Theme 1 (MR STEEDS)

Question 1

What is the problem with scarcity?

Answer 1

There are unlimited wants but limited resources

Question 2

What are the three economic questions?

Answer 2

• what to produce?
• how to produce it?
• for whom to produce it for?

Question 3

Who are the four economic agents?

Answer 3

• producers
• consumers
• government
• workers

Question 4

What do producers want to maximise?

Answer 4

Profit

Question 5

What do consumers want to maximise?

Answer 5

Satisfaction

Question 6

What do the government want to maximise?

Answer 6

Social welfare

Question 7

What do workers want to maximise?

Answer 7

The benefit of the job

Question 8

What does the demand curve show?

Answer 8

The amount of products that consumers would buy at different prices

Question 9

What causes a shift in demand?

Answer 9

• population
• price of complementary/substitute goods
• income
• advertising

Question 10

What does the supply curve show?

Answer 10

How much of a product producers will supply onto the market at different prices

Question 11

What causes a shift in supply?

Answer 11

• wages
• taxes
• subsides
• raw materials
• natural factors
• technology

Question 12

What is the formula for price elasticity of demand?

Answer 12

% change in quantity demand/% change in price

Question 13

What is the answer when price elasticity of demand is elastic?

Answer 13

> 1

Question 14

What is the answer when price elasticity of demand is inelastic?

Answer 14

-1 < x < 0

Question 15

What happens when demand is elastic?

Answer 15

• increasing price would reduce revenue
• decreasing price would increase revenue

Question 16

What happens when demand is inelastic?

Answer 16

• increasing price would increase revenue
• decreasing price would reduce revenue

Question 17

What is the answer when price elasticity of demand is unitary?

Answer 17

= 1

Question 18

What is the answer when price elasticity of demand is perfectly inelastic?

Answer 18

= 0

Question 19

What are the determinants of price elasticity of demand?

Answer 19

• time period
• number and closeness of substitute
• income

Question 20

What is the formula for price elasticity of supply?

Answer 20

% change in quantity supplied/% change in price

Question 21

What is the answer when price elasticity of supply is elastic?

Answer 21

> 1

Question 22

What is the answer when price elasticity of supply is inelastic?

Answer 22

< 1

Question 23

What are the determinants of price elasticity of supply?

Answer 23

• four factors of production
• time
• spare capacity and stock

Question 24

What is the formula for income elasticity?

Answer 24

% change in demand/% change in income

Question 25

What is the formula for cross elasticity of demand?

Answer 25

% change of demand for good A/% change in price of good B - complements have a positive sign - substitutes have a negative sign

Question 26

What are the three functions of price mechanism?

Answer 26

- rationing function - signalling function - incentive function

Question 27

What are some advantages of PED?

Answer 27

- more efficient resource allocation - taxation and subsidies decisions

Question 28

What are some disadvantages of PED?

Answer 28

- ignoring other factors (brand loyalty or consumer preference) - time horizon (short and long term)

Question 29

What are some advantages of PES?

Answer 29

- informed pricing and production decisions - greater profitability

Question 30

What are some disadvantages of PES?

Answer 30

- measurement challenges (reliable on data) - it may be difficult for suppliers to adjust their production in response to price changes

Question 31

What are some advantages of price mechanism?

Answer 31

- efficient allocation of resources - ability to adapt to changes in the market

Question 32

Why might people be rational?

Answer 32

- maximising utility - self interest

Question 33

Why might people not be rational?

Answer 33

- limited capacity to calculate all the costs and benefits of a decision - influenced by their social networks - make different decisions in emotional states

Question 34

What are the three parts of market failure?

Answer 34

- free rider problem - asymmetric information - information gaps

Question 35

What are some advantages of government provision of public goods?

Answer 35

- social welfare is improved - help affordability

Question 36

What are some disadvantages of government provision of public goods?

Answer 36

- opportunity cost - free rider problem - non beneficiaries pay

Question 37

What is the impact of increased government spending?

Answer 37

- increased productivity - increased aggregate demand ~ higher output - higher interest rates

Question 38

What is the impact of decreased government spending?

Answer 38

- lower inflation - stronger currency - higher unemployment

Question 39

What are the impacts of increased net exports?

Answer 39

- increased GDP - higher employment - stronger currency

Question 40

What are the impacts of decreased net exports?

Answer 40

- reduced aggregate demand - higher unemployment - weaker currency

Question 41

What are the impact of increased investments?

Answer 41

- increase aggregate demand - increase productivity - increase incentives

Question 42

What are the impact of decreased investments?

Answer 42

- decreased productivity - decreased incentives - decreased in GDP

Question 43

How can the free rider problem lead to market failure?

Answer 43

- incentive to free rider - under-provision

Question 44

How can the asymmetric information lead to market failure?

Answer 44

- creating inefficiencies - misallocation of resources

Question 45

How can the information gaps lead to market failure?

Answer 45

- misallocation of resources - exploitation

Question 46

What are some advantages of regulations?

Answer 46

- solves issues in free market - allocative efficiency and welfare gain

Question 47

What are some disadvantages of regulations?

Answer 47

- setting the right regulation - unintended consequences/black market

Question 48

What indicates a signalling function?

Answer 48

- queuing - excess stock - waiting lists

Question 49

What indicates an incentive function?

Answer 49

- higher prices - extension of supply

Question 50

What indicates a rationing function?

Answer 50

- limited consumption - rising prices - reduced excess demand

Question 51

What are some government interventions?

Answer 51

- indirect taxes - subsidies - maximum/minimum pricing - trade able pollution permits - regulation - provision of public goods

Question 52

What are some causes of government failure?

Answer 52

- distortion of price signals - unintended consequences - information gaps