The Role of Markets

Question 1

What’s division of labour?

Answer 1

When each worker completes a specific task in a production process. The concept was stated by Adam Smith, who showed, through the division of labour, that productivity can increase

Question 2

What are the advantages of specialisation?

Answer 2

Higher output and potentially higher quality, as production focuses on what people and businesses are best at
Greater variety of goods and services produced (Dyson makes many types of vacuum cleaner)
More opportunities for economies of scale, so the size of the market increases
More competition and this gives an incentive for firms to lower their costs, which helps to keep prices down

Question 3

What are the disadvantages of division of labour?

Answer 3

Work becomes repetitive, which could lower motivation of workers, potentially affecting quality and productivity
There could be more structural unemployment, since skills might not be transferable, especially as workers have focussed on one task for so long
By producing a lot of one type of good through specialisation, variety could decrease
There could be higher worker turnover for firms (employees become dissatisfied with their jobs and leave regularly)

Question 4

What is comparative advantage?

Answer 4

When a country has a lower opportunity cost at producing a good/service than another country

Question 5

What is absolute advantage

Answer 5

When a country can produce more of a good with the same factor inputs

Question 6

What are the advantages of comparative advantage?

Answer 6

Greater world output, so there is a gain in economic welfare
Lower average costs, since the market becomes more competitive
There is an increased supply of goods to choose from
There is an outward shift in the PPF curve

Question 7

What are the disadvantages of comparative advantage?

Answer 7

Less developed countries might use up their non-renewable resources too quickly, so they might run out.
Countries could become over-dependent on the export of one commodity, such as wheat. If there are poor weather conditions, or the price falls, then the economy would suffer.

Question 8

What are the functions of money?

Answer 8

A medium of exchange
A measure of value
A store of value
A method of deferred payment

Question 9

Define specialisation

Answer 9

The production of a limited range of goods by a company/country so they aren’t self-sufficient and have to trade with others

Question 10

Define joint demand

Answer 10

When goods are bought together

Question 11

Define competitive demand

Answer 11

When goods are substitutes so buying one means you don’t buy the other

Question 12

Define composite demand

Answer 12

When the good demanded has more than one use

Question 13

Define competitive supply

Answer 13

When a business could make more than one good with its resources, and producing one means they can’t produce the other

Question 14

Define composite supply

Answer 14

When two or more goods and/or services are combined to make a bundle

Question 15

Define consumer surplus

Answer 15

The difference between the price the customer is willing to pay and the price they actually pay

Question 16

Define producer surplus

Answer 16

The difference between the price the producer is willing to charge and the price they actually charge

Question 17

Define excess demand

Answer 17

When the price is set too low so demand is greater than supply

Question 18

Define excess supply

Answer 18

When the price is set too high so supply is greater than demand

Question 19

Define derived demand

Answer 19

The demand for one good is linked to the demand for a related good

Question 20

Define joint supply

Answer 20

Increasing supply of one good causes an increase in the supply of a by-product

Question 21

Define elasticity

Answer 21

How responsive demand or supply is to a change in price

Question 22

Define price elasticity of demand

Answer 22

The responsiveness of demand to a change in price

Question 23

Define cross elasticity of demand (XED)

Answer 23

The responsiveness of demand to one good to a change in price of another good

Question 24

Define income elasticity of demand (YED)

Answer 24

The responsiveness of demand to a change in income

Question 25

Define price elasticity of supply

Answer 25

The responsiveness of supply to a change in price

Question 26

Define perfectly price elastic good

Answer 26

PED/PES=Infinity; quantity demanded/supplies falls to 0 when price changes

Question 27

Define perfectly price inelastic good

Answer 27

PED/PES=0; quantity demanded/supplied does not change when price changes

Question 28

Define price elastic good

Answer 28

When PED/PES>1; demand/supply is relatively responsive to a change in price, so a small change in price leads to a large change in quantity demanded/supplied

Question 29

Define price inelastic good

Answer 29

When PED/PES<1; demand/supply is relatively unresponsive to a change in price, so a large change in price leads to a small change in quantity demanded/supplied

Question 30

Define luxury good

Answer 30

YED>1; an increase in income causes an even bigger increase in demand

Question 31

Define normal good

Answer 31

YED>0; demand increases as income increases

Question 32

Define inferior good

Answer 32

YED<0; goods which see a fall in demand as income increases

Question 33

Define complementary goods

Answer 33

Negative XED; if good B becomes more expensive, demand for good A falls

Question 34

Define substitutes

Answer 34

Positive XED; if good B becomes more expensive, demand for good A rises

Question 35

Define unrelated good

Answer 35

XED=0; if the price of good B changes, it has no impact on the demand for good A

Question 36

Define margin

Answer 36

The effect of an additional action

Question 37

Define diminishing marginal utility

Answer 37

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping

Question 38

Define market failure

Answer 38

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

Question 39

Define marginal external benefit

Answer 39

The extra benefit to a third party not involved in the economic activity, per unit consumed

Question 40

Define marginal private benefit

Answer 40

The extra benefit to the individual per unit consumed

Question 41

Define marginal external cost

Answer 41

The extra cost to a third party not involved in the economic activity, per unit consumed

Question 42

Define marginal social cost

Answer 42

The extra cost to society per unit consumed

Question 43

Define marginal private cost

Answer 43

The extra cost to the individual per unit consumed

Question 44

Define marginal social benefit

Answer 44

The extra benefit to society per unit consumed

Question 45

Define externalities (91)

Answer 45

The cost or benefit a third party receives from an economic transaction outside of the market mechanism