Economics

Question 1

What are Economies of Scale?

Answer 1

Economies of scale are the advantages of large-scale production which lead to lower average costs.

Question 2

What are Diseconomies of Scale?

Answer 2

Diseconomies of scale are the disadvantages of larger-scale production.

Question 3

When does Profit Maximisation occur?

Answer 3

Marginal Cost (MC) = Marginal Revenue (MR)

Question 4

Conditions of Perfect Competition? (5)

Answer 4

•Large number of sellers and buyers
•Homogeneous products
•Each buyer and seller has perfect knowledge and information
• No barriers to entering or exiting the market
• Firms aim to maximise profits

Question 5

What is a Monopoly?

Answer 5

•Monopoly is a market structure where there is one firm who has control over the market for a product or service by being the sole supplier.

•Think of the board game ‘Monopoly’. The aim of the game is to buy (or take over) as much of the property on the board as possible and therefore to end up as the sole supplier.

Question 6

What is an Oligopoly?

Answer 6

•Oligopoly is a market structure where there are a few firms that dominate the market.

Question 7

What is a Fixed Cost?

Answer 7

A fixed cost (FC) is a cost that does not change with increased or decreased levels of output. For example, rent on a building or factory owned by a firm is classed as a fixed cost.

Question 8

What is a Variable Cost?

Answer 8

A variable cost (VC) is a cost that does change with increased or decreased levels of output.

For example, raw materials used in the production of a product are classed as a variable cost. Advertising, hourly wages, fuel for ferries.

Question 9

What are Total Costs?

Answer 9

Total costs (TC) are the sum of fixed and variable costs to a firm.

Question 10

What are Average Total Costs?

Answer 10

•These are total costs averaged by the output of the firm.

Question 11

What are Average Fixed Costs

Answer 11

•Average fixed costs (AFC) are the fixed costs of a firm averaged by output, again to compare like with like.

Question 12

What are Marginal Costs?

Answer 12

Marginal costs (MC) are the costs for producing one more unit of a good.

Question 13

What is Cyclical Unemployment?

Answer 13

This occurs in an economy when there is not enough demand for goods and services (Aggregate Demand).

If people are not buying goods and services, both sales and profits fall and workers are no longer required to produce these goods and services. This causes job losses and lower disposable incomes.

Question 14

What is Structural Unemployment?

Answer 14

•This occurs when the industrial structure of an economy changes.

•For example, old ‘heavy’ industries such as coal mining have seen large-scale unemployment in the past, as the skills of the employees of these industries are no longer in demand because their products/services are no longer in demand. Many businesses struggle to find suitably qualified staff, even in a recession.

Question 15

What is Regional/Geographical Unemployment?

Answer 15

Unemployment will occur in a particular region of the country that may be dependent on a particular industry, rather than the whole economy.

For example, historically Dundee (jute), Fife (mining). Regional unemployment can be a form of structural unemployment.

Question 16

What is Frictional Unemployment?

Answer 16

•This occurs when workers change jobs and spend a short time unemployed.

Question 17

What is Seasonal Unemployment?

Answer 17

•A number of jobs in an economy are dependent upon the weather and/or the time of the year.

Question 18

What is Technological Unemployment?

Answer 18

•In certain industries, employees have been, or are being replaced by machinery.

Question 19

What is Residual Unemployment?

Answer 19

•Some people would like to work but are unable to do so, for example, as the result of a disability.

•Some people do not want to work.

•Coalition govt. Welfare Reform via the Welfare Reform Act 2012
- ‘Universal Credit: welfare that works’

Question 20

What is Voluntary Unemployment?

Answer 20

•This occurs when someone is unemployed not due to the unavailability of jobs but because there are no jobs available that meet their requirements, whether because of the type of work or the pay being offered.

Question 21

What is Inflation?

Answer 21

The loss in purchasing power of money.

Question 22

What is Demand Pull Inflation?

Answer 22

Demand –pull inflation is likely when there is full employment of resources and a booming economy. Prices rise as does output

Question 23

What is Cost Push Inflation?

Answer 23

Increased costs of production causes firms to increase prices, but also to reduce production so prices rise and output falls

Question 24

What is Latent Inflation?

Answer 24

•As the name suggests, this is hidden inflation, i.e. the decrease in the weight, quantity or quality of products.

Question 25

What is Hyper Inflation?

Answer 25

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.

Question 26

What is Fiscal Policy?

Answer 26

Fiscal policy is where the government influences aggregate demand (AD) and economic activity by changing taxation levels and government expenditure.

Question 27

What is Monetary Policy?

Answer 27

Monetary policy is a set of tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.

Question 28

What is Supply-Side Policy

Answer 28

Supply-side policies are government attempts to increase productivity and efficiency in the economy.

Question 29

What are Free-Market Supply-Side Policies?

Answer 29

Policies to increase competitiveness and free-market efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.

Question 30

What are Interventionist Supply-Side Policies?

Answer 30

Government intervention to overcome market failure. For example, higher government spending on transport, education and communication.

Question 31

What is Elasticity?

Answer 31

•The responsiveness of demand to price changes doesn’t only vary between goods.

•Different price changes for the one good can have different effects.

•Economists use the term elasticity to describe the responsiveness of demand to price changes.

Question 32

What is Inelasticity?

Answer 32

•When demand is relatively unresponsive to price changes, it is said to be inelastic.

•Unresponsive = Inelastic

•A change in price will have little effect on the demand for this product.

Question 33

What is Demand?

Answer 33

An economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service.

Question 34

What is Supply?

Answer 34

•A change other than price will cause a change in the conditions of supply.

•This will move the ENTIRE supply curve.

•A fall in production costs will move the entire supply curve to the right. Falling production costs mean that at any given price producers will be able to supply more to the market.

•An increase in production costs will move the entire supply curve to the left. Increasing production costs mean that at any given price, suppliers will be able to supply less to the market.

Question 35

What is Individual Demand?

Answer 35

One person’s effective demand for that product. So, for instance one person may have an effective demand for 2 litres of lemonade per week.

Question 36

What is Market Demand?

Answer 36

Market demand for a product is when we add all the separate individual effective demands for a product together.

Question 37

What happens to Demand if Price Decreases?

Answer 37

Demand would rise with a reduction in price for each of these items.

Question 38

What happens to Demand if Price Increases?

Answer 38

Demand would fall with an increase in the price of these products and services.

Question 39

What happens to Supply when Price Increases?

Answer 39

•A rise in price will result in a rise in the supply of a product or service to the market.

Question 40

What happens to Supply when Price Decreases?

Answer 40

As price falls supply falls.

Question 41

What is an extension?

Answer 41

When Demand increases as Price Falls and Supply increases as Price increases.

Question 42

What is a contraction?

Answer 42

When Demand decreases as Price increases and Supply Decreases as Price Decreases.

Question 43

What happens when Production Costs Increase?

Answer 43

Increasing production costs mean that suppliers will supply less to the market.

Question 44

Where is the Market or Equilibrium Price?

Answer 44

Where Demand and Supply meet in a market.

Question 45

What are Elastic Demand Goods? (4)

Answer 45

•Goods with close substitutes, e.g. Butter and Margarine

•Goods that take up a large proportion of consumers income. Televisions.

•Goods perceived as luxuries, aftershave, champagne.

•Whose purchase can be postponed, dishwashers.

Question 46

What are Inelastic Demand Goods? (4)

Answer 46

•Basic necessities (Electricity, Milk, Bread)

•Goods and services that take up a small % of disposable income. (Cinema tickets)

•Addictive goods (Cigarettes, Alcohol, Chocolate)

•Goods and services with no close substitute. (Cigarettes)

Question 47

What does Elasticity Affect?

Answer 47

•The revenue collected by suppliers at different prices.

•Total Sales Revenue (Selling price x quantity demanded) collected by the supplier at different prices depends on the elasticity of demand.

•Total Sales Revenue = Price x Quantity Sold

Question 48

What does it mean for Price when Demand is Inelastic?

Answer 48

•When demand is inelastic it will be disadvantageous to reduce prices as Total Revenue will fall.

Question 49

What does it mean for Price when Demand is Elastic?

Answer 49

When demand is elastic it will be disadvantageous to increase prices as Total Revenue will fall.

Question 50

How can companies achieve economies of scale?

Answer 50

Increasing production and lowering costs. By increasing production costs will be spread across more goods therefore reducing them.

Question 51

When do internal economies of scale happen?

Answer 51

Internal economies of scale happen when a company cuts costs internally, so they’re unique to that particular firm.

Different types are:

Technical: large-scale machines or production processes that increase productivity

Purchasing: discounts on cost due to purchasing in bulk

Managerial: employing specialists to oversee and improve different parts of the production process

Risk-Bearing: spreading risks out across multiple investors

Financial: higher creditworthiness, which increases access to capital and more favorable interest rates

Marketing: more advertising power spread out across a larger market, as well as a position in the market to negotiate

Question 52

When are external economies of scale achieved and when do they occur?

Answer 52

External economies of scale, on the other hand, are achieved because of external factors, or factors that affect an entire industry.

These occur when there is a highly-skilled labor pool, subsidies and/or tax reductions, and partnerships and joint ventures - anything that can cut down on costs to many companies in a specific industry.

Question 53

What is the profit maximising level of output for a firm operating in conditions of perfect competition?

Answer 53

Where MR=MC (2 marks)

Question 54

Explain what is meant by the term ‘Economies of Scale’​​

Answer 54

Economies of scale are the cost advantages that a business can exploit by expanding their scale of production in the long run.

Question 55

Describe how economies of scale might impact on CalMac.​​

Answer 55

Responses should state that expanding into the their output will increase and economies of scale should cause a reduction in the average cost per unit.

There also may be an opportunity to save on market costs.

An answer that simply states that the AC will decrease gains max 1 mark.