Economic Flashcards

Front 1

Society

Back 1

A self reproducing group of individuals occupying a paticular territory, which may have its own distinctive culture and institution

Front 2

Inflation

Back 2

Period of rising prices and purchasing power falls

Front 3

Fiscal

Back 3

Use of government power to spent to regulate economic activity

Front 4

Regressive

Back 4

One that takes a higher percentage of a low income and a lower percentage of a high income

Front 5

Proprietary Right

Back 5

Party exercising private ownership, control or use over an item of properaty usually to the exclusion of others

Front 6

Currency

Back 6

Paper money/coins/ issued by federal govt.

Front 7

Flat Tax

Back 7

A tax that would eliminate most deductions and apply same tax to all incomes

Front 8

Excise Tax

Back 8

Tax levied on a manufactured item or sale of a specific item

Front 9

Oligopoly

Back 9

Market dominated by a few large firms

Front 10

Net Worth

Back 10

Differences between firms assets and liabilities

Front 11

Division of Labor

Back 11

Breaking down large tasks into series of smaller ones so that each laborer completes one or fewer steps involved

Front 12

Sole Proprietorship

Back 12

Business owned by one Person

Front 13

interest

Back 13

Payment for using some else's money; income for allowing someone to use your money

Front 14

Money

Back 14

Anything generally accepted for payment of goods or services; legal tender

Front 15

Demand

Back 15

Quantities of particular goods and services consumers are willing and able to buy at different prices at a particular time

Front 16

Substitute Goods

Back 16

Goods that satisfy similar wants

Front 17

Scarcity

Back 17

Result of inability to satisfy all wants

Front 18

Profit

Back 18

What remains after cost of doing busineess have been met

Front 19

Complementary Goods

Back 19

Goods often used together

Front 20

Functional Unemployment

Back 20

Unemployment that is always present in the economy resulting from temporary transitions made by workers or employees or from workers and employers having incomplete info.

Front 21

3 Types of Investments

Back 21

Savings, Money Market, Bond, CD

Front 22

Natural Monopoly

Back 22

When gov sets up something as a monopoly because it is 2 expensive for competition

Front 23

Collusion

Back 23

An agreement in which companies restrict production to raise profit.

Front 24

Free Trade

Back 24

Absence of Trade Restrictions

Front 25

3 Characteristics of a monopoly and 3 examples

Back 25

Single Seller
No close substitutes
Barriers to entry

Ex. telephone, electric and water

Front 26

Pure price competition

Back 26

A market with many sellers offering similar products

Front 27

5 main parts of a financial statement

Back 27

Balance sheet, income statement, statement cash flow, statement retained earnings, assets, liabilities, net worth, total assets, total liabilities and net worth

Front 28

What is GDP?
4 major components

Back 28

Gross domestic product
market value of goods and services produced in a given time; measured in 1/4 intervals

Front 29

Rationing

Back 29

System of allocating goods and services that are in short supply

Front 30

What causes an increase in demand?

Back 30

Change in style, tasks, habits change in income if income increases people have more money to spend
Price or availabity of substitutes
Change in weather

Front 31

Elastic demand

Back 31

large price effect

Front 32

What causes a decrease in supply?

Back 32

Increase in production cost, expectations of higher future cost

Front 33

Inelastic demand

Back 33

Price effect small

Front 34

Why do producers offer more product at higher prices than lower?

Back 34

to make profit

Front 35

Elasticity of Demand

Back 35

the measure of how responsive consumers' demand quantity is to a change in the price of a product

Front 36

Why is money the best median of exchange?

Back 36

money is usable for buying and selling goods and services

Front 37

Which of the following economic goals is associated with the desire to get
maximum benefits at the minimum costs from the limited productive resources that
are available?
(a) full employment
(b) economic growth
(c) economic security
(d) economic efficiency
(e) Equitable distribution of income

Back 37

(d) economic efficiency

Front 38

What is the economic rationale for the law of increasing opportunity costs?

(a) full production and full employment of resources have not been achieved
(b) economic resources are not completely adaptable to alternative uses
(c) economic growth is being limited by the pace of technological
advancement
(d) an economy’s present choice of output is determined by fixed
technological and fixed resources
(e) allocative and productive efficiency are not attainable simultaneously

Back 38

(b) economic resources are not completely adaptable to alternative uses

Front 39

In any economy in which there is full employment and full production,
constant amounts of resources and unchanging technology,

(a) to increase the production of capital goods requires an increase in the
production of consumer goods.
(b) to decrease the production of capital goods necessitates a decrease in the
production of consumer goods.
(c) to increase the production of capital goods is impossible
(d) to increase the production of capital goods requires a decrease in the
production of consumer goods
(e) to increase the production of capital goods requires an increase in
consumer demand.

Back 39

d) to increase the production of capital goods requires a decrease in the
production of consumer goods

Front 40

GUNS('000) EDUCATION ('000 of students)
0 25
2 24
4 20
6 15
8 9
10 0

The table above identifies various points on the current production possibility
frontier for a society. This table shows that

(a) the society should produce 2,000 guns and 24,000 students as this
maximises total output in the society
(b) the society would not face scarcity if only 4,000 people desired guns
(c) as the production of guns increases there is a greater opportunity cost
associated with gun production
(d) the society can currently produce 10,000 guns and 25,000 students
(e) resources cannot be transferred from guns to education

Back 40

(c) as the production of guns increases there is a greater opportunity cost
associated with gun production

Front 41

Which of the following will not necessarily result, sooner or later, from a
decrease in consumer demand for a product?

(a) a decrease in the profits of the industry producing the product
(b) a decrease in the output of the industry
(c) a decrease in quantity supplied of the product
(d) an increase in the prices of resources employed by the firms in the
industry
(e) a transfer of productive resources away from the production of the product

Back 41

(d) an increase in the prices of resources employed by the firms in the industry

Front 42

Suppose a root disease in vines causes a loss of most of the Australian
premium red wine-grape crop at the same time that the medical profession
releases a report that states that moderate consumption of premium red wine
is good for public health. What might be expected to happen to the
equilibrium price and quantity traded of Australian premium red wine?
(a) Price will increase while quantity traded is indeterminate
(b) Quantity traded will increase but price is indeterminate
(c) Price and quantity traded will remain unchanged because the change in
demand and supply will be equal in size
(d) Price will increase and the quantity traded will increase
(e) Both (b) and (d) are likely outcomes

Back 42

(a) Price will increase while quantity traded is indeterminate

Front 43

Which of the following producers is talking about a movement along the
supply curve of his or her product?

(a) ‘the recent award wage increases have forced us to raise our prices’
(b) ‘we have just brought some sophisticated new equipment that will enable
us to undercut our competitors’
(c) ‘the price of our raw materials have just sky-rocketed; we will have to
pass it on to our customers’
(d) ‘we anticipate a big increase in the demand for our production. When that
happens, the prices of our product should increase and so we are planning
ahead for an increase in our output’
(e) ‘our major supplier has shifted their manufacturing base overseas so the
components will probably cost more’

Back 43

(d) ‘we anticipate a big increase in the demand for our production. When that
happens, the prices of our product should increase and so we are planning
ahead for an increase in our output’

Front 44

If there is a shortage of rental housing accommodation, an increase in rents
charged will eventually eliminate the housing shortage because:

(a) As the rent rises, the quantity of housing demanded decreases while the
quantity of housing supplied increases.
(b) As the rent rises, the quantity of housing demanded increases while the
quantity of housing supplied decreases.
(c) As the rent rises, the demand for housing decreases while the supply of
housing increases.
(d) As the rent rises, the demand for housing rises while the supply of housing
decreases.
(e) Rising rents means an increase in production costs so fewer flats will be
built.

Back 44

(a) As the rent rises, the quantity of housing demanded decreases while the
quantity of housing supplied increases.

Front 45

If both the demand for and the supply of crayfish (lobster) increase during
the Christmas season, we could expect:
(a) Both the price and quantity of crayfish traded to increase.
(b) The price of crayfish to fall, but the quantity of crayfish traded to increase
(c) The quantity of crayfish traded to increase but the equilibrium price to
either rise or fall, or stay the same.
(d) The price of crayfish to increase, but the quantity traded could either
increase or decrease, or stay the same
(e) A blow-out in the merchandise trade component of current account due to
most crayfish going to Japan.

Back 45

(c) The quantity of crayfish traded to increase but the equilibrium price to
either rise or fall, or stay the same.

Front 46

An increase in the rate of economic growth of Australia’s major
trading partners is likely to:
(a) Result in a depreciation of the $AUD (Australian dollar) because our
major trading partners must be exporting more to Australia.
(b) Result in an appreciation of the $AUD because demand for Australian
exports will increase.
(c) Have no effect on the value of the $AUD because our major trading
partners are more concerned with their exports to Australia
(d) Result in a depreciation of the $AUD because there will be an increase in
the supply of $AUDs.
(e) Cause the Reserve Bank of Australia to adopt a fixed exchange rate
regime.

Back 46

(b) Result in an appreciation of the $AUD because demand for Australian
exports will increase.

Front 47

Refer to the accompanying table. If an increase in the cost of labour
lowers the quantity supplied by 65 tonnes at each price, the new equilibrium
price would be.

(a) $22
(b) $24
(c) $26
(d) $28
(e) None of the above

Price $ Qty demanded (ton) Qty supplied (ton)
20 395 200
22 375 250
24 350 290
26 320 320
28 280 345
30 235 365

Back 47

(d) $28

Front 48

If an increase in demand for a product and the resulting rise in the price of a
product causes the supply of the product, the size of the industry producing
the product and the amounts of resources devoted to its production to expand,
price is successfully performing its:

(a) Guiding function
(b) Rationing function
(c) Medium of exchange function
(d) Standard of value function
(e) Equilibrium function

Back 48

(a) Guiding function

Front 49

Which of the following is not a cause of market failure?

(a) Negative externalities associated with air pollution caused by cars
(b) Positive externalities associated with a child’s measles vaccination
(c) The self-interest of firms to maximise profits
(d) The appearance of monopoly power in previously competitive markets
(e) High barriers to entry and above normal profits

Back 49

(c) The self-interest of firms to maximise profits

Front 50

Productive efficiency is said to occur when:

(a) Resources are allocated to the production of the goods and services most
wanted by society.
(b) Resources are allocated to the production of the goods and services that
are least costly to produce.
(c) Society chooses the least costly production techniques for producing the
goods and services it wants.
(d) Society produces goods and services with the least waste of its labour
services.
(e) Society allocates more resources to the production of new capital
equipment.

Back 50

(c) Society chooses the least costly production techniques for producing the
goods and services it wants.

Front 51

Which of the following could cause an increase in the demand for product X?

(a) A fall in the prices of goods that are close substitutes for X.
(b) A decrease in the price that consumers expect to pay in the future.
(c) A decrease in the supply of X.
(d) An increase in consumer income if product X is a normal good
(e) A fall in the price of X.

Back 51

(d) An increase in consumer income if product X is a normal good

Front 52

An increase in the price of a product would probably be caused by:

(a) A fall in business taxes.
(b) An increase in consumer taxes.
(c) A decrease in resource costs for production.
(d) An appreciation of the $AUD making imported components more
expensive.
(e) A decrease in the price of complementary good.

Back 52

(e) A decrease in the price of complementary good.

Front 53

When the production and consumption of a product entail spill-over costs, a
competitive product market results in:

(a) Under-allocation of resources to the product.
(b) Over-allocation of resources to the product.
(c) Optimal allocation of resources to the product.
(d) A higher price for the product.
(e) A closer approximation of allocative efficiency.

Back 53

(b) Over-allocation of resources to the product.

Front 54

The competitive market system has the following virtues:

(a) Elimination of market failures and the promotion of technological
advancement.
(b) Efficient allocation of resources and freedom of enterprise.
(c) Provision of an equitable distribution of income and a fair standard of
living for all.
(d) Elimination of the need for decision making and public goods.
(e) Both (a) and (c).

Back 54

(b) Efficient allocation of resources and freedom of enterprise.

Front 55

If a new technological breakthrough in genetic engineering makes it possible
to grow twice as much rice per hectare as had been possible in the past, the most
likely result will be

(a) A decrease in the supply of rice, due to the increased costs associated with
the new technology
(b) An increase in the supply of rice, due to the reduced cost of production.
(c) An increase in the demand for rice, due to the greatly reduced price.
(d) An increase in the quantity supplied of rice, due to the increased
willingness to sell rice by rice producers
(e) An increase in the allocation of resources to a substitute e.g. wheat.

Back 55

(b) An increase in the supply of rice, due to the reduced cost of production.

Front 56

One way to distinguish between a shortage and a scarcity is that:

(a) We can eliminate a shortage by raising price, but scarcity cannot be eliminated.
(b) Shortages result from price controls, but scarcity results from sellers
deliberately withholding output.
(c) Shortage means that we can’t have all that we want at zero price; scarcity
means that we can’t have all we want at any price.
(d) At a high enough price, there is no scarcity, but shortages continue to exist
even at high prices.
(e) Scarcity is an absolute concept, but a shortage is normative.

Back 56

(a) We can eliminate a shortage by raising price, but scarcity cannot be eliminated.

Front 57

Diminishing marginal product occurs whenever:

(a) A firm is operating inefficiently, resulting in high per unit costs of
production.
(b) A firm becomes so large that it is increasingly difficult to manage and
productivity necessarily declines.
(c) Diseconomies of scale occur.
(d) Additional workers add less to output than did the workers who came before
(e) A firm expands it output beyond its long-term equilibrium.

Back 57

(d) Additional workers add less to output than did the workers who came before

Front 58

The vertical distance between average total cost and average variable cost.

(a) Increases as output increases, due to the operation of the law of
diminishing returns.
(b) Decreases as output increases, because fixed costs are spread over a larger
output.
(c) Remains the same, because total fixed cost is independent of the level of
output.
(d) Remains the same, because input prices are beyond the control of the firm.
(e) Starts off large, gets smaller for a period then begins to expand again.

Back 58

(b) Decreases as output increases, because fixed costs are spread over a larger
output.

Front 59

Which of these business people is talking about the behaviour of his/her
average total costs?

(a) “I worry about my rent. Regardless of the number of cars I sell each
month , I have to pay the same rent for the car yard”
(b) I employed another worker in my rug making shop and my rug production
has increased by 20 rugs a day. Given that I pay this extra worker $40.00 a day and adding the cost of the materia., each extra rug costs me about $15.00”
(c) “I think I should increase my output of refrigerators. Although my wage
payments and raw materials costs will increase, I will be able to spread my
overhead (fixed) costs over a larger output. On balance, I think my per
unit cost will fall.
(d) “an economist friend has advised me to try to increase my Big Mac sales
so that I can spread my franchise fee and other overhead costs over a
larger output”
(e) “The last price rise my insurance company imposed was a killer”.

Back 59

(c) “I think I should increase my output of refrigerators. Although my wage
payments and raw materials costs will increase, I will be able to spread my
overhead (fixed) costs over a larger output. On balance, I think my per
unit cost will fall.

Front 60

A monopolistic competitor is producing an output of 1,000 units. Marginal
cost is $75, marginal revenue is $100 and price is $150. Total cost is $200,000, of
which $60,000 is fixed. In the short run, to maximise profit or minimise loss, the
firm should:

(a) Shut down.
(b) Reduce its output and raise price.
(c) Keep output and price the same
(d) Expand its output and lower price
(e) Seek a return to normal profit.

Back 60

(d) Expand its output and lower price

Front 61

Which of the following statements is true?

(a) Advertising is inherently inefficient because it adds to the cost of
production without creating anything of value.
(b) Advertising is inherently valuable because it increases sales and lowers
overall average total costs, leading to lower prices.
(c) Advertising is costly but it also provides benefits in the form of product
information.
(d) Brand names add to the price paid by consumers without providing
anything of value.
(e) Advertising is an expense categorised as a fixed cost.

Back 61

(c) Advertising is costly but it also provides benefits in the form of product
information.

Front 62

If it normally takes a large retail department store 5 days to hire suitable
sales staff and middle-level management, 4 weeks to order additional
merchandise, 3 months to advertise for and hire top management and 2 years to
enlarge its premises, the short run for such a department store is

(a) Any period less than 5 days
(b) Any period longer than 4 weeks
(c) Any period longer than 2 years
(d) Any period longer than 5 days but shorter than 2 years
(e) Any period longer than 3 months but less than 2 years.

Back 62

(e) Any period longer than 3 months but less than 2 years.

Front 63

If demand is price elastic and price decreases, then


(a) The extra revenue from the additional units of output sold is exactly offset
by the loss in revenue as a result of the lower prices.
(b) The extra revenue from the additional units of output sold is greater than
the loss in revenue from the lower prices
(c) The extra revenue from the additional units of output sold is less than the
loss in revenue from the lower price.
(d) More information is necessary to determine what happens to total revenue
(e) Total revenue will be negatively impacted in the short run but positively
affected in the long run.

Back 63

(b) The extra revenue from the additional units of output sold is greater than
the loss in revenue from the lower prices

Front 64

Imagine the model for a firm in long-run equilibrium in monopolistic
competition. The model for this firm would show

(a) An AR curve tangent to the ATC curve.
(b) An MR curve down sloping under the AR curve at all values except the


first.
(c) A profit maximising quantity offered that occurred where MR = MC.
(d) Normal profits only for the firm.
(e) All of the above.

Back 64

(e) All of the above.

Front 65

Picture in your mind a model depicting a profit maximising monopolist.
Which of the following statements is false?

(a) To maximise profits the monopolist will operate at a point where MR =
MC.
(b) The price generated by the quantity offered for sale will equate to the
firm's minimum average total cost due to economies of scale.
(c) The monopolist will be operating in the elastic portion of the demand
curve above the mid-point.
(d) The price-maker will charge a price above the price which ensures
allocative efficiency.
(e) The firm’s AR curve is down-sloping and the firm’s MR curve is also
down-sloping and the MR curve has a slope equal to 50% of AR.

Back 65

(b) The price generated by the quantity offered for sale will equate to the
firm's minimum average total cost due to economies of scale.

Front 66

Imagine you run a firm that is purely competitive and produces a normal
good. The government then reduces official interest rates. Which of the
following best sums up the likely long-term impact on your firm?

(a) Due to the interest rate fall, market supply increases, prices fall and new
firms are attracted to the industry.
(b) The access to cheaper loans means more consumers borrow to buy
expensive items such as houses so demand falls, market price falls and
economic losses emerge.
(c) Market price will rise due to an increase in demand, big firms are lured by
the emergence of economic profits and the industry becomes oligopolistic
virtually overnight.
(d) The government’s expansionary monetary stance is designed to improve
business confidence but it will be automatically followed by
contractionary fiscal moves such as higher taxes.
(e) The immediate impact of an increase in consumer demand drives up your
average and marginal revenue such that economic profits are generated
and this will entice new firms to enter the industry, forcing prices down
and the eventual elimination of economic profits.

Back 66

(e) The immediate impact of an increase in consumer demand drives up your
average and marginal revenue such that economic profits are generated
and this will entice new firms to enter the industry, forcing prices down
and the eventual elimination of economic profits.

Front 67

When a sales tax is placed on a good with a given elasticity of demand, the
more inelastic the supply for the good
(a) the greater is the total tax collected by the government
(b) the greater is the burden of the tax paid by consumers
(c) the larger is the fall in sales suffered by producers
(d) the flatter is the slope of the supply curve
(e) the larger is the burden of the tax paid by producers

Back 67

(e) the larger is the burden of the tax paid by producers

Front 68

To an economist opportunity cost includes
a) just fixed costs
b) just explicit costs
c) just implicit costs
d) just variable costs
e) all explicit and implicit costs

Back 68

e) all explicit and implicit costs

Front 69

Assume that the average product of labour is seen to rise in the short-run.
This implies that
(a) the average product of labour must have been above the marginal product of
labour
(b) the marginal product of labour must have been above the average product of
labour
(c) the average product must have been larger than the wage rate
(d) the average product of labour must have been smaller than total product
(e) no conclusions can be made about the relationship between average and marginal
product

Back 69

(b) the marginal product of labour must have been above the average product of
labour

Front 70

Serendipity Farm, a small vegetable producer in the Adelaide Hills, is
observed to earn normal profits. For an economist this implies
a) any situation where TR>TC
b) a situation where all implicit costs are being met by revenues
c) long run average cost is minimised
d) any situation where MR equals MC
e) a situation where TR-TC =0

Back 70

e) a situation where TR-TC =0

Front 71

Assume labour is the only variable input and the wage rate is constant. In the

short run, if the average product of labour stays the same as output rises then
a) average fixed cost will stay constant over that range of output
b) average variable cost will stay constant over that range of output
c) average variable cost will rise over that range of output
d) average variable cost will fall over that range of output
e) marginal cost will be above average variable cost over that range of output

Back 71

b) average variable cost will stay constant over that range of output

Front 72

In the long run we can expect average total costs to
a) rise if economies of scale are present
b) fall if diseconomies of scale are present
c) rise if there are increasing returns to scale present
d) fall if economies of scale are present
e) fall if there are constant returns to scale present

Back 72

d) fall if economies of scale are present

Front 73

The demand curve facing a firm in pure competition is perfectly elastic because
a) the product being produced is homogenous
b) when price changes, the percentage change in quantity demanded is infinitely
large
c) firms are price takers
d) firms are price setters
e) firms compete using non-price competition

Back 73

c) firms are price takers

Front 74

Eggzalent Eggs produces eggs in a purely competitive market. Its minimum
average total cost of production for a dozen eggs is $1.50. This implies that it
a) will just earn normal profits if the market price is above $1.50
b) will earn normal profits if the market price equals $1.50
c) will close down in the short run if the market price is less than $1.50 but above
minimum average variable cost
d) will close down if it does not achieve economies of scale
e) has its marginal cost above its marginal revenue

Back 74

b) will earn normal profits if the market price equals $1.50

Front 75

In the long run, a firm in pure competition will be in long run equilibrium when
price equals
a) minimum long run average total cost
b) minimum marginal cost
c) minimum average fixed cost
d) long run average total cost
e) average and marginal revenue

Back 75

a) minimum long run average total cost

Front 76

In maximising profits, a firm in pure competition may find that
a) average revenue is larger than average total costs
b) marginal revenue equals marginal costs
c) price equals marginal revenue
d) price equals average revenue
e) all the above are correct

Back 76

e) all the above are correct

Front 77

Assume a purely competitive, constant cost industry is in long-run equilibrium.
If a decline in demand occurs, firms will
a) leave the industry, industry output will fall and price will stay the same
b) leave the industry, industry output will rise and price will stay the same
c) enter the industry, industry output will fall and price will stay the same
d) leave the industry, industry price and output will both fall
e) enter the industry, industry output will rise and price will stay the same

Back 77

a) leave the industry, industry output will fall and price will stay the same

Front 78

For Sandwich Heaven, a small monopolistically competitive sandwich bar, the
marginal cost of producing another sandwich is $2.50 and marginal revenue is
$3.50 at the current production level. To maximise profits Sandwich Heaven
should
a) produce more sandwiches
b) carry on producing the same level of sandwiches
c) produce fewer sandwiches
d) produce fewer sandwiches on condition that marginal revenue stays above
marginal cost
e) we cannot determine the level of production that maximises profits without being
told the price

Back 78

a) produce more sandwiches

Front 79

Imperfectly competitive firms exert monopoly power because they are able to
a) set prices that are below their marginal revenues
b) charge a price that is above their marginal cost
c) compete using non-price competition
d) set price in the elastic portion of their demand curves
e) earn profits in the long run

Back 79

b) charge a price that is above their marginal cost

Front 80

Collusion by oligopolists usually results in consumers having to accept
a) a higher price and a lower quantity supplied
b) a lower price and a lower quantity supplied
c) a lower price and a larger quantity supplied
d) a constant price but lower quantity supplied
e) a higher price and a higher quantity supplied

Back 80

a) a higher price and a lower quantity supplied

Front 81

Which of the following is a unique feature of oligopoly?
a) non-price competition
b) advertising expenditures
c) mutual interdependence
d) product differentiation
e) product standardisation

Back 81

c) mutual interdependence

Front 82

Which of the following is not a reason for market failure?
a) Externalities
b) Public goods
c) Imperfect competition
d) Imperfect information
e) Economies of scale

Back 82

e) Economies of scale

Front 83

Trade practices legislation attempts to



a) ban anti-competitive mergers designed to dominate a market
b) prevent price fixing
c) prevent the misuse of market power designed to damage rivals
d) permit some mergers that have offsetting public benefit
e) cover all the above

Back 83

e) cover all the above

Front 84

In about 75 words (i.e. one paragraph) explain why you think it’s true or false If a sales tax was imposed on a product that had a price elasticity coefficient of -0.4
and a unitary price elasticity of supply, the majority of the tax burden (or tax incidence)
would fall on the consumer.

Back 84

TRUE. If the price elasticity of demand is less than 1.0 then demand is said to be
price inelastic. Assuming that the government expected the seller to collect the tax, the
imposition of the tax would be illustrated via a vertical shift of the supply curve, S to S',
since it effectively adds to supplier's price. At the new price of, the government collects
additional revenue and the consumer's burden is clearly larger than the producers' burden.
Again, a neatly drawn, well labelled model is essential here. See the diagram and
discussion on page 74/75).

Front 85

In about 75 words (i.e. one paragraph) explain why you think it’s true or false
The law of diminishing returns suggests that the addition to total product derived
from an additional unit of input will increase initially but eventually become constant as
economies of scale set in

Back 85

FALSE. The law of diminishing returns (or diminishing marginal productivity)
suggests that as successive units of a variable resource (e.g. labour) are added to a fixed
resource, the returns attributable to the additional (or marginal) unit will eventually
decline. This can be shown in a diagram similar to that on page 88of the text where
marginal product rises initially but eventually declines beyond some point. Moreover,
constant returns and economies of scale are both long-run concepts and are not applicable
to DMR which is a short-run concept. For example, in the diagram on page 98 economies
of scale are evident over the output range where per unit costs are falling.
Since this question is worth more we would look for high quality definitions and it must
be very clear that the long-run is a time frame during which ALL factors of production
can be varied so the notion of fixed plant is irrelevant.

Front 86

In about 75 words (i.e. one paragraph) explain why you think it’s true or false
In the long-run, a monopolistically competitive firm will earn normal profits only

Back 86

TRUE. What we are looking for here is an explanation of the "tangency" solution.
One proof could run along these lines: the existence for example of economic profits will
attract new players. In the standard model a firm is enjoying short-run economic profit
possibly due to successful product differentiation. (see discussion on page 157). This is
shown as the shaded area above the ATC curve and below the AR curve (or demand
curve). Profits act as a signal to other entrepreneurs to direct their available resources to
this industry, so competition "hots up". Remember that barriers to entry in monopolistic
competition are not huge. The arrival of new players means that some of the firm's clients
will be lured to the new player, remembering also that under monopolistic competition
products are close substitutes, although not perfect. Thus, the firm's demand curve shifts
to the left to illustrate the reduction in the number of buyers. Ultimately, the demand
curve is tangent to the average cost curve and the firm is making normal profits only and
just breaking even.
The proof can be equally effective through the discussion of economic losses (see Fig 6.2
b on page 157 of the text book for this version). We did NOT expect both answers but we
did expect that reference to the "tangency solution" be made to get high marks.

Front 87

In about 75 words (i.e. one paragraph) explain why you think it’s true or false
The term oligopoly describes the situation when the number of firms in an industry is
so small that each must consider the reactions of rivals in formulating its price policy.

Back 87

TRUE. As the text reminds us, "oligopoly exists when a few firms dominate the
market for a good or service."
Thus, the focus of the discussion here needs to be on mutual interdependence, the key
feature of this market structure. What we would be looking for is for the students to
explain the features of oligopoly and then make some effort to demonstrate the
significance of 'fewness' via an appropriate model. Thus, the kinked demand curve model
for non-collusive oligopolies would be useful here or the simple 'prisoner's dilemma'
could be discussed using game theory. The discussion using the kinked demand model
would conclude that a firm's rivals will match a price cut but ignore a price rise. This
needs to be clearly explained using reference to price elasticity of demand, i.e. above the
going market price demand is thought to be relatively price elastic, so even a small price
rise results in a large fall in quantity demanded; however, below the going market price
demand is deemed to be relatively price inelastic, so the gains in market share from a
price cut are negligible and leave all of the firms worse off in terms of total revenue. If
game theory is used, the discussion should conclude that the "maximin strategy" is for
firms to maximise their minimum pay-offs by not risking a high price strategy nor relying
on their rival not to undercut them. Thus, the Nash equilibrium is the dominant strategy
here. (fig 6.4 p164 is relevant here) The statement is very clear with respect to rivals' reactions to "formulating price policy"
so we would expect that high quality answers specifically address this.

Front 88

Short answer qn:
Compare the efficiency outcomes of perfect or pure competition with that of one
imperfectly competitive market. Conclude your analysis with a comment on why
governments of modern, mixed economies invariably enact some form of legislation to
promote competition.

Back 88

Allocative and productive efficiency defined as per textbook; pre-condition for both
established, viz. P=MC for allocative, P=minATC for productive; pure competition
modelled and features identified; imperfect market structure identified and modelled;
conclusion re why efficiency not achieved; example of government's role in promoting
competition.

Front 89

Short answer qn:
Using at least one current example, describe how governments can correct market
failures.

Back 89

Students can select from a wide range of potential examples. We would expect the
majority to analyse an externality, especially "spill-over costs" associated with pollution.
Thus, look for appropriate use of models as per page 184of the text. Higher quality
answers will allude to a more socially optimal equilibrium higher than the current market
outcomes and conclude that such an externality results in the over-allocation of resources.
Other examples could be public goods, imperfect competition, imperfect information,
equity and spill-over benefits.

Front 90

Short answer qn:
Explain why a perfectly competitive firm will not charge a price which is higher or
lower than the market determined price.

Back 90

A price higher than the market determined price will result in zero sales as consumers
switch to the perfect substitutes which are available. A lower price will not be charged
because the firm is able to sell at the market price any quantity it has the capacity to place
on the market. There is no reason to lower the price; it will merely reduce revenue and
profit.

Front 91

Short answer qn:What does equilibrium mean to buyers and sellers in competitive markets?

Back 91

At the equilibrium price, the supply of goods to the market is equal to the level of sales.
Any buyer willing to pay the market price can obtain the product. Sellers will be
maximizing profit but in the short run there is no guarantee that this will result in positive
profits; it is merely the best result possible in the current market.

Front 92

Short answer qn:
Define the concept of a business cycle identifying the main phases. Illustrate with a
diagram.

Back 92

A business cycle is an irregular but recurring fluctuation in the rate of economic growth.
It proceeds through these phases: expansion, peak, contraction, and trough.

Front 93

What are the different types of unemployment?

Back 93

Frictional Unemployment, Structural unemployment and cyclical unemployment

Front 94

What is Frictional unemployment?

Back 94

the level of unemployment associated with the efficient movement of workers between jobs. Allows for the movement of labour from low-productivity to higher-productivity areas

Front 95

What is Structural unemployment?

Back 95

Unemployment resulting from mismatches in the skills and geographic location of labour due to changes in the composition of the total demand for labour, which in turn have been cause by changes in consumer demand and in technology.

Front 96

What is Cyclical unemployment?

Back 96

Unemployment caused by the business cycle - that is, by a deficiency in aggregate demand or total spending.

Front 97

Define full employment / 'the natural rate of unemployment'?

Back 97

A situation of labour market balance consistent with output at the economy's potential output level. Cyclical unemployment is absent, that is, 'full employment is achieved when the cyclical unemployment rate is 0.

Front 98

Distinguish between Demand-Pull and Cost–Push inflation.

Back 98

Demand-pull inflation is inflation resulting from excess demand for output. In this case, the economy attempts to spend beyond it's capacity to produce - beyond its potential level of output.
Cost-push inflation is inflation that arises on the supply or cost side of the market. often explained in terms of the market power of unions and businesses.

Front 99

What is fiscal policy and when would the government undertake it?

Back 99

Fiscal policy will be taken when the government wants to attempt to alter the equilibrium level of real GDP, employment and inflation. Discretionary fiscal policy is the deliberate manipulation of taxes and spending by govnmt for the purpose of altering real GDP and employment, controlling inflation and stimulating economic growth.
Expansionary fiscal policy is the use of increased govmt spending and/or lower taxes, to increase the govmt budget deficits to stimulate economic activity and move the economy out of recession or depression.

Front 100

What is monetary policies and when would the government undertake it?

Back 100

Monetary policy consists of influencing interest rates and credit availability to assist in stabilising real GDP, employment and the price level. Govmnt may undertake this when they wish to constrain spending and inflation (prior to and during a boom).

Front 101

What is positive and normative economics

Back 101

Positive economics deals with facts and avoids value judgements. Normative economics involves value judgements about what the economy should be like or what policies should be undertaken.