Unit 2 (2.7-2.11)

Question 1

What is Price Elasticity of Demand

Answer 1

measures the percentage change in quantity demanded in relation to percentage change in price

Question 2

Formula for PED

Answer 2

%change in quantity demanded/%change in price

Question 3

what happens when the PED is infinity

Answer 3

product is completely price elastic( a change in price leads to an infinite change in quantity demanded)

Question 4

what happens when the PED is >1

Answer 4

its is price elastic. a change in price leads to a greater change in quantity demanded

Question 5

what happens when the PED =1

Answer 5

it is unit elastic. A change in price leads to the same change in quantity demanded

Question 6

what happens when the PED is <1

Answer 6

it is price inelastic. a change in price leads to a smaller change in quantity demanded

Question 7

what happens when the PED is 0

Answer 7

completely price inelastic. a change in price leads to no change in quantity demanded

Question 8

what is the nature of a demand curve if PED=<1

Answer 8

it is a steeper curve

Question 9

what is the nature of the PED if PED>1

Answer 9

it is a gentle curve

Question 10

What will the producer do if product is price inelastic(demand)

Answer 10

will increase the price to increase revenue

Question 11

what will the producer do if demand if price elastic

Answer 11

producer will lower the price to increase revenue

Question 12

What factors affect the PED

Answer 12

number of substitutes available
Branding(consumers arent sensitive to price)
percentage of income spent on product
time

Question 13

significance of PED for firms

Answer 13

allows them to calculate impact of price changes
this allows them to plan stock and staff levels
forecast sales,cash flow,profit

Question 14

what is Price elasticity of supply

Answer 14

measures the percentage change in quantity supplied in response to a percentage change in price

Question 15

how to calculate PES

Answer 15

percentage change in quantity supplied/percentage change in price

Question 16

factors of PES

Answer 16

capacity available
factor substitution(easy for factors from one production switch to another)
time
stocks

Question 17

What is the private sector

Answer 17

refers to businesses owned by private individuals

Question 18

what is the public sector

Answer 18

refers to businesses owned by the government.They can have social objectives

Question 19

In a free market economy, who answers the basic economic questions

Answer 19

decisions are made by firms and households in the private sector

Question 20

In a command or planned economy, who answers the basic eco questions

Answer 20

answers by the government allocating resources

Question 21

what is a mixed economy

Answer 21

when there is both a public and private sector.Questions are solved by both

Question 22

what is nationalisation

Answer 22

when a government takes over a private sector business

Question 23

what is privatisation

Answer 23

when a business is handed over to private ownership from the government

Question 24

Advantages of planned economies

Answer 24

can pursue social objectives and take account of social costs
can overcome market failure( monopoly power and provide public goods)

Question 25

disadvantages of planned economies

Answer 25

removes profit incentive which can lead to lack of innovation and enterprise government has to make many decisions and may not make the right ones

Question 26

advantages of free market economies

Answer 26

incentive to be profitable means firms innovate doesnt need a government to decide what to do so costs are reduced

Question 27

disadvantages of free market economies

Answer 27

may only focus on private costs and benefits price can fluctuate as supply and demand change which can cause instability

Question 28

what is market failure

Answer 28

the inefficient distribution of goods and services within the free market

Question 29

What are public goods

Answer 29

they are non-diminishable(if someone consumes more of a product it does not reduce the amount available for others) non-excludable(you cannot prevent someone from consuming the product)

Question 30

what is the free rider problem

Answer 30

where people use a public good or resource without paying their share of the cost

Question 31

what are merit goods

Answer 31

they are better for the individual than the individual may realise

Question 32

what are demerit goods

Answer 32

they are worse for the individual than the individual may realise

Question 33

what are private benefits and private costs

Answer 33

they are benefits and costs that are generated by businesses. They do not reflect the full costs and benefits to society

Question 34

what is social costs

Answer 34

private costs+external costs

Question 35

what is social benefit

Answer 35

private benefit+external benefit

Question 36

What is a monopoly

Answer 36

when one firm dominates the market. Monopolies can b price makers

Question 37

how can government overcome market failures

Answer 37

by intervening in the economy

Question 38

what is a maximum price

Answer 38

set by the government to limit the price that can be charged in the market

Question 39

what happens if the maximum price is set below the equilibrium price

Answer 39

it will create a shortage

Question 40

what is a minimum price

Answer 40

set by the government to limit how low the price can go in a market( wages) a minimum price set about the equilibrium price will create a surplus

Question 41

What is indirect taxation

Answer 41

they may be imposed on producers to make them take account of the external costs of their production or to make consumers aware

Question 42

what are subsidies

Answer 42

they may be used to pay producers to reduce their costs if there are social benefits to production or they may be paid to consumers to encourage consumption

Question 43

what are regulations

Answer 43

forces businesses to act in certain ways( for example take account of health and safety measures)

Question 44

what are regulations

Answer 44

forces businesses to act in certain ways( for example take account of health and safety measures)