Economics Student Activities: Microeconomics (Int 2)

Economics

Student Activities:

Microeconomics (Int 2)

9047

.

December 2001

HIGHER STILL

Economics

Student Activities

Microeconomics

Intermediate 2

Support Materials θρ

INTERMEDIATE 2 ECONOMICS

STUDENT ACTIVITIES: MICROECONOMICS

Introduction

This pack contains classroom and homework activities to support the learning and teaching process for Economics at Intermediate 2 level. It covers those parts of the course content listed under the heading of Microeconomics (Int 2) and the material associated with the unit specification, Microeconomics (Int 2).

This pack is divided into four sections:

Section A The Basic Economic Problem

Section B Demand

Section C Supply

Section D Costs

Each Section contains a number of student activities and solutions are provided after each section of activities. The solutions given represent some of the possible answers which could be acceptable. When using the exercises and questions, some discretion should be used when judging responses. Students should be given credit for responses which are an acceptable answer to the exercise or questions but which do not appear in the suggested solutions.

Teachers and lecturers will have their own preferred ways of using the material in this pack. The Activities are intended to complement the delivery of course concepts.

They are exercises which can be done in class or as homework to introduce relevant knowledge, to reinforce new knowledge and understanding or to extend existing knowledge and understanding. While their primary use is likely to be during the actual delivery of course material, they can be used for revision purposes.

Economics: Microeconomics Students Activities (Int 2) 5


CONTENTS

Section A The Basic Economic Problem

Section B Demand

Section C Supply

Section D Costs



SECTION 1

STUDENT ACTIVITIES



ECONOMICS

INTERMEDIATE 2

A1

1

The Basic Economic Problem

(a)

“Factors of Production have alternative uses. Mobility is the degree to which a factor of production is willing or able to move between locations

(geographical areas) or uses (occupations)

Explain, using examples, what is meant by the statement ‘factors of production have alternative uses’? below:

(i)

Area of

Farmland

(ii)

A person good at word processing

(i)

(ii)

(i)

A delivery lorry

(ii)

(c)

(d)

(e)

(f)

Explain how the occupational mobility of labour could be improved.

Explain what is meant by geographical mobility.

Which of the resources shown in (b) is not geographical mobile? Explain your answer.

How might the geographical mobility of labour be improved?


ECONOMICS

INTERMEDIATE 2

A2

1.


Explain what is meant by the term ‘scarce resources’.

2. Listed below are examples of 3 resources.

A farmer’s field

A person with a Business Studies Degree

A pair of scissors

(a) State which resource each example is.

(b) List some alternative uses for each example.

(c) Explain the difference between a shortage and scarcity.

(d) Explain why each resource is scarce.

3. Because resources are scarce and human wants are unlimited, choices must be made. Every time a choice is made an opportunity cost is involved.

(a) What choices might the following be faced with:

(i) A school pupil

(ii) A local shop manager

(iii) A Headteacher

(iv) The Chancellor of the Exchequer.

(b) Using one of your examples from 3 (a), explain, what is meant by the term opportunity cost?

(c) Why does an opportunity cost occur every time a choice is made?


ECONOMICS

INTERMEDIATE 2

A3

1.


“Scarce derelict land, owned by the local council in a Scottish city centre, is wanted for a planned £100 million development by a London-based property company. The local council may, however, have other priorities when deciding what to do with the land.”

(a) (i) Explain the meaning of “scarce derelict land”.

(ii) What alternative uses may such land have in a city centre?

(b) (i) Using an example, explain what is meant by the term

“Opportunity cost”.

(ii) Discuss, briefly, the “opportunity cost” for the council of selling the derelict site to the London property company.

(c) For what reasons may a local council which owns a derelict city centre site decide to build a leisure complex there, rather than allow its use as a private property development.


ECONOMICS

INTERMEDIATE 2

A4 The Basic Economic Problem

If everyone could have everything they wanted, there would be no need for economics. Money would be irrelevant – we could help ourselves to anything.

Unfortunately, however, the world is not like that. Factors of production are scarce, therefore every society has to find the answer to three basic economic questions:

What to produce?

How to produce?

For whom to produce?

In answering these questions, every country strives for economic efficiency.

(a)

(b)

(c)

(d)

(e)

2

Explain what is meant by the term ‘factors of production’.

Explain how each of the factors of production is scarce.

In what ways could each of the factors of production be increased?

Explain the difference between scarcity and a shortage.

Explain what is meant by ‘economic efficiency’.

Because resources are scarce and wants are unlimited, economic choices have to be made and an opportunity cost is involved.

Explain an economic choice which each of the following groups may have to make and describe the possible opportunity costs involved.

(a) Government


ECONOMICS

INTERMEDIATE 2


(a)

What to produce, how to produce and for whom to produce are questions that have to be answered by any society. There are many different answers to these questions and every society develops its own economic system to try and solve these problems. One way of solving the problem is by having a

MIXED ECONOMY where

Some resources are privately owned by people and firms, therefore it is producers and consumers who make decisions about what, how and of whom to produce .

Other resources are owned by government who decide what, how and for whom to produce

In a free market economics system, what is the main aim of:

(i) a producer;

(ii) a consumer?

(b) Explain how firms in a free market economic system decide:

(i) what to produce;

(ii) how to produce;

(iii) who the goods and services are for.

(c) (i) What goods and services does the Government provide in a mixed economy?

(ii) Choose 2 goods and services you have mentioned in f (i) and explain

why the Government would provide these.

Microeconomics Students Activities (Int 2) 15

ECONOMICS

INTERMEDIATE 2


For many years, the City of Edinburgh Council has been looking at ways to solve the ever-increasing traffic congestion in and around the city. One solution was to build the City Bypass. However, some people believe that the building of this road has made the problem worse rather than provided a solution to it. Many more people using cars and lorries have been encouraged on to the roads and traffic congestion is now worse than ever.

In the past, public transport users and cyclists have been neglected. However, the

Council is now looking towards schemes to improve public transport, as well as to make provision for cyclists.

If public transport was better and cheaper then commuters - especially from outlying areas - would be tempted to use it.

(a) Why do many people travel to work by car?

(b) What resources are provided to help motorists?

(c) In the past, resources have been provided to satisfy motorists’ wants. What groups of people might suffer because of this?

(d) Why might the people you have mentioned in (c) suffer?

(e) How does the above passage show that an economics problem exists?

(f) How might public transport be made better for commuters?

(g) Who would you give more resources to - motorists or public transport user?

Explain your+ answer.

(h) Explain why the passage shows that in the past resources have been wasted.


ECONOMICS

Intermediate 2


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(a) (i) Explain, using examples, what is meant by the statement “economic resources are scarce”.

(ii) Explain the difference between resources being scarce and being in short supply.

(iii) Is the problem of scarcity universal? Give reasons for your answer.

(b) (i) Explain what is meant by ‘unlimited wants’.

(ii) Why might Kirsty’s little sister’s wants be unlimited?

(c) In view of the fact that resources are scarce, what economic decisions might the following have to make?

(i) A child making up their Christmas list

(ii) A Toy Manufacturer

(iii) Santa.

(d) Unfortunately, Kirsty didn’t get any CDs from Santa, however, her Aunt gave her a £15 CD Token. She decided to buy the Boyzone CD.

(i) What could Kirsty have chosen instead?

(ii) What is the economic term used to describe the above situation?

(e) Briefly explain how this letter describes ‘The Basic Economic Problem’.


ECONOMICS

INTERMEDIATE 2


The UK’s economic resources are scarce. These resources are important to us because they are used in the production of goods and services. We must, therefore, try to make the best use of them that we can and not waste them. This is true, not only in this country, but in every country in the world.

(a) Describe, using examples, the term economic resources.

(b) In what sense are resources considered to be scarce?

(c) Explain, using examples, the difference between goods and services.

(d) Why must the UK try to make the ‘best use of resources and not waste them’?

(e) Why does every country in the world have the same problem?


ECONOMICS

INTERMEDIATE 2


1 (a) What is meant by “opportunity cost” and how does it arise?

(b) Show how opportunity cost applies to economic decisions made by each of the following:

(i) a family thinking about taking a holiday in Switzerland;

(ii) a farmer thinking about buying a new tractor;

(iii) a local authority thinking about building a new sports centre.

8

2 “Countries attempted in different ways to solve the economic problem of how to allocate scarce resources for different purposes.”

(a) Explain what is meant by ‘scarce resources’.

(b) Give two examples of different uses for any one resource.

(c) Describe how decisions about the use of scarce resources are made in a mixed economic system.

8

2

10

3 “Scarce resources are allocated most efficiently in a ‘free enterprise’ economy where the Government interferes as little as possible with its operation. A free enterprise economy could, therefore, be said to increase economic efficiency.”

(Economist supporting the free market system)

(a) (i) What is meant in economics by ‘scarce resources’?

(ii) How are these resources allocated in a ‘free enterprise’ economy?

(b) How might a free enterprise system be said to increase economic efficiency?

6

4

3

(c) What arguments might supporters of a ‘mixed economy’ give for the provision of certain goods and services by the government? 7

4

4

4


4 “Countries attempt in different ways to solve the economic problem of how to allocate scarce resources for different purposes.”

(a)

(b)

(c)

Explain clearly what is meant by ‘scarce resources’.

Give two examples of different uses for any one scarce resource.

Explain how a government intervenes in a mixed economic system.

8

2

10


ECONOMICS

INTERMEDIATE 2

A1 The Basic Economic Problem – Suggested Solutions

1 (a) Resources (land, labour and capital) can be used for different things/purposes e.g. land - building or grazing etc, labour - clerk or teacher, capital - oven can be used to bake bread or cakes (any reasonable example - not necessary to take into account the extent to which a factor is willing or able to move e.g. labour - clerk or teacher - limits to occupational mobility here because of training, however, student need not explain this when answering this question).

(b) Accept any reasonable examples of alternative uses (basic understanding as in (a)).

(c) Education, training, natural talents, institutional barriers, finance lack of information regarding job opportunities, overspecialisation etc.

(d) Extent to which factor of production is willing and able to move between geographical areas.

(e) Land (cannot be moved to any other location).

(f) Financial incentives, provide information regarding job opportunities etc.


ECONOMICS

INTERMEDIATE 2

A2 The Basic Economic Problem - Suggested Solutions

1 Resources (land, labour, capital and enterprise) required to produce goods and services are scarce relative to unlimited wants for goods and services.

2 (a) land, labour, capital

(b) Student’s examples of alternative uses for the above resources.

(c) Shortage relates supply to demand. (Demand is a want backed up by the ability to buy and is therefore limited by income). Resources are insufficient to satisfy demand.

Scarcity relates supply to wants (wants unlimited and are therefore never fully satisfied). Resources available for producing output are insufficient to satisfy wants.

(d) Student’s explanation of why each of the resources are scarce. For example, land - total supply fixed - surface area, non-renewable resources, labour - population, capital - investment.

3 (a) Student’s examples of choices, for example:

(i) School pupil - whether to study Economics or Physical

Education.

(ii) Shop manager - whether to take on another assistant or work extra hours herself.

(iii) Headteacher - whether to attend a meeting or meet a parent.

(iv) Chancellor - whether to increase VAT or income tax.

(b) Student’s explanation of opportunity cost - that every choice involves a sacrifice i.e. what we could have chosen instead. The real cost making any choice is the sacrifice of the next best alternative choice. This real cost is known as opportunity cost.

(c) Opportunity cost is the direct result of scarcity and occurs every time a choice is made. In making a choice, there is always a sacrifice.


ECONOMICS

INTERMEDIATE 2


(a) (i) Land - all is scarce. Derelict land - unused land/waste - although land is derelict it is still scarce.

(ii) Car park, building (e.g. property or office blocks), park etc.

(b)

(c)

(i) Opportunity cost is the sacrifice of the next best alternative. Not a money cost, but the real cost i.e. what has been given up because of the course of action taken.

(ii) Discussion of what the council could have done instead with the site e.g. build council offices, sold it to someone else, landscaped the site.

Student’s explanation - For example, Council may feel it is more beneficial to the community as a whole to build a leisure complex.


ECONOMICS

INTERMEDIATE 2

A4 The Basic Economics Problem - Suggested Solutions

1 (a) Explanation of scarce resources i.e. factors of production land, labour, capital and enterprise. Resources used in the production of goods and services.

(b) Student’s explanation of how each of the resources are scarce. For example. Land - total supply fixed - surface area, non-renewable resources, labour - population, capital - investment.

(c) Land - conservation, making land more efficient e.g. fertilisers

Labour - increase quality or quantity, for example increase total population, increase number of hours worked, increase efficiency of labour, retraining, education.

Capital - increase investment (forgo present consumption)

(d) Shortage relates supply to demand. (Demand is a want backed up by the ability to buy and is therefore limited by income). Resources are insufficient to satisfy demand.

Scarcity relates supply to wants (wants are unlimited and are therefore never fully satisfied). Resources available for producing output are insufficient to satisfy wants.

(e) Basic explanation of economic efficiency i.e. resources are being used to satisfy as many wants as possible (refers to what is being produced as well as how).

2 (a) Student’s explanation of economic choice made by Government and the possible opportunity cost of that choice.

(b) Student’s explanation of economic choice made by a business and the possible opportunity costs of that choice.

(c) Student’s explanation of economic choice made by an individual and the possible opportunity cost of that choice.


ECONOMICS

INTERMEDIATE 2

A5

(a)

The Basic Economics Problem - Suggested Solutions

(i) Profit (although student could mention survival, increasing market share).

(b)

(c)

(i)

(ii)

(iii)

(i)

(ii)

What to produce is based on consumer demand/sovereignty (for goods and services), therefore firms in a free market allocate resources in order to produce those goods and services demanded by consumers.

(Price mechanism).

As efficiently as possible. Combination of resources (land, labour and capital) which produces highest output from least cost inputs of resources. Strive for economic efficiency.

Based on consumers’ ability to pay.

Public/merit goods (accept any goods/services which central or local government provide e.g. defence, education, health, refuse collection etc.

Student’s choice - Why?

Market failure, consumers with most money exercise greatest weight in spending therefore production may be devoted to those goods where greatest profit is made, commodities which people are willing to pay for may not be those which are most useful to society, or may be unsuitable for provision by private sector, unemployment, existence of externalities.


ECONOMICS

INTERMEDIATE 2


(a) Possible reasons could include: convenience, public transport inadequate.

(b) Roads, car parks.

(c) People who use trains, buses, pedestrians, cyclists.

(d) Resources used to provide better facilities for motorists mean that less resources are used to improve facilities for other e.g. cycle paths/bus lanes, more buses and trains.

(e) Scarce resources versus unlimited wants for these resources - motorists wants versus bus/train/cyclist and pedestrian’s wants.

(f) For example: more frequent services provided, bus lanes to increase speed of journey or any other measure the student explains.

(g) Student’s answer with justification. For example - public transport users - if less resources allocated to motorists, they may be persuaded to use public transport therefore reducing congestion, pollution etc.

(h) More roads have been built, however instead of solving the problem of congestion, the problems is worse than ever.


(d)

ECONOMICS

INTERMEDIATE 2


(a) (i) Resources (land, labour, capital and enterprise) required to produce goods and services are scarce relative to unlimited wants for goods and services.

(ii) In short supply i.e. a shortage relates supply to demand. Resources are insufficient to satisfy demand.

Scarcity relates supply to wants (wants are unlimited and are therefore never fully satisfied). Resources available for producing output are insufficient to satisfy wants.

(iii) Yes - scarcity is the basic economic problem facing all countries (rich as well as poor) and results from the fact that no country has enough resources to produce enough goods to completely satisfy all of its people.

(b)

(c)

(i) Wants are never satisfied, we always want more no matter what we have already, we will always want something else.

(ii) New goods appearing, human greed, goods wearing out.

(i) What to put on their list, for example a pair of roller blades or a skateboard.

(ii) What to produce, for example dolls or dolls prams, what resources to use.

(iii) Who to distribute the to, how to distribute them.

(i) Shania Twain or any other CD.

(e) Scarce resources used to produce goods and services (toys) versus unlimited wants of consumers (children).


ECONOMICS

INTERMEDIATE 2


(a) Explanation of resources i.e. factors of production land, labour, capital and enterprise. Resources used in the production of goods and services.

(b) Resources (land, labour, capital and enterprise) required to produce goods and services are scarce relative to unlimited wants for goods and services.

(c) Goods – are tangible items i.e. you can see and touch them e.g. chairs, watches, etc.

Services – are intangible – i.e. you cannot see them e.g. hairdressing, education, etc.

(d) Not enough resources to satisfy everyone’s wants. In addition non-renewable resources. Therefore existing resources must be put to the best possible use in order to produce as much as possible with as few inputs as possible (strive for economic efficiency) – existing resources last longer.

(d) Scarcity is universal. It is the basic economic problem facing all countries

(rich as well as poor) and results from the fact that no country has enough

resources to produce enough goods to completely satisfy all of its people.


Economics

INTERMEDIATE 2


1 (a) Opportunity cost is the sacrifice of the next best alternative. Not a money cost but real cost i.e. what has been given up because of the course of action taken.

Arises because of the basic economic problem i.e. scarce resources versus unlimited wants. The only way unlimited wants can be reconciled with limited resources is through choice.

As there are insufficient resources to satisfy all wants choices must be made at all levels i.e. consumers, producers, governments. As scarcity is universal – everyone must choose. Every time a choice is made an opportunity cost arises.

(b) For all 3 parts of this question look for understanding of how opportunity cost relates to the economic decisions which have to be made.

(i) For example, economic choice for the family – if they do decide to go to Switzerland, they will give up the chance to holiday in this country or spend their money on something else (they can’t do both). Opportunity cost is not the money cost but what they will give up in order to holiday in

Switzerland.

(ii) What the farmer could have instead of a tractor. For example, build a new barn or buy livestock.

(iii) What could be built instead of the sports centre. For example, an extension to a school

2 (a) Explanation should be given of the nature of scarce resources (with examples) in relation to unlimited wants for goods and services which are made from these scarce resources.

Why wants are unlimited.

Student must explain that scarcity is a relative concept.

(b) Student’s examples of two different uses for one resource. For example, land can be used for building houses or as arable land.


(c) Brief definition of mixed economy (in terms of market and planned).

Private sector – resources allocated by price mechanism (supply and demand), decisions taken through the workings of the market.

− goods and services produced in response to consumer demand/ability to pay

− resources attracted to expanding industries

− role of profit as a signal to firms.

Public sector – government regulations in certain areas, key industries run by state for benefit of the people

− provision of goods/services (public and merit goods)

− general state intervention – for example,, subsidies, taxes, price fixing, acts of parliament, regulatory bodies.

3 (a) (i) Explanation should be given of the nature of scarce resources (with examples) in relation to unlimited wants for goods and services which are made from these scarce resources.


Students must explain that scarcity is a relative concept.

(ii) Limited government involvement in the market, therefore resources are allocated through the workings of the market.

Prices signal the value of individual resources.

Resources flow to where they yield the highest profit.

(b) In the long run (because of the high degree of competition), firms are producing at the lowest point in the average cost curve. At this point the quantity of resources need to produce one unit of a commodity are minimised (optimum output). All firms would be producing to consumers’ demand, therefore they would not only be produced at minimum cost, but they would also be goods which people wanted.


4

(c)

(a)

(b)

(c)

Question is asking why government intervenes i.e. problems of free market

Market failure – consumers with most money exercise greatest weight in spending, therefore production may be devoted to those goods where profit is made. Protection of consumer.

Goods and services people are willing to pay for may not be those which are most useful to society, or may be unsuitable for provision (public/merit goods).

Unemployment.

Existence of externalities.

Uneven distribution of income and wealth.

Student should give relevant examples.

Explanation should be given of the nature of scarce resources (with examples) in relation to unlimited wants for goods and services which are made from these scarce resources.


Student must explain that scarcity is a relative concept.

Student’s examples of two different uses for one resource. For example, land can be used for building houses or as arable land.

Question is asking how government intervenes

Taxes/benefits, provision of public/merit goods, privatisation/nationalisation, location of industry, stabilising economy (inflation targets, exchange rates, international trade e.g. quotas), regulations/law, regulatory bodies e.g. OFTEL/OFGAS.


ECONOMICS

INTERMEDIATE 2

B1 – Demand

Tom Robinson makes high quality furniture but he knows that although a great number of people would like to buy his furniture – especially his dining tables – few can afford to.

One friend said to Tom recently “If your dining tables were cheaper, I’d certainly buy one and I know several other people who would too!”

Tom immediately enlisted the help of his son. They did some market research and drew up the following demand schedule for dining tables:

Demand schedule for dining tables

Price per table(£’s) Quantity demanded (Units)

(a) Using an example from the above passage, explain the difference between wants and demand.

(b) (i) Draw the demand curve for Dining Tables.

(ii) Explain why the quantity of dining tables demanded rises as price falls.

(c) Why might some people be upset if Tom increases his prices?

(d) (i) Explain the difference between individual demand and market demand.

(ii) Does the above table show market demand or individual demand?

Explain your answer.

(e) Using a demand diagram, explain what might happen to the demand for

Tom’s dining tables if people’s real incomes rose.

(f) Other than real income, what factors might affect the demand for Tom’s dining tables.


ECONOMICS

INTERMEDIATE 2

B2 – Demand

Economists assume that to show the effect of price on demand other factors remain constant. Contractions and extensions of demand can then be examined. The following diagram shows the demand curve for Yoyos:

In reality, the factors which determine demand (determinants of demand) are rarely constant and they produce changes which would cause the demand curve to shift

(either to the left or right).

(a) In the above diagram, does an increase in price from P1 to P2 cause an extension or contraction in quantity demanded. Explain your answer.

(b) Using diagrams, explain what would happen to the demand for Yoyo’s in the following situations.

(i) Every child in the UK between the age of 7 and 12 is given an increase in their pocket money.

(ii) A daily newspaper criticises children for spending too much time playing games and not enough time doing homework or reading.

(iii) The price of superbouncers, an alternative pocket money toy, drops considerably.

(iv) Yoyo’s are heavily advertised on TV and in children’s

Comics.

(v) The Government Minister for Health warns that the paint used on

Yoyo’s may be poisonous.


ECONOMICS

INTERMEDIATE 2

B3 – Demand

The two diagrams below show the number of holidays taken by Scottish holidaymakers:

(a) From the information in the above diagrams, describe what has happened to:

(i) the demand for holidays taken abroad;

(ii) the demand for holidays taken in the UK.

(b)

(c)

Explain why these changes might have happened.

Given the recent earthquakes in Turkey and Greece:

(i) Using a diagram, show how this might affect the demand for holidays in Turkey and Greece.

(ii) Using a diagram, show how this might affect the demand for holidays in other foreign destinations.

(iii) Draw a new demand diagram showing what could happen to the demand for UK holidays.


ECONOMICS

INTERMEDIATE 2

B4 – Demand

There are many factors other than price that affect the demand for a product.

Decide which determinant of demand in each of the following examples is: a) Potatoes have risen in price, therefore more pasta is bought. b) CD players have fallen in price, therefore more CDs are being bought. c) The price of PCs is expected to fall, therefore will wait before buying a PC. d) Average wages in the UK have risen by 6% in the past year. e) The rate of interest on finance for new cars has fallen. f) This year’s hot summer dramatically increased the demand for ice cream and ice lollies. g) Branded trainers are a must for 12-18 year olds.


ECONOMICS

INTERMEDIATE 2

B5 – Demand

Consumers buy goods and services because of the utility they receive. The table below shows the utility a consumer receives from consuming good A.

(a)

Units of Good A Total Utility Marginal Utility

0 0 -

1 4 4

2 11 ?

3 15 ?

4 17 ?

5 16 ?

6 15 -1

Explain what is meant by the following terms:

(i) total utility;

(ii) marginal utility.

(b) Describe what happens to total utility as consumption of good A increases.

(c) (i) Calculate the marginal utility between 2 and 5 units of consumption

(ii) Describe what happens to marginal utility as consumption of good A increases.

(d) The above example shows the law of diminishing marginal utility. How does this law explain the shape of a demand curve?


ECONOMICS

INTERMEDIATE 2

B6 – Demand

The following table shows the weekly amount of total utility a consumer gains from consuming a particular good – GOOD Y:

Quantity of Good Y (per week) Total Utility Marginal Utility

1 8

2 4

3 18

4 20

5 20 a) Explain what is meant by the term ‘total utility’. b) Explain what happens to total utility as consumption increases. c) Explain what is meant by the term ‘marginal utility’. d) Calculate the marginal utility between one and five units of consumption. e) Describe the relationship between total and marginal utility.


ECONOMICS

INTERMEDIATE 2

B1 – Demand - Suggested Solutions

(a)

(b)

Wants – what people would like unsupported by the ability to pay. Effective demand – demand for goods and services backed up with resources (money) to pay for them. (Concept is important as price mechanism is related to effective demand, not wants).

(i)

(ii) Substitution and income effects, marginal utility v price – consumers spend money in a way which gives them the greatest utility.

(c) Some consumers may no longer be able to afford these dining tables (income effect) therefore they would be unhappy if Tom increased his prices. They may have to buy a dining table which they perceive to be of inferior quality to Tom’s tables, or do without.

(d) (i) Individual – one person, firm, government’s demand for goods and services. Market demand – the sum of each individual demand.

(iii) Market – demand curve is based on demand of all potential consumers of a good, not just one consumer. One buyer is not going to buy 25 dining tables!


(e)

(f) Price of substitutes, taste and fashion, advertising, interest rates, availability of credit.


ECONOMICS

INTERMEDIATE 2

B2 – Demand - Suggested Solutions a) Contraction in quantity demanded – only price has changed, therefore the same quantity is demanded at every price – movement along the curve. In this situation, price has risen, therefore less is demanded (i.e. quantity has contracted). b) (i) Demand curve shifts to the right

(ii) Demand curve shifts to the left

(iii) Demand curve shifts to the left

(iv) Demand curve shifts to the right

(v) Demand curve shifts to the left


ECONOMICS

INTERMEDIATE 2


(a) (i) Over the period shown – demand for holidays abroad increased sharply between 1987 and 1991, then increased more slowly over the rest of the period shown.

(ii) Over the period shown – demand for holidays in the UK fell sharply between 1987 and 1991, then decreased more slowly over the rest of the period shown.

(b) Increased real or disposable incomes, falling interest rates, falling prices of foreign holidays, increased prices of UK holidays, UK weather, becoming increasingly fashionable to travel abroad, availability of credit/credit cards, advertising.

(c) (i) Demand for holidays in Greece and Turkey might fall, causing demand curve to shift to the left.

(ii) Demand for holidays in other foreign destinations might shift tot the right as consumers switch to these countries.

(iii) Demand for holidays in the UK might shift to the right as consumers switch from foreign holidays to UK holidays


ECONOMICS

INTERMEDIATE 2


(a) Price of substitute good

(b) Price of complementary good

(c) Expectation of future prices

(d) Income

(e) Interest rates

(f) Weather

(g) Fashion


ECONOMICS

INTERMEDIATE 2


(a) (i) The total amount of satisfaction gained from the consumption of a particular good/combination of goods.

(ii) The extra satisfaction gained from the consumption of one more unit of a good.

(b) Increases by a decreasing amount, then falls.

(c) (i) 7, 4, 2 and –1.

(ii) Increases then decreases until it becomes negative.

(d) Explanation of why the law of diminishing marginal utility is the basis of consumer demand, i.e. the more we have of a good the less we are willing to pay to get one more unit of it. Demand curve is a curve that plots (joins) marginal utilities.


ECONOMICS

INTERMEDIATE 2

B6 – Demand - Suggested Solutions a) The total amount of satisfaction gained from the consumption of a good –

Good Y in this example. b) Total utility increases, but by a smaller and smaller amount as each additional unit is added. The fifth unit adds nothing to total utility. c) The extra utility gained from the consumption of one more unit of a good. d) 8, 6, 4, 2, 0. e) Marginal utility decreases continuously until it reaches 0. This means that total utility increases for the first 4 units, but by a smaller and smaller amount each time. When marginal utility is 0, there is no increase in total utility.


ECONOMICS

INTERMEDIATE 2

C1 Supply

A supply curve slopes upwards from left to right and shows how much of a good producers are willing to sell at any given price over a period of time.

A change in price causes a movement along a supply curve i.e. an extension or contraction in supply. Price, however, is not the only factor which determines the level of supply. There are also other important factors to consider. These other factors cause a shift in the supply curve.

(a) If the price of a good increases

(i) explain how producers will react;

(ii) explain why producers will react in this way.

(b) Using diagrams, explain what is meant:

(i) an extension in supply;

(ii) a contraction in supply.

(c) Explain, using diagrams, the ‘other important factors’ which determine the level of supply of a good


ECONOMICS

INTERMEDIATE 2

C2 Supply

Economists assume that to show the effect of price or supply, factors other than price remain constant. Movement along a supply curve can be examined.

The following diagram shows the supply curve for Yoyo’s.

In reality, the factors which determine supply (determinants of supply) are not constant and they produce changes which would cause the supply curve to shift.

(a) (i) In the above diagram, does a change in price from P to P cause an extension or contraction in supply? Explain your answer.

(ii) Why are the suppliers willing to supply more at higher prices?

(b) Using diagrams, explain what would happen to the supply of Yoyo’s in the following cases..

(i) Price of plastic used to make Yoyos has fallen.

(ii) Workers making Yoyos have been given an increase in wages

(iii) Producers of Yoyos have installed new equipment in their factories

(iv) Several new films have started up, producing Yoyos


ECONOMICS

INTERMEDIATE 2

C3 Supply

Kevin Blackie owns a Mushroom Farm which supplies Greengrocers in East Lothian.

The following table shows the market supply schedule for these mushrooms..

PRICE OF MUSHROOMS QUANTITY SUPPLIED PER

MONTH

(per kg) (£) (kgs)

(c)

1.50 1600

1.25 1300

1.00 1000

0.75 700

0.50 400

(a) Draw the market supply curve for mushrooms in East Lothian.

(b) (i)

(ii)

How does quantity supplied change as price changes?

Why does this happen?

Kevin would like to supply more mushrooms to the market at every price.

(i)

(ii)

What factors might affect his ability to do so?

Using a diagram, show what would happen if Kevin is willing and able to supply more to the market at every price.


ECONOMICS

INTERMEDIATE 2

C1

(a)

Supply – Suggested Solutions

(i)

(ii)

Existing producers will increase production. New producers will enter the market.

Increased profits are to be made at higher prices therefore this will induce existing producers to supply more and new firms to enter the market.

(b) (i) Extension in supply is shown by movement along the supply curve, more is supplied at higher prices.


(ii) Contraction in supply is also shown by a movement along the supply curve, less is supplied at lower prices.

(c) Other factors cause a shift in the supply curve, for example costs of production (or any factor which affects these), technology (usually a shift to the right), prices of other goods, government legislation, stockpiling, weather, ease of entry/exit of firms to an industry, taxes, subsidies.

Student should show appropriate diagram with explanation.


ECONOMICS

INTERMEDIATE 2

C2

(a)


(i) Extension, as price moves from P to P1 quantity supplied increases from Q to Q1.

(b) (i) Shift to the right, more supplied at every price.

(ii) Shift to the left, increase in costs of production – less supplied at every price.

(iii)

(iv)

New technology – shift to the right.

Shift to the right more supplied at every price.


C3

(a)

ECONOMICS

INTERMEDIATE 2


(b)

(c)

(i)

(ii)

(i)

(ii)

As price increases, more is supplied and vice versa.

Producer is more willing to supply more at higher prices because of increased profit margins.

Availability of factors of production, weather, cost of factors of production.

Diagram showing a shift to the right of the supply curve.


ECONOMICS

INTERMEDIATE 2

D1 Costs

Production refers to the making of goods and services in order to satisfy people’s wants.

(a) Using examples, explain which types of firm might be better using a production system where each person does everything necessary to produce a good or service.

(b)

(c)

Assume a firm employs specialised production, What advantages might there be for:

(i) employees;

(ii) employers;

(iii) consumers.

If a firm used specialised production. What disadvantages might there be for:

(i) employees;

(ii) employers;

(iii) consumers.


(c)

(d)

ECONOMICS

INTERMEDIATE 2

D2 Costs

Angela Rayson is an excellent cook. She started a small business in her home town making novelty cakes which she sells at £12 each.

She has the following costs:

Rent of premises

Hire of machinery

Materials/ingredients

Wages

£100 per week

£55 per week

£3 per cake

£1 per cake

Loan repayment

Other variable costs

(a) (i)

(ii)

£45 per week

£1 per cake

Explain, using examples, what is meant by fixed costs.

How much are Angela’s total fixed costs per week?

(b) (i) Explain what is meant by the term average fixed cost.

(ii) Calculate the average fixed cost if 100 cakes were produced per week.

(iii) Calculate the average fixed cost if 200 cakes were produced per week.

(iv) Describe what happens to average fixed cost as production increases.

(e)

(i)

(i)

(ii)

Explain, using examples, what is meant by variable costs.

(ii) Calculate the total variable cost if 100 cakes were produced per week.

(iii) Calculate the total variable cost if 200 cakes were produced per week.

(iv) Describe what happens to total variable cost as production increases.

How is the total cost calculated?

How is average total cost calculated?

Explain what is meant by the term marginal cost?


ECONOMICS

INTERMEDIATE 2

(f) Copy and complete the following table:

CAKES

MADE

PER

WEEK

FIXED

COST

VARIABLE

COST

TOTAL

COST

AVERAGE

COST

MARGINAL

COST

(g)

0 200 0 200

50

100

150

200

250

300

(i) Explain what is meant by term average revenue.

(ii) What is Angela’s average revenue?

(iii) How is total revenue calculated?

(h) Explain how Angela would calculate her:

(i) profit per cake;

(i)

(j)

Supposing 150 cakes were produced and sold:

(i) Calculate Angela’s total revenue;

(ii) Calculate Angela’s total profit.

Supposing 250 cakes were produced and sold:

(i) Calculate Angela’s total revenue;

(ii) Calculate Angela’s total profit.


ECONOMICS

INTERMEDIATE 2

D3 Costs

The following data relates to a firm which uses only labour and capital as its factors of production:

LABOUR

(Units)

CAPITAL

(Units)

TOTAL

OUTPUT

(a)

3 3 100

6 6 300

12 12 600

24 24 900

Explain what is meant by:

(i) increasing returns to scale;

(ii) decreasing returns to scale;

(iii) constant returns to scale.

(b) If this firm increases its factor inputs from 3 to 6 units of labour and capital:

(i) By what percentage has its factors inputs increased?

(ii) By what percentage does its total output increase?

(iii) Is this firm experiencing increasing, decreasing or constant returns to scale?

(iv) Will this firm’s average cost be rising, staying the same or falling?


(c) If this firm increases its factor inputs from 6 to 12 units of labour and capital:

(i) By what percentage has its factors inputs increased?

(ii) By what percentage does its total output increase?


(iv) Will this firm’s average cost be rising, staying the same or falling?



(d) If this firm increases its factor inputs from 12 to 24 units of labour and capital:

(i) By what percentage has its factor inputs increased?

(ii) By what percentage does its total output increased?


(iv) Will this firm’s average cost be rising, staying the same or failing?


(e) Explain, using examples, what is meant by economies of scale.


ECONOMICS

INTERMEDIATE 2

D4 Costs

Shown below are the short run units cost curves for a firm:

(a) Explain what is meant by:

(i) short run;

(ii) marginal cost;

(iii) average variable cost.

(b) Explain how average total cost is calculated.

(c) (i) Explain, using examples, what is meant by fixed costs;

(ii) How are average fixed costs calculated?

(iii) How are average costs affected as output increases?


ECONOMICS

INTERMEDIATE 2

D5 Costs

Shown below are the short run unit cost curves for a firm:

(a) Which curve represents:

(i) average total cost;

(ii) average variable cost?

(b) (i) Explain what is meant by average fixed cost.

(ii) Why does average fixed cost continue to fall at all levels of output?

(c) What happens to average variable cost as output increases?

(d) What is meant by optimum output?


ECONOMICS

INTERMEDIATE 2

D1

(a)

Costs – Suggested Solutions

Small firms providing a personal service. For example, plumbing, fashion, firms providing a unique product.

(b) (i) More highly skilled in job, perfect skills.

Better wages if on piece rate

(ii) Highly skilled workforce, less need for supervision – control more people with one. Supervisor, increased output resulting in lower unit cost.

(iii) Lower prices.

(c) (i) Boredom, lack of challenge and opportunity, lack of adaptability (if skill no longer needed – redundant)

(ii) Lack of flexibility, e.g. if a person is ill could affect product – difficult to substitute employees. Could be higher fault rate/carelessness/absenteeism.

(iii) The quality of the product may be lower if it is produced on an

assembly line.


ECONOMICS

INTERMEDIATE 2

D2 Costs – Suggested Solutions

(a) (i) Fixed costs – costs which do not vary with output – rent, hire of machinery, loan.

(ii) £200 per week

(b) (i) Fixed cost per unit i.e. total fixed cost divided by output.

(ii) £2

(iii) £1

(iv) Decreases continuously as production increases as fixed costs are being spread over a larger and larger output.

(c) (i) Costs which vary directly with output – ingredients, wages, other variable costs.

(ii) £500

(iii) £1,000

(iv) Increases continuously as output increases.

(d) (i) Total fixed cost plus total variable cost.

(ii) Total cost divided by output.

(e) Increase in total cost from the production of one more unit.

(f)

CAKES

MADE

PER

WEEK

FIXED

COST

VARIABLE

COST

TOTAL

COST

AVERAGE

COST

MARGINAL

COST

0 200 0 200

50 200 250 450 9 5

100 200 500 700 7 5

150 200 750 950 6.33 5

1,000 5

1,250 5

1,500 5

(g) (i) Revenue gained from selling one unit. (Total revenue divided by number of units sold).

(iii) Average revenue X number of units sold.

(h) (i) Revenue per cake – total cost of one cake (AR-AC )

(ii) Profit per cake (TR-TC) X no of cakes sold


(i)

(j)

(i) 150 x 12 = £1,800

(ii) £1,800 - £950 = £850

(i) 250 x 12 = £3,000

(ii) £3,000 - £1,450 = £1,550


ECONOMICS

INTERMEDIATE 2


(a) (i) If factor inputs are increased, there is more than proportionate increase in output.

(ii) If factor inputs are increased, there is less than proportionate increase in output.

(iii) If factor inputs are increased, there is the same proportionate increase in output.

(b) (i) 100%

(ii) 300%

(iii) Increasing

(iv) Falling

(c) (i) 100%

(ii) 100%

(iii) Constant

(iv) Staying the same

(d) (i) 100%

(ii) 50%

(iii) Decreasing

(iv) Rising

(e) Falling long run average cost due to specialisation/division of labour, technical, marketing, financial, managerial, risk-bearing economies (look for simple explanations of relationship to average cost).


ECONOMICS

INTERMEDIATE 2


(a) (i) Period of time when at least one of a firm’s factor inputs remain fixed. No fixed length of time – depends on type of business/industry.

(ii) Cost of producing one extra unit of a product.

(iii) Variable cost per unit – total variable cost divided by number of units.

(b) Total cost divided by number of units produced or (fixed cost per unit plus variable cost per unit).

(c) (i) Fixed costs – costs with do not vary with output (with student’s examples).

(ii) Total fixed costs divided by output.

(iii) Decreased continuously as fixed costs are spread over a larger and larger output.


(d)

ECONOMICS

INTERMEDIATE 2


(a) (i) C

(ii) B

(b) (i) Fixed cost per unit of output i.e. total fixed cost divided by the number of units produced.

(ii) Fixed cost is being spread over a larger and larger number of units.

(Student could give a numerical example to explain this point).

(c) Falls, reaches a minimum, then rises. (Good students may be able to explain why in terms of diminishing, increasing returns to the fixed factor).

Lowest point on average total cost curve. Productivity at its maximum and unit cost at its lowest.


Economics Student Activities: Microeconomics (Int 2)

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Student Activities:

Microeconomics (Int 2)

HIGHER STILL

Economics

Student Activities

Microeconomics

Intermediate 2

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Economics Student Activities: Microeconomics (Int 2)

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Student Activities:

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HIGHER STILL

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Student Activities

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