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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 goods
Capital 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
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 services
6. Distinguish between a market economy, a command economy and a mixed
A 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 socialism
Capitalism 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 activities
Secondary - oil refining, gas works, power station
Tertiary - 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 Country
North 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
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 etc
7. 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
8. Explain how a maximum legal price (ceiling price) may distort a
- 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
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 IPD
2. 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 –

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

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
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