Unit 3

Question 1

What does how to produce and how much mean?

Answer 1

depends on consumer demand, resource availability, and profitability. Businesses produce goods and services that people want and can afford, while governments may intervene to provide essential goods. The quantity produced is based on demand forecasts, production costs, and market competition.

Question 2

How to produce means?

Answer 2

firms, motivated by profit will seek to lower production costs and improve technical efficiency.

Question 3

For whom to produce means?

Answer 3

based on the ability to pay, purchasing power - income and wealth

Question 4

What does a PCM mean (perfectly competitive market)?

Answer 4

this means that there are many sellers, which the competition goes up = consumer sovereignty. Homogenous meaning they sell the same products, low barriers of entry and also no government intervention.

Question 5

What is relative scarcity?

Answer 5

imbalance between unlitimed needs/wants and limited resources

Question 6

what is opportunity cost

Answer 6

the value of the next best option forgone

Question 7

what is productive capacity?

Answer 7

the potential max output when all resources are used to the best capacity

Question 8

what is allocative efficiency

Answer 8

single combination of resources that maximise societies wellbeing and living standards

Eg A bakery produces more bread and less cake because demand for bread is higher.

Question 9

technical (productive) efficiency

Answer 9

output per input, utilising all resources at the lowest possible cost

EG
A car factory maximizes output by using advanced automation to reduce waste.

Question 10

dynamic efficiency

Answer 10

the time and speed required to reallocate resources

EG A tech company invests in R&D, developing faster and cheaper smartphones.

Question 11

intertemporal efficiency

Answer 11

balancing current production and resources sustainably for future generations

Eg A government limits deforestation to ensure sustainable timber supply for the future.

Question 12

What is the law of demand

Answer 12

As prices increase demand decreases. which consumers will become less willing. this will cause a movement along the curve due to income effect and substitution

Question 13

what is the income effect

Answer 13

When income increases, people spend more, and when income decreases, people spend less. And as prices increase the purchasing power of income falls.

Question 14

substitution effect

Answer 14

as prices change (increases), it changes the relative price of substitues (falls) which makes them more attractive. (not non-price factor change in price of substitute product shift.

Question 15

What is the law of supply and the profit motive

Answer 15

The Law of Supply states that as price increase supply increases. As people are more willing and able when higher paid profit margin - due to profit motive. This being the individuals motivation to undertake activities in order to gain revenue and profit.

Question 16

What are the non-price factors of demand

Answer 16

disposable income, consumer preferences, consumer confidence, price complementary products, interest rates, population

Question 17

what is the NPF demand - disposable income, price of substitute

Answer 17

income after tax and welfare - Higher income increases demand (curve shifts right), raising price and quantity. Lower income decreases demand (curve shifts left), lowering price and quantity.

something fulfils the same needs and wants - If a substitute’s price rises, demand for the good increases (curve shifts right), raising price and quantity. If a substitute becomes cheaper, demand decreases (curve shifts left), lowering price and quantity.

Question 18

what is the NPF demand - conusmer preferences, consumer confidence

Answer 18

trends - Popular products see higher demand (curve shifts right), increasing price and quantity. Unpopular ones see demand fall (curve shifts left), reducing price and quantity.
,

a measure of how optimistic people are about the economy and their finances. - When consumer confidence is high, people feel positive about the economy and spend more, increasing demand (curve shifts right), which raises price and quantity. When confidence is low, people spend less, decreasing demand (curve shifts left), which lowers price and quantity.

Question 19

what is the NPF demand - price of complementary products, population

Answer 19

the cost of a product that is used alongside another product, where a change in the price of one directly affects the demand for the other. - If a complement’s price rises, demand for the good decreases (curve shifts left), lowering price and quantity. If a complement becomes cheaper, demand increases (curve shifts right), raising price and quantity.

population - Population – A growing population increases demand (curve shifts right), raising price and quantity. A declining population decreases demand (curve shifts left), lowering price and quantity.

Question 20

what is the NPF of demand - income

Answer 20

cost of borrowing money, - Higher interest rates reduce consumer spending and demand (demand curve shifts left), lowering price and quantity. Lower interest rates increase spending and demand (demand curve shifts right), raising price and quantity.`

Question 21

what are the NPF of supply

Answer 21

quantity of resources, productivity - quality of resources, cost of production, amount of selles, gov regulation

Question 22

what is the NPF supply - quantity of resources, cost of production

Answer 22

More resources (raw materials, labor) increase supply (shifts right), lowering prices. Scarcity reduces supply (shifts left), raising prices.

• Higher costs (wages, materials) reduce supply (shifts left), raising prices. Lower costs increase supply (shifts right), lowering prices.

Question 23

what is the NPF supply - productivity (quality of resources),

Answer 23

output per input, technology - Higher productivity (better methods, training) increases supply (shifts right), lowering prices. Low productivity decreases supply (shifts left), raising prices.

Question 24

what is the NPF supply - amount of sellers, gov regulation

Answer 24

More sellers increase competition and supply (shifts right), lowering prices. Fewer sellers reduce supply (shifts left), raising prices.

Stricter regulations increase costs, reducing supply (shifts left), raising prices. Fewer regulations reduce costs, increasing supply (shifts right), lowering prices.

Question 25

what does a disequalirbrium equal -

Answer 25

shortage

Question 26

Part of a 4 point answer

Answer 26

demonstrate understaning - definitions, link impact to either households or firms explain how this is related to the GRAPH what is the outcome

Question 27

explain in a 4 point answer what would happen if a sugar tax (excise tax) was implemented by the gov

Answer 27

understanding - excise tax is a disincentive. substitute price changes. A sugar tax increases the cost of production for firms that sell sugary products. This can reduce their willingness to supply as profit margins shrink. Firms may respond by increasing prices, reducing production When a sugar tax is applied, the supply curve shifts left because the tax increases production costs, reducing the quantity supplied at any given price. This leads to a higher equilibrium price and a lower equilibrium quantity as demand contracts due to the price increase. 3. graph - shift left in supply, shortae, price increase, to non sugar drinks - demand right, shortage price increase outcome - A) contraction in demand, B) expansion in supply

Question 28

when is there a shortage

Answer 28

Demand increases (shifts right) or supply decreases. (shifts left). When supply is higher then demand.

Question 29

when is there a surplus

Answer 29

Supply increases (shifts right) or demand decreases. (shifts left). When demand is higher then supply

Question 30

when is there an expansion

Answer 30

when demand or supply shifts right

Question 31

when is there a contraction

Answer 31

when demand or supply shifts left

Question 32

when there is a tax on something, what happens to the s and d, also to the substitute product

Answer 32

A) supply shifts left. shortage - B) demand shifts right shortage

Question 33

explain the change in price of a substitute product

Answer 33

A non-price factor, that explains that as a higher prices of something, it makes the substitute relatively cheaper.

Question 34

what is the differnce between substitution effect and change of price of substitute product.

Answer 34

SE - movement due to price relatively cheaper changes whilst PSP is a shift that creates a disequalibrium and price changes.

Question 35

when does a movement along the curve happen

Answer 35

Movement happens when price changes along the curve (e.g., higher price = less demand, more supply).

Question 36

when does a shift occur

Answer 36

Shift happens when non-price factors (NPFs) change, like income or production costs, causing the whole curve to move (e.g., more demand due to higher income = shift right).

Question 37

what is an elastic thing

Answer 37

when something is not necessary. change in Qauntity Demanded or QS is greather than change in price. PED or PES > 1

Question 38

what is an inelastic thing

Answer 38

When something is necessary. Change in QD or QS is lesss than change in price PED/PES < 1

Question 39

What are the factors of PED (price elasticity of demand)

Answer 39

Degree of Necessity - necessary = PED>1 - not necessary = PED<1, Availability of Substitutes - Lots - elastic, Few - inelastic Portion of income - cheaper = inelastic, expensive = elastic Time to make decision - shorter - inelastic, longer - elastic

Question 40

What is elasticity

Answer 40

responsiveness in the change in quantity (demanded or supplied) in relation to the change in price

Question 41

Example, - explain PED of housing

Answer 41

elasticity is responsiveness in the change in quantity (demanded or supplied) in relation to the change in price its inelastic - PED<1 if prices were to increases by 10% less than 10% of people would stop paying due to its necessity For example, if PED is 0.5, a 10% price increase might only cause a 5% decrease in quantity demanded. This is because people still need to buy or rent homes, so they won’t drastically change their demand even with a significant price increase.

Question 42

What is the PED factor Degree of Necessity

Answer 42

necessary = inelastic PED<1 - not necessary = elastic PED>1, Necessities (e.g., food, medicine) have inelastic demand because people still buy them even if prices rise. Luxuries (e.g., expensive cars) have elastic demand because consumers can cut back on them if prices increase.

Question 43

what is the PED factor of Availability of Substitutes

Answer 43

Lots - elastic, Few - inelastic If there are close substitutes for a good (e.g., different brands of soda), the demand is more elastic because consumers can easily switch if the price increases. Few substitutes make demand inelastic.

Question 44

What is the PED Factor of Portion of income

Answer 44

cheaper = inelastic, expensive = elastic : If a good takes up a large proportion of income (e.g., cars, houses), demand is more elastic because price changes significantly impact the consumer’s budget. Small-cost items (e.g., salt) are more inelastic.

Question 45

what is the PED factor of time to make decision

Answer 45

shorter - inelastic, longer - elastic In the short run, demand tends to be more inelastic (e.g., housing, gas) because it takes time to adjust to price changes. In the long run, demand becomes more elastic as consumers can find alternatives or adjust behavior.

Question 46

What are the Factors of PES

Answer 46

Spare capacity, time to produce, storable/durable

Question 47

what is the factor of PES spare capacity

Answer 47

If a firm has spare capacity (unused resources), it can quickly increase supply when demand rises, making supply more elastic. If there is no spare capacity, supply is inelastic.

Question 48

what is the factor of PES time to produce

Answer 48

In the short run, supply is usually inelastic because firms can't adjust production quickly. In the long run, supply becomes more elastic as firms can adjust and expand production.

Question 49

what is the factor of PES storable and durable

Answer 49

If goods are easily storable, supply is more elastic because producers can store goods and release them when prices are high. If goods are not storable, supply is inelastic because producers can't adjust quickly.

Question 50

What are living standards

Answer 50

his is a broad measure of the overall quality of life, which includes both material and non-material aspects. It considers the well-being of individuals based on income, resources, and other factors that contribute to life quality.

Question 51

what are material living standards

Answer 51

Refers to the measurable aspects of living standards, such as income, wealth, and access to goods and services (e.g., housing, healthcare, education). It is focused on the tangible aspects that can be measured in economic terms.

Question 52

what are non material living standards

Answer 52

Refers to the non physical factors that contribute to well-being, such as health, education, freedom, environmental quality, social connections, and personal happiness. These are not directly measurable in monetary terms but are vital for a good quality of life.

Question 53

what is relative prices

Answer 53

one price relative to another, not a single products price change. EG - EG - milk 2024 $4, 2025 $6. Bread 2024 $3, 2025 $3. the relative price of bread has decreased. If a burger costs $5 and a fries costs $2, the relative price of fries is 2.5 burgers (because 5 ÷ 2 = 2.5).

Question 54

What are the market failures

Answer 54

Public goods, externalities, asymetric information, common access goods

Question 55

What is the market failures of public goods

Answer 55

Public goods are non-excludable meaning anyone can use it. They are non-rivalrous meaning there is no competition. They are free and non-profitable. Government invention - direct provision. Example are street lighting, public parks, basic education.

Question 56

what is the market failures of externalities

Answer 56

Occurs when consumption or production of a product has a third party cost (negative externality) or benefit (positive) not internalized by the price. Externalities cause market failures by shifting the S&D graph. Negative externalities (like pollution) shift the supply curve left, increasing social costs, leading to overproduction and low prices. Positive externalities (like education) shift the demand curve right, increasing social benefits, leading to underproduction and higher prices. Both cause inefficiency, as the market doesn’t account for these external costs or benefits. Governemnt int examples - Positive Externalities (Underproduction): Education Subsidies: Government funding for schools to make education more accessible. Vaccination Programs: Free or subsidized vaccines to prevent diseases Negative Externalities (Overproduction): Carbon Tax: A tax on fossil fuel companies to reduce emissions.

Question 57

What is the market failure asymmetric information

Answer 57

This occurs when either consumer or seller does not have "perfect knowledge" which leads to decisions that are not in their best interest - misallocation, can be over or under. Examples - used car sales person, mechanic.

Question 58

Common access goods

Answer 58

are non-excludable, rivalrous, naturally occuring, depletable. Eg Oceans, fishing, hunting, foraging

Question 59

how can a excise tax on tobacco lead to a decrease in an efficiency

Answer 59

An excise tax on tobacco aims to reduce smoking by increasing prices, but it can unintentionally lower allocative efficiency. Higher prices may create a black market for illegal cigarettes, leading to inefficient resource allocation as consumers shift to untaxed, unregulated products. This reduces government tax revenue and weakens the intended health benefits.

Question 60

what is the production possibility frontier

Answer 60

The PPF shows the maximum possible output combinations of two goods or services an economy can produce with its given resources and technology. It illustrates opportunity cost, efficiency, and economic growth. Points on the curve are efficient, inside are inefficient, and beyond are unattainable without growth.

Question 61

What is PED

Answer 61

The responsivenes in the change in quantity demanded in reltion to the change in price of a product

Question 62

what is PES

Answer 62

measures how much quantity supplied changes in response to a change in price. It shows how flexible producers are in adjusting supply.

Question 63

What does a tax affect - one non price factor

Answer 63

cost of production

Question 64

what is a market failure

Answer 64

market failures occurs when there is a misallocation of resoures that does not satisfy society's wellbeing and achieve allocative efficiency.

Question 65

what is a disequilibrium

Answer 65

This occurs due to change in supply and demand and are a natural function of markets answering

Question 66

what is the difference between disequilibrium and market failure?

Answer 66

The difference is disqeualibrium sends price signals to firms to reallocate resources to improve efficiency, whereas market failures usually need government intervention to correct inefficient allocation of resources.