Economics questions and answers to first chapter -1. What is the central economic problem?The central economic problem in scarcity and choice - human’s wants are

unlimited and there are not enough resources to fulfill these wants.2. What are the two main methods by which resources are allocated between

competing uses?The two ways in which they would be allocated would be in a market and

command economies.In a market economy there could be firms exchanging goods for goods (barter)

firms may also exchange money for goods (this is more common). People could exchange labour for money as well (voluntary exchange)

In a command economy it is the state, not any firms that decide what to exchange, how, how much this etc. will be a forced exchange

3. Define consumer and capital goodsCapital goods are the goods of production for firm e.g. industrial materials.

Wealth set aside to produce further wealth. Consumer goods are goods made by capital goods e.g. a washing machine (a

durable white good) or crisps (non-durable goods)4. What is meant by economic growth?Economic growth means the better potential of produce. ‘a decision to sacrifice

current consumption in favor of a higher level of future consumption’ . Making more consumer and capital goods (shift of the production possibility frontier)

5. What is a market?A market is a meeting of buyers and sellers in which goods and services are

exchanged for other goods or services6. Distinguish between a market economy, a command economy and a mixed

economyA market economy has large numbers of different firms that are privatized and

therefore not owned by the government (state). This allows consumer sovereignty to occur and resources are used much more efficiently.

A command economy is an economy owned by the government/state with no privatization. This is practically the opposite of a market economy therefore resources are not used efficiently

A mixed economy is a mix of both a command economy and a market economy. It is the market economy with the intervention of the government/state for the economies benefit.

7. Distinguish between capitalism and socialismCapitalism is a system in which the means of production are privately owned by

individuals whereas socialism means the means of production are owned by the state on behalf of the people.

8. Explain the difference between the primary, secondary and tertiary parts of the economy

Primary sector - the primary sector is basic industries (extractive industries) like forestry, fishing, mining (raw materials of primary contribute towards the input of secondary)

Secondary sector - the secondary sector is the manufacturing (processing and construction of primary outputs e.g. oil refining, gas works, power station.

Tertiary sector - is the services industries e.g. transport, administration, entertainment etc

9. List three secondary sector activities and three tertiary sector activitiesSecondary - oil refining, gas works, power stationTertiary - train services, restaurants, cinema 10. How has the UK mixed economy changed over the last 30 years?The mixed economy has changed because state intervention has become less

helpful even though the states intention if for the good of the economy. This is called unintended consequences e.g. there may be unfair benefits given to people that don’t work that are paid for by working citizens.

11. Distinguish between privatization and marketisation (or commercialization)Privatization is selling off state owned assets whereas marketisation is charging

a price for free goods or services previously owned by the government.12. What are LDCs, NICs, the north and the south?LDCs are less developed countries and NICs are Newly Industrialized CountryNorth countries lean towards NICs because northern countries are more

developed and south countries “ “ LDCs because southern countries are less developed.

13. How has the growth of NICs affected the structure of the UK economy?

Economics questions and answers to second chapter –

1. List and explain the three functions that prices perform in a market – - 1.signaling the information that allows all the traders in a market to plan and Co-ordinate their economic activities. - 2. Creating incentives for buyers and sellers to behave in a manner that allows the market to operate in an orderly and efficient way. - 3. Rationing and allocating scarce resources between competing uses.2. Distinguish between the goods market and the factor market – - Goods market is a product like chocolate and other goods - Factor market – industrial equipment etc could be making the goods.3. What is effective demand - - Demand backed up by the ability to pay – not just wanting something but the willingness and ability to pay for it. 4. Distinguish between planned demand and realized demand – - Planned demand – quantities of a good that households would like to purchase at different prices. What price you would like to buy goods at - Realized demand – whatever the price at which goods are traded, the amount bought always equals the amount sold. What price you plan to buy goods at.5. Explain why, when planned demand equals planned supply, a market is in equilibrium – - equilibrium is a state of balance or rest, in this case it is the market and this can only occur when there is planned demand and planned supply. This is because consumers want to buy the certain amount that producers want to sell and at a certain price. Producers and consumers are happy with these sales so the price to quantity ratio is at equilibrium.6. Explain the difference between market equilibrium and disequilibrium – - Equilibrium is a state of balance or rest in the market - Disequilibrium is the opposite, market plans are not fulfilled etc7. Distinguish between excess demand and excess supply – - Excess demand - consumers are willing to buy more quantity but the producers are only willing to supply a lower quantity - Excess supply – unsold stock, stock that was intentionally meant to sell.8. Explain how a maximum legal price (ceiling price) may distort a market. - A ceiling price could make the government have a rationing process because a ceiling price creates excess demand so the product could never

be sold in large quantities to any person, the producer is only willing to supply x amount when the consumer wants e.g. x + 1. This can create corruption and the black market where people supply consumers with goods at a high price only the rich can afford.

9. using a supply and demand diagram, explain how a national minimum wage may increase unemployment in labour markets –

- 10. Why may a demand curve shift? – - There may be less demand for a product (because of high prices etc) so the demand curve will move to the left of the normal, or there could me more demanded for a product (because low price) and the demand curve will move to the right. 11. Why may a supply curve shift? – - There could be a glut in supply (because too much of the good is made) of a good in which case the curve moves to the right, or a shortage of supply (maybe because of deterioration of stock) of the good in which case the curve moves to the left.12. Why are agricultural prices often unstable? – - The CAP has to intervene every time a crop over produces or there are shortages, so prices are always changing, mostly for the better of the economy. 13. What is the BUFFER stock scheme? – -The government, when the market is good, buy goods when the harvest is good so that when stock is low and there is excess demand the government can release stock therefore putting the price closer to planned demand and preventing firms to fail and fairer for consumers.14. Explain why buffer stock intervention often fails - - this could fail because there may not be any buffer stock to buy in the first place, so when there is a shortage of the good, there is no replacement meaning the problem will not be solved. This can create corruption on the black market for richer members of the public and make higher prices for consumers.

- this could work the other way round as well because if there was a lot of stock and the government put a lot aside and there is no shortages in the good then there could be deterioration of the stock, making it useless to sell back when there is a shortage. - Schemes like these are expensive to manage anyway so they use up a lot of tax payers money, we may as well give money to failing businesses.

Chapter 21 self-testing questions – 1. State and briefly explain the main items in the UK current account –

All the Imports of goods and services, and all the exports and all the IPD2. How have the balances of trade in goods and services changed in recent

years –

3. What is long term capital flow –

6. What is the purpose of the balance (or balancing) item in the balance of payments account –

7. What has happened to the UK balance of trade in manufactured goods in recent years –

8.9.

Economics inflation questions – 1 - define inflation – Inflation is defined as a sustained rise in the average prices of goods within a economy.

2 – what is the difference between the price level and inflation? – The price level is the average price of living and inflation mean how much this rises every year.

3 – distinguish between falling prices and a fall in the rate of inflation – A fall in the rate of inflation means that the price doesn’t rise as much as last time but it still rises. Falling prices means the percentage is negative and there is a deflation. 4 – explain the difference between demand pull inflation and cost push inflation – - Demand pull inflation occurs when there is a high level of demand in the economy but the firms do not have enough capacity to catch up with this level of high demand. - cost push inflation occurs when a firms cost is driven up for some reason, this erodes profit margins and firms tend to raise their prices because of this, causing inflation.

5 – briefly state how the above two might be linked – They both normally result with inflation.

6 – discuss two major negative effects of inflation on firms – If UK inflation is higher than the international inflation then UK firms may become less competitive because British prices may be rising by 5% each year whereas Germanys is rising by only 2%. Firms may also have less profits being made because of facing inflation of the raw materials they buy e.g. steel for spades etc. The firms will have increased costs and not revenue so less profits are made. 7 – discuss one positive effect on inflation on firms – A positive effect inflation has on firms is when borrowing money from banks – loaning. This is because when you borrow £500,000 for instance and inflation percentage rises then you gain money when you pay it back because inflation has lower the value of money.

8 – which sections of society suffer most from inflation? –

The sections of society that suffer most are the poorest regions as their pay may not rise as much as inflation has affected their income e.g. unskilled workers, pensioners and non-unionized workers.

9 – discuss measures that be taken to reduce inflation – Inflation needs to be controlled as it effects many firms and workers. This means the government has taken action on controlling inflation by having a target of 2.5% inflation over the long run. This is achieved by generally lowering demand as inflation is normally caused by the rise in demand. This has not been done yet but governments could also increase taxes and reduce government spending – this is called the fiscal policy. The government have to be careful when using 2.5% inflation as a target because it could lower consumer demand too much and defeat the point of this action. So to conclude there are two main ways of attempting to lower the rate of inflation –

1) The government can introduce the Fiscal policy which will encourage workers to be more restrained in their pay demands

2) Government can try and weaken the link between wages and prices so workers may be less able to respond to rising prices by pushing for higher wages.