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Three points to be covered:

Explanation could include: 

  1. there are limited/finite resources and unlimited wants.
  2. limited resources are used to satisfy unlimited wants.
  3. in the process choices have to be made which leads to an opportunity cost.

 

 

Definition must include the following:

the (next) best alternative foregone/not taken as a result of taking a decision/making a choice.

Because it is a 3 marks question – appropriate example of choice must be given.

Factors of production: 

  1. Land: natural resources available for production, e.g. oil, coal, forests, fish, farming. 
  2. Labour: human effort available for production/human capital, e.g. skilled/unskilled. 
  3. Capital: man-made physical goods used in production, e.g. machines, tools, factories (Do NOT accept money). 
  4. Enterprise: the role of the entrepreneur in terms of organising the other factors of production and in taking a risk in doing so. 

 

Examples for each factor must be given to fetch full marks.

Build a two sided discussion and consider the pros and cons of using natural resources. You answer could include:

if Conservation of natural resources is done:

  • this will avoid too rapid a depletion of resources
  • this is more sustainable as it takes into account the needs of future generations
  • a better long-term strategy

On the other hand use of natural resources:

  • will raise output
  • will raise income and employment
  • but resources will be depleted/exhausted more quickly
  • more of a short-term strategy

A one-sided answer, which focuses on the conservation or use of resources only, can gain no more than 5 marks.

Explanation should include the definition of LAND and examples

It refers to all those natural resources used in production.

Examples could include: Coal, oil, gold, fish, forests and the land itself 

The answer must include the following concept explanation 

  • scarcity due to limited resources  and unlimited wants of consumers 
  • this leads to choices being made and opportunity cost when a choice is
  • Therefore, proper decision must be made to utilise the resources in the optimal manner in terms of what to produce, how to produce and for whom to produce 

The answer must include the following:

Definition of opportunity cost: the (next) best alternative foregone as a result of making a decision 

Diagram of production possibility curve – axes correctly labelled and curve correct shape (bowed out or straight downward sloping)

Explanation – idea of moving along one axis has the effect of a reverse movement along the other axis 

PPC curve

This is a 4 marks questions. Therefore, the answer should go beyond just the definition and should include atleast two comparisons.

  1. Labour is human/effort/workers’ services, whilst enterprise is the ability and willingness to bear uncertain risks/organise other factors of production.
  2. The reward for labour is wages whereas the reward for enterprise is profit 
  3. Enterprise tends to be more geographically or occupationally mobile than labour

 

This answer should inclulde :

a PPC (production possibility curve) diagram (properly labeled) showing a shift of PPC to the left. An explanation of the diagram and its movement will fetch full marks.

 

The explanation should state that  fewer resources reduces the ability of an economy to produce both products/reduces productive potential/reduces GDP which results in the shift of PPC to the level

 

You are expected to:

Define an oligopoly and characteristics of an oligopoly market structure

Distinction between a collusive and non-collusive oligopoly

Explanation of prices may not change due to interdependence among firms.

Support your explanation with the help of an kinked demand curve 

Explain the diagram

Explain that there might be non-price competition in this kind of market structure such as advertising.

However, despite their relative stability, prices may change in a non-collusive oligopoly:

– price change operated by market leaders

– long-run changes leading to economies of scale and lower LRACs.

Advantages of a market system

  • resources are allocated through the price mechanism (‘invisible hand’)
  • consumers said to be sovereign
  • economy is very responsive to changes in consumer demand
  • choice is provided for
  • competition and the profit motive promote efficiency
  • incentive for entrepreneurs to produce.

Causes of market failure: 

  • merit goods under-consumed (don’t need to use that term)
  • demerit goods over-consumed (don’t need to use that term) 
  • public goods not provided (don’t need to use that term) 
  • information failure 
  • existence of externalities
  • some people have more influence in a market than others
  • existence of monopolies.

This requires a balanced response in which both the advantages and disadvantages of government interventions must be discussed. One sided answer will lead to maximum half the marks.

Advantages of government intervention: 

  • indirect taxes to discourage consumption of demerit goods
  • subsidies to encourage consumption of merit goods 
  • taxation to finance expenditure on public goods  
  • regulations to control private producers, e.g. on pollution and monopolies having market dominance. 

Limitations of government intervention:

  • consumption of demerit goods might be discouraged, but unlikely to end completely given inelastic demand, e.g. for cigarettes and alcohol 
  • consumption of merit goods might be encouraged, but still a limit to extent of increase in consumption 
  • available finance to provide public goods  might be limited/restricted, especially if a large budget deficit 
  • regulations may not be adequately policed/enforced. 

 

  1. what to produce? 
  2. how to produce? 
  3. for whom to produce?

Possible explanation could include:

  • goods and services are freely exchanged through a market without the need for government intervention.
  • an equilibrium price and quantity will be established in the market through the interaction of the buyers and sellers.
  • This will determine the allocation of the scarce resources.
  • Price mechanism signals preferences.
  • Profits encourage switching/reallocation of resources and thus an optimum level of efficiency is achieved.

Broadly speaking, an explanation of how market system works on its own through the dynamics of demand and supply in the market.

A subsidy is: 

a payment made to a producer, e.g. by a government to help reduce the costs of production as a result producers will want to increase supply at every given price. Consumption is therefore encouraged although this could mean supporting an inefficient producer and so distort competition.

Note:

Marks are usually allocated on the following criteria:

That axes are correctly labelled P and Q and curves are correctly labelled D and S or S and S-subsidy (1) 

Show the supply curve shifts to the right (1) 

Equilibrium price falls and equilibrium quantity increases (1). 

Explanation of the effect of a subsidy on equilibrium price and quantity {will get upto 3 marks}

 

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  • the price of the product 
  • the price of substitute goods/services 
  • the price of complementary goods/services 
  • changes in income 
  • changes in tastes and preferences of consumers 
  • the impact of an advertising campaign. 

Please note:

A brief description is required for each point in order to gain full marks. You might lose marks if only points are listed without explanation.

Definition and explanation

PED is the percentage change in the quantity demanded of a product divided by the percentage change in its price

Or 

PED is the responsiveness of demand to a change in price. 

 

Its value can range from perfectly inelastic to perfectly elastic. inelastic demand has a value of less than 1 while elastic demand has a value of more than 1 and it is usually a minus figure varies along the demand curve.

A brief explanation is required to get full marks.

  • there will be elements of a market economy where equilibrium price and quantity are determined  by  forces  of  demand  and  supply  without  the  need  for  government intervention
  • changes in demand and supply bring about changes in price and quantity 
  • the allocation of resources is, therefore, determined by the profit motive 
  • bringing together the preferences of the producers and the consumers 
  • there will also be elements of government intervention either through direct government control and ownership or through influences on the private sector, such as through laws and regulations

Diagram showing a shift on the supply curve to the left and rise in price and fall in quantity.

Explain the diagram  

a decrease in supply will lead to a rise in the equilibrium price and a fall in equilibrium quantity.

impact of tax

 

The case for government intervention:

  • to provide public goods
  • to provide merit goods 
  • to  reduce  the  demand  for  demerit goods 
  • to  encourage  positive  externalities and discourage negative externalities
  • to  control/discourage  monopolies  if these work against the public interest
  • to overcome information failure

The case against intervention:

  • intervention may lead to inefficient firms   being   supported   by   the government finance   
  • needed   to   pay   for intervention will need to come from somewhere  and  there  will  be  an opportunity cost involved in terms of the alternative uses that the money could have been put to.
  • nationalisation may put politicians in charge rather experienced/knowledgeable business people

Any Two reasons must be identified along with a brief explanation for each.

  • Government subsidy: a government subsidy will reduce costs of production/provides an incentive to produce more
  • Falls in costs of production : a fall in costs of production means that firms can produce more at the same price
  • Advances in technology: advances in technology lower costs of production
  • Good weather: good weather can increase the supply of agricultural products
  • Seasonal factors: when a crop is in season, the supply increases
  • Reduction in indirect tax: reduction in indirect tax lowers costs of production
  • Changes in the price of other products produced: if the price of one product firms produce falls, they may move resources to this product.

 

 

 

 

 

 

 

 

 

 

The answer should include 4 points with brief explanation. Avoid writing in a list style. 

Role of commercial banks:

  • accept deposits
  • lend to customers 
  • enable customers to make payments 
  • travellers cheques/foreign currency 
  • deposit important documents 
  • source of financial advice.

 

Functions of money: 

  • means of exchange 
  • unit of account/measure of value 
  • standard for deferred payments 
  • store of value. 

In order to get full marks, the answer should include 4 functions with description.

The usual trend of income change is as follows:

There is low earnings at the start in a job, earnings gradually rise with more experience and reach a high point before retirement. However, retirement income is likely to be lower. The income might also be affected by the change in demand for occupation over a lifetime.

The discussion will include a two sided discussion on the importance of wages. The response might include that:

certainly wages are a very important factor to be taken into account. However, other factors also influence the choice of occupation for individuals. These might include:

  • working conditions/health and safety
  • promotion prospects
  • hours of work
  • proximity to home
  • canteen/sports facilities
  • pension provision
  • skills/education
  • fringe benefits.

A one-sided answer can gain only half the marks.

It is true in most of the cases however, wages also depend on: 

  • experience 
  • skills 
  • training 
  • promotion. 

 

Factors that can affect an individual’s choice of occupation: 

  • wages/salaries 
  • bonuses/commission 
  • pension 
  • holiday entitlement 
  • proximity to home 
  • promotion prospects 
  • working conditions 
  • canteen/social facilities. 

A brief description for each point is required to achieve full marks. 

Benefits of a trade union to an individual: 

  • collective bargaining to improve pay 
  • working on behalf of members in terms of working conditions, pension entitlement 
  • protecting the rights of members, e.g. in a legal dispute 
  • acting on behalf of members in discussions with government.

 

Key word "Discuss' Two sided discussion.

Potential disadvantages: 

  • there might be industrial action 
  • powerful unions/industrial action could lead to disruption of the economy 
  • this could lead to a firm going out of business, causing an increase in unemployment 
  • this could affect output and damage reputation of country 
  • powerful trade unions could lead to higher wages 
  • making products uncompetitive in world markets. 

Potential advantages:

  • can work with employers, not always against them 
  • can work with government, e.g. to support legislation. 

 

Explanation: 

Involves comparing the importance of function of money as a medium of exchange as compared to barter (the direct exchange of goods and services for other goods and services without using money )

The problem with barter was that it relied on a double coincidence of wants, this wasn’t always possible and the use of money as a means of exchange avoids this. 

Money is also significantly better as a measure of value, a store of value and a standard for deferred payments.

Possible reasons: 

  • some individuals run into financial difficulties 
  • some individuals are spending ‘beyond their means’ 
  • some individuals may be more aware of what is available from financial institutions 
  • some individuals may be better able to pay the money back 
  • some individuals may be able to provide more security 
  • some individuals may have a need of money for a very short period of time, e.g. until the next pay day 
  • some individuals may have a greater need for something, e.g. a car or a holiday and borrow for the medium term to pay for it 
  • some individuals may wish to buy a house and may borrow for a long period of time, e.g. a mortgage to purchase a house which is often for 25 years. 

 

Demand and supply diagram based on restricting supply

trade union effect on wages

Answer must include:

axes correctly labelled (wage/price and employment/quantity) (1) 

demand and supply curves correctly labelled (1) 

shift of supply curve to the left (1) 

rise in wage/price and fall in employment/quantity (1)

 

Candidates could mention: 

  • reward for higher level of skill, training and qualifications,
  • they are likely, therefore, to have a higher level of productivity (they may have some idea of marginal revenue productivity, although it is not on the syllabus) 
  • such workers are relatively scarce/in shorter supply compared to unskilled workers 
  • it is less easy to recruit skilled than unskilled workers

Explanation of each point will get full marks.

 

An explanation of the economic problem of unlimited wants, limited resources, scarcity, choice and opportunity cost

Relate to a two good model of the economy, using a PPC.

Draw a PPC diagram to expalin the concept

Explain free market economy and a centrally-planned economy

Differentiate between these two systems keeping in view the three questions.

While explaining -what to produce?

Free market economy, decided by consumer sovereignty/demand – in a centrally-planned economy, decided by the central planners, based upon their view of what is appropriate

How to produce?

Free market economy, decided by cost of production and attempts to minimize unit costs of production/maximizing profit – in a centrally-planned economy, decided by the central planners based upon desired production targets

Whom to produce?

Free market economy, decided by income/ability to pay – in a centrally-planned economy, determined by perceived needs in the view of the central planners.

You would be expected to

Explain a production possibility curve: the boundary between attainable and unattainable levels of production given current resources and technology

Draw a Production possibility curve diagram

Related scarcity and the production possibility curve: scarcity of resources determines the position of the production possibility curve and identifies the maximum that can be produced with available resources of land, labour and capital (quantity and quality)

Relate choice and the production possibility curve: better to choose a point on the production possibility curve than a point inside the curve, but points outside the curve cannot be chosen

Relate opportunity cost and the production possibility curve: making a choice of where to produce on the production possibility curve involves an opportunity cost; definition of opportunity cost and explanation. Making a choice to move from a point inside the production possibility curve to the production possibility curve involves no opportunity cost.

You will be expected to

Draw a diagram of a production possibility curve (PPC) indicating two alternative types of output (most likely "capital goods/consumer goods")

Define PPC – distinction between potential and actual output

Explain economic growth in terms of a shift outwards in the PPC and that a movement along the PPC  represents reallocation of resources and opportunity cost

Also explain that substitution of capital goods for consumption goods (opportunity cost) along the PPC in the short-term leads to a shift outwards in the PPC i.e. economic growth.

You are expected to:

Explaint that profit maximizing output is where MC = MR and if , at this output, AC is greater than AR, the firm will make a loss in the short run.

Illustrate this point using the standard perfect competition diagram.

Label the diagram and explain it properly

You are expected to

Define

  • short-run
  • marginal cost (MC)
  • average total cost (ATC)

Explain the concept of diminishing returns

Draw diagram showing marginal cost (MC) and average total cost (ATC). Label it properly and explain it

Explain MC cuts ATC at lowest point

Explain the impact of marginal cost (MC) changes on average total cost (ATC)

Expalin that  MP cuts AP at highest point.

You are expected to 

Start with definitions of allocative and productive efficiency

Explain perfect competition

Explain that a firm in perfect competition in long-run is allocatively and productively efficient

Support your answer with correctly drawn and labelled diagram

Explain monopoly

The firm in monopoly in long-run is neither allocatively nor productively efficient

Support your answer with correctly drawn and labelled diagram

However there is higher output and lower prices in monopoly than in perfect competition due to economies of scale

You are expected to

Define allocative and productive efficiency.

Draw the standard perfect competition equilibrium diagram showing and explaining that in perfect competition output will occur on the lowest point of the ATC curve (productive efficiency), and that price will be equal to MC (allocative efficiency).

Label your diagram properly and explain it.

You are expected to

Define monopoly

Explain that a monpolist strives to proudce at the revenue maximizing level of output (MR = 0) and the profit maximizing level of output (MC = MR)

Support your answer with an accurately labelled diagram showing the levels of price and output when profit is maximized and when revenue is maximized.

Explain the fact that when the change from revenue maximization to profit maximization is made, output will fall and price will rise.

You are expected to

Define short run and long run

Explain the concepts of

  • law of diminishing returns
  • economies of scale

Draw a properly labelled diagram of product curves and/or short run cost curve showing law of diminishing returns

Support your answer with a diagram illustrating economies of scale using long run cost curves

Explain the linkage between the two concepts

You are expect to 

Explain the concept of profit maximization (MC=MR) with the help of properly labelled diagram

Explain that many firms may have profit maximization as a goal.

Explain the concept of Sales revenue maximization (MR=0), or where TR is at its maximum 

Explain that sales revenue maximization may be a goal of the firm.

You are expected to 

Define monopoly

Distinguish between revenue and profit

Draw a diagram should show profit maximizing level of output (MC = MR)

Draw a diagram should show revenue maximizing level of output (MR = 0)

These diagrams should include AR(D), MR and MC curve

Support your diagram with an explanation that when there is a move from profit maximization to revenue maximization, output will increase and the price of the good will fall.

You are expected to

Explain the characteristics of monopolistic competition

Support with an example of monopolistic competition, e.g. food, clothing, restaurants

Draw a diagram illustrating a short-run profit maximizing position, e.g. abnormal profits or losses

Explain your diagram.

Draw a diagram illustrating the long-run profit maximizing position, i.e. normal profits

Explain long-run profit maximizing position and how it differs from the short-run profit maximizing position.

Define price discrimination

Explain that an airline would want to practice price discrimination in order 

to earn higher revenues and earn greater economic (supernormal) profits through the capture of consumer surplus

to drive higher cost competitors out of the market by lowering prices for some consumer groups, and therefore it can increase its monopoly power

You answer should also include an explanation about how an airline can practice price discrimination:

It may do so by spliting the market and discriminate between different buyers: they can charge the elderly lower prices on certain days, give discounts for students' weekend travel, offer lower fares to travellers who make advance bookings and charge higher fares to those making their travel plans closer to the day of travel

In the question the first part of the statement refers to a movement along the supply curve resulting from a shift of the demand curve to the left and a fall in price. The second part of the statement refers to a shift of the supply curve to the right, a movement along the demand curve and fall in price.

You are expected to show

The difference between a shift and a movement along a supply curve.

Draw diagrams (a) movement along the supply curve (b) shift of supply curve. Label it properly, or else you will lose marks.

You are expected to

Define the concept of income elasticity of demand.

Explain that.... for most agricultural products, demand expands less than proportionately as real incomes grow, so demand tends to be income inelastic and the value of the YED tends to be low. Thus YED determines the extent to which the agricultural producers' demand curve will shift to the right in response to an increase in income.

Illustrate with the help of a properly labelled diagram that income is a determinant of demand and therefore can shift the demand.

Draw diagrams:

  • demand curves shifting to the right
  • income elasticity diagram

You are expected to

Explain the concept of scarcity

Explain that resources are allocated in a free market through the interaction of demand and supply because there is no government intervention. Emphasise that this is a dynamic process and that the market forces i.e. demand and supply are constantly changing to arrive at an equlibrium or market price.

Draw the following diagrams

  • Supply and demand diagram to illustrate the signalling effect of a change in demand
  • supply and demand diagram to illustrate the rationing effect of a change in supply via a change in price

Label the diagrams properly. Always explain your diagrams.

You are expected to

Define cross elasticity of demand as the % change in quantity demanded of good X in response to a % change in the price of good Y.

Explain that XED with respect to the price of a complement is negative for substitute is positive

Give some examples of negative and positive cross elasticity

Explain closeness of substitute or complement determines the degree to which the quantity of a product demanded changes when the price of substitutes or complements change.

Draw properly labelled diagrams showing

  • a shift in the demand curve right or left
  • positive sloping positive cross elasticity of demand (substitutes)
  • negative sloping negative cross elasticity of demand (complements)

Always explain your diagrams.

You are expected to

Explain that as per the law of demand ,all other things being equal, a rise in price causes a fall in the quantity demanded similarly a fall in price causes a rise in the quantity demanded.

Explain that a normal demand curve is downward sloping demand

Draw properly labelled demand curve diagram.

Now talk about exceptions to the law of demand i.e. demand curves can sometimes slope upwards Giffen goods or Veblen goods or speculative goods

Draw Giffen Goods diagram and Veblen goods diagram. Label them

Always explain your diagrams.

You are expected to start with a definition of price elasticity of supply.

State the formula for calculating the PES

Explain why the PES can change over time (factors affecting PES)

How quickly the costs of using resources rise as output increases; if the cost of resource use increases quickly as production increases, producers are less likely to increase supply, resulting in an inelastic supply

Time period: the longer the time period considered, the more elastic supply will be (for example, difficulty in expanding capital e.g. constructing another factory)

Spare Capacity: the greater the excess capacity, the more elastic supply will be

Availability of substitutes in production: the more the substitutes, the easier it is to switch production, and the more elastic supply will be.

Give examples, such as primary products (agriculture, minerals) which have a lower PES than manufactured products.

Draw a diagram showing supply curves with different values of PES. Label it properly.

Always explain your diagrams.

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