Economics Theme 1

Question 1

What are the functions of the price mechanism?

Answer 1

• A rationing device (allocates scarce resources)
• An incentive device (rising prices offer an incentive to produce more of a good or service as higher profits can be earned).
• A signalling device (indicates changes in demand or supply).

Question 2

Consumer Surplus

Answer 2

The difference between the price consumers are willing to pay and the price they actually pay.

Question 3

Producer Surplus

Answer 3

The difference between the price producers are willing to supply for and the price they actually supply for.

Question 4

Specialisation

Answer 4

When an individual, firm, region or country concentrates on the production of a limited range of goods and services. (Goods they are best/most efficient at)

Question 5

Division of Labour

Answer 5

The specialisation of workers on specific tasks in the production process.

Question 6

Utility

Answer 6

The amount of satisfaction obtained from consuming a good or service.

Question 7

Marginal Utility

Answer 7

The utility gained from consuming one extra unit of a good or service.

Question 8

Diminishing Marginal Utility

Answer 8

As successive units of a good are consumed, the utility gained from each extra unit will fall.

Question 9

Price Elasticity of Demand (PED)

Answer 9

The responsiveness of demand for a good or service to its change in price.

% Change in Quantity Demanded
__________________________
% Change in Price

Question 10

Cross Elasticity of Demand (XED)

Answer 10

% Change in Demand for good A
__________________________
% Change in price of good B

Question 11

Supply

Answer 11

The quantity of a good or service that firms are willing to sell at a given price over a given period of time.

Question 12

Indirect Taxes

Answer 12

A tax imposed on goods or services supplied by businesses. It includes specific and ad-valorem taxes.

Question 13

Subsidy

Answer 13

A government grant to firms which reduces production costs leading to an increase in output. This increases supply, lowering the price of a good, thus increasing demand for the good.

Question 14

Externalities

Answer 14

The costs/benefits to 3rd parties not involved in the making, buying, selling and consumption of a specific good or service.

Question 15

External Costs

Answer 15

Negative 3rd party effects outside of a market transaction.

Question 16

External Benefits

Answer 16

Positive 3rd party effects outside of a market transaction.

Question 17

Scarcity (The Economic Problem)

Answer 17

There are finite resources compared to unlimited human wants so choices have to be made about how to use those resources.

Question 18

What are the factors of production?

Answer 18

• Land (Including all the natural resources on it)
• Labour
• Capital (Equipment used to produce goods and services)
• Enterprise (Willingness to take a risk to make a profit)

Question 19

Ceteris Paribus

Answer 19

All other things being equal.

Question 20

Positive Statement

Answer 20

An objective statement which can be tested by referring to the available evidence.

Question 21

Normative Statement

Answer 21

A subjective statement which contains a value judgement (opinion).

Question 22

Opportunity Cost

Answer 22

The value of the next best alternative forgone.

Question 23

Free Market Economy

Answer 23

All resources are allocated by the price mechanism. No government intervention.

Question 24

Mixed Economy

Answer 24

Some resources are allocated by the price mechanism and some by the government.

Question 25

Planned Economy

Answer 25

All resources are allocated by the government. There is no price mechanism.

Question 26

Price Elasticity of Supply (PES)

Answer 26

% Change in supply of a good
_______________________
% Change in price of a good

Question 27

Income Elasticity of Demand (YED)

Answer 27

% Change in demand for a good
__________________________
% Change in real income

Question 28

Social Costs

Answer 28

Private costs + External costs

Question 29

Social Benefits

Answer 29

External benefits + Private benefits

Question 30

Public Goods

Answer 30

Goods which have non-rivalry and non-excludeability in their consumption.

Question 31

Free Rider Problem

Answer 31

Once a public good is provided, it is impossible to stop someone from benefiting from it, regardless of whether they have paid for it.

Question 32

Maximum Price Scheme

Answer 32

A ceiling price set by the government on a good or service, above which it cannot rise. It may be enforced through government legislation.

Question 33

Money

Answer 33

Anything which is acceptable in the payment of a good, service or debt.

Question 34

Rational Decision Making

Answer 34

Where consumers allocate their expenditure on goods and services to maximise their utility.
Where producers allocate their resources to maximise profit.

Question 35

Demand

Answer 35

The quantity of a good or service purchased at a given price over a given time period.

Question 36

Government Failure

Answer 36

When government intervention leads to an inefficient allocation of resources and a net welfare loss.

Question 37

Regulation

Answer 37

Government rules in markets to influence the behaviour of consumers and producers.

Question 38

Tradeable pollution permits

Answer 38

Pollution permits that can be bought and sold in a market. They are an attempt to solve the problem of pollution by creating a market for it.

Question 39

Incidence of Tax

Answer 39

The distribution of the tax paid between consumers and producers.

Question 40

Production Possibility Frontier (PPF)

Answer 40

The maximum potential output of two goods or services an economy can produce when all resources are fully and efficently employed.

Question 41

What are the functions of money?

Answer 41

• Medium of Exchange
• Measure of value
• Store of value
• Method of deferred payment

Question 42

Information Gaps

Answer 42

Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.

Question 43

Symmetric Information

Answer 43

Where consumers and producers have access to the same information about a good or service in the market.

Question 44

Asymmetric Information

Answer 44

Where consumers and producers have unequal access to information about a good or service in the market.

Question 45

Minimum Price Scheme

Answer 45

A floor price set by the government on a good or service, below which it cannot fall. It may be enforced through government legislation.