immobility

Frictional unemployment is the unemployment due to job search in the process of transiting between jobs.

Seasonal unemployment is the unemployment resulting from th seasonal nature of the demand for the final product and thus the fluctuating demand for labour (harvest season for farmers and workers in ski resorts)

Question 23

Inflation

Answer 23

Inflation is defined as an economic situation where there is sustained increase in general price level of an economy

Demand-pull inflation occurs when there are persistent rises in aggregate demand (AD) in the economy that are not matched by the ouput of goods and services (AS).
Excessive AD occurs near or at full employment level of national output (classicla range)

Cost-push inflation occurs when there are persistent rises in cost of production, independent of aggregate demand.

Regardless of the initial type of inflation, inflation can breed more inflation, due to a wage-price spiral.