Basic economics and PPC
What is scarcity?
Scarcity is when there are unlimited wants but limited resources to satisfy them.
State the term used to describe the market condition where quantity demanded exactly equals quantity supplied.
Market Equilibrium (or market clearing price).
Define Market Failure
Market failure occurs when the free market allocates resources inefficiently — it over- or under-produces goods/services relative to the socially optimal level.
What is barter? State ONE problem with it.
Barter is the direct exchange of goods/services without money. Problem: requires a 'double coincidence of wants'.
Define the primary, secondary, and tertiary sectors of an economy, providing a job example for each.
Primary: Resource extraction (e.g., miner).
Secondary: Manufacturing/construction (e.g., factory worker).
Tertiary: Service delivery (e.g., teacher/doctor).
Name the four factors of production.
Land, Labour, Capital, Enterprise.
Identify the sole cause of a movement along a demand or supply curve, and contrast it with what causes a shift.
A movement along is caused only by a change in the price of the good itself. A shift is caused by non-price factors (e.g., income, tastes, costs).
State two distinct causes of market failure in a free market.
Externalities, under provision of merit goods, under provision of public goods monopoly power, overprovision of demerit goods
List the FOUR functions of money
Medium of exchange, store of value, unit of account, standard of deferred payment.
Explain why a worker might choose to join a trade union, identifying their two main negotiation goals.
To gain collective bargaining power. Goals: Higher wages and improved working conditions/job security.
Define opportunity cost and provide a brief example of an opportunity cost a government faces when building a new highway.
The next best alternative foregone when a choice is made. Example: The government gives up building a new school or hospital to build the highway instead.
A smartphone manufacturer discovers their product has a PED of 0.4. To increase total revenue, analyse whether they should raise or lower their price.
They should raise the price. Because demand is inelastic (< 1), the percentage increase in price will be greater than the percentage drop in quantity demanded, increasing total revenue.
State TWO ways governments intervene to correct market failure.
Any two of: taxes (e.g. carbon tax), subsidies, regulations/legislation, price controls, public provision, advertising/information campaigns.
Contrast the primary objective of a country's Central Bank with the primary objective of a Commercial Bank.
The Central Bank maintains monetary stability and acts as the government's bank. A Commercial Bank is a private, profit-seeking firm that takes deposits and provides loans to households/businesses.
Explain two non-wage factors that can influence a worker's choice of occupation.
Working hours, holiday entitlement, job security, distance/commute time, career promotion prospects, or fringe benefits (e.g., free healthcare).
Explain the difference between an economic good and a free good, giving one example of each.
An economic good uses scarce resources to produce and has an opportunity cost (e.g., clothing, cars). A free good is unlimited in supply, requires no resources, and has zero opportunity cost (e.g., sunlight, air).
Explain how an indirect tax and a subsidy differently impact a firm's supply curve.
An indirect tax shifts supply left/upward (increases production costs). A subsidy shifts supply right/downward (decreases production costs).
State the formula for Social Cost using private and external costs. Then, give an example of an external cost associated with chemical factory production.
Social Cost = Private Cost + External Cost. External cost example: Water pollution that toxic waste leaks into a local river, harming wildlife and local fishermen.
What is the double coincidence of wants?
This problem of barter occurs when two people each have something the other wants and are willing to trade.
Analyse FOUR factors that influence household spending decisions.
1. Income — higher income enables more spending. 2. Interest rates — higher rates encourage saving, discourage borrowing. 3. Consumer confidence — optimism increases spending. 4. Wealth — higher asset values (e.g. house prices) increase spending. 5. Credit availability — easy credit boosts spending. 6. Inflation expectations — expected price rises may bring forward purchases.
Describe what a movement along a PPC signifies and identify the core economic concept it directly measures.
Signifies the reallocation of resources from one good to another. It measures opportunity cost.
Explain Three determinants of PED
Number of Substitutes, Proportion of income, Luxury/Necessities, Addictive/Habit-forming, Time Period
*award for any three explained*
Explain the price mechanism and how it allocates resources. Include the role of incentives, signals and rationing.
The price mechanism uses price changes to coordinate decisions. Prices act as SIGNALS (show where resources are needed), INCENTIVES (rising prices attract producers, deter consumers), and RATIONERS (allocate scarce goods to those willing and able to pay). Rising prices signal producers to increase supply and attract new firms; falling prices signal over-production.
One of the main functions of this institution is controlling the money supply and setting interest rates to help maintain economic stability.
Central Bank
Distinguish between a vertical backward merger and a conglomerate merger.
A vertical backward merger involves a firm joining another firm at an earlier stage of production in the same industry (e.g., bakery buying a flour mill). A conglomerate merger involves firms merging in completely unrelated industries to achieve diversification (e.g., airline buying a fast-food chain).