Deck 2: The Economic Environment

Question 1

Explain what is meant by the economic problem and show how economic efficiency relates to its three parts.

Answer 1

Describe the problem of scarcity-limited resources but unlimited needs and wants.
Describe and explain the three parts of the economic problem in terms of allocation, production, and distribution.
Show how efficiency then needs to relate to allocation, production, and distribution, and how we might measure the degree to which it has been achieved.

Question 2

Define what is meant by 'market failure' and show the circumstances in which this might occur.

Answer 2

Describe the operation of market forces in terms of allocation, production, and distribution decisions.
Show how, in relation to allocation, market failure might occur in not providing merit goods, public goods, or in failing to take into account externalities.
Show how there may be problems in production as a result of monopolies, destructive competition, market instability, long-term projects, and risk and uncertainty.
Show how distribution issues are important, and that if there is inequity then this is a problem.

Question 3

Explain what is meant by the term 'price elasticity of demand', and show with examples how differences in the price elasticity of demand faced by firms will influence their behaviour.

Answer 3

Define and explain the nature of the price elasticity of demand.
Explain the degrees of price elasticity and the determinants of these.
Show how the behaviour of firms will depend on the nature of the degree of elasticity. In general, if markets are competitive then there will be incentives for firms to cut prices, but the reverse is true if markets are not competitive.

Question 4

Explain why there was a widespread adoption of neoclassical and neoliberal policies across the global economy from the mid 1970s onwards. What are seen as the main weaknesses of this approach to economic policy?

Question 5

To what extent is there agreement that the 2008 global financial crisis was the result of insufficient attention being paid to government regulation? What actions are needed to reform the global financial system?

Question 6

The opportunity cost of an individual's decision to allocate a fixed amount of resources to an activity is best described as:

A) The value to the individual of that activity
B) The costs to society of that activity
C) The value of the next best activity forgone
D) The monetary costs of that activity

Question 7

Which of the following is not universally accepted as being a reason for legitimate government policy?

A) The provision of merit goods
B) The provision of public goods
C) The need to take account of externalities
D) Very high taxation rates on the richer members of society

Question 8

If the demand for a good is relatively price elastic and its price falls the revenue will:

A) Fall
B) Remain constant
C) Rise
D) None of the above

Question 9

Which of the following would indicate that markets are operating efficiently?

A) Consumer sovereignty is being achieved
B) Firms are making a high level of profits
C) There is a constant rise in the money value of goods and services
D) Incomes are distributed equally across all people

Question 10

Which of the following activities in the supply chain for automobiles is an example of a service activity?

A) Production of the rubber for the tyres
B) The production of the tyres themselves
C) The assembly of all the car components into a finished motor car
D) The selling of the car through a motor sales dealership

Question 11

Which of the following are examples of an externality? Please select all that apply.

A) The cost to a cigarette smoker of a packet of cigarettes
B) Noise levels for households who live near airports
C) The effect on the value of homes for existing homeowners of an increase in the reputation of schools in the neighbourhood
D) The cost of petrol to a motorist

Question 12

Which of the following businesses can be best described as being in the primary sector? Please select all that apply.

A) A farm
B) An oil rig
C) A supermarket
D) A bank

Question 13

If as a result of a 5 per cent rise in price demand falls by 10 per cent, which of the following statements is correct? Please select all that apply.

A) The price elasticity of demand is elastic
B) The price elasticity of demand is −2
C) The revenue for the firm will fall
D) It is likely that the firm is operating in an uncompetitive market

Question 14

If there was a shortage in a particular market, which of the following is least likely to happen if the market is allowed to operate freely? Please select all that apply.

A) A permanent black market would form
B) Prices would rise to choke off the excess demand
C) In the long run supply would increase to eradicate the shortage
D) Prices will fall

Question 15

Which of the following are the most likely characteristics of a market which has a high degree of monopoly power? Please select all that apply.

A) Prices will be high and allocative efficiency will not be evident
B) Productive efficiency will not be attained
C) The elasticity of demand for the product will be relatively inelastic
D) There will be very large profits

Question 16

Assume that a person has sufficient resources to consume either A, B, or C, and chooses C. The opportunity cost of C is A and B.

Question 17

The basic economic problem is simply that we haven't got enough money to do all the things that we want.

Question 18

Economic efficiency has to encompass the three parts to the economic problem.

Question 19

If revenue from sales of a product increases as a result of an increase in price, then the price elasticity of demand for the product must be relatively inelastic.

Question 20

As incomes rise we would expect there be a greater percentage of this spent on services than on primary goods.