Economics Form 4 Mid Yearly Past Paper PDF

Economics Form 4 Mid Yearly Price elasticity of demand (PED)\ Definition: price elasticity of demand measures the extent to which demand for a product changes due to a change in its price. Price inelastic demand describes demand for a product which is unresponsive to changes in price, mainly due t...

Economics Form 4 Mid Yearly Price elasticity of demand (PED)\ Definition: price elasticity of demand measures the extent to which demand for a product changes due to a change in its price. Price inelastic demand describes demand for a product which is unresponsive to changes in price, mainly due to lack of substitutes for the product. Price elastic demand describes demand for a product that is responsive to changes in price, usually due to substitutes being available. Calculation of price elasticity of demand Percentage change in quantity demanded divided by percentage change in price or annotated as % Qd divided by % P. If PED for a product is less than 1 it is price inelastic. If PED for a product is greater than 1 it is price elastic. Always ignore the minus sign. As the price rises from 10 to 14 the QD falls by a Smaller proportion from 80 to 72. Examples of Products with low PED are alcohol, electricity and Cigarettes. Inelastic Demand When the price drops from P1 to P2, the quantity Demanded rises by a greater proportion from Q1 To Q2. Examples of products with high PED are Chocolate bars, soft drinks and cars. As the price rises from P1 to P2, the quantity Demanded remains unchanged this means PED=0. The closest items to this are water and  Prescription drugs. Perfectly Price Inelastic. This situation will only exist if there are perfect Substitutes readily available on the market. PED=∞. Perfectly Price Elastic. As the price increase, the quantity demanded falls By the same proportion PED=1. Unitary price Elastic. Determinants of price elasticity of demand: Substitution- this is the key determinant of PED. In general the greater the number and availability of close substitutes the higher the value of PED will be. This is because such products are easy to replaced if the price increases. By contrast products with few substitutes will have a low PED such as private education and prescribed medicine. Income- the proportion of a consumers income that is spent on a product effects its PED. If the price of a product that is cheap were to double it would be so insignificant that people would still continue to buy it. By contrast if a price for an item is expensive and it rises by 25% this would discourage a person from buying it as it would take up a large part of that persons disposable income. Necessity- If a product is essential it will have a low PED while if a product is a want it will have a high PED. Necessity also depends on the timeframe. For example during valentines day the demand for flowers rise so on that day the demand for flowers is relatively price inelastic. Habits and addictions- if a product is habit forming or highly fashionable, its PED tends to be relatively price inelastic. Advertising and brand loyalty- Customers who are particularly loyal to particular brands are less sensitive to changes in price making them price inelastic. Time- in the long run as people have more time to think products tend to be more price elastic. On the other hand in the short run as people have little time to think people tend to be less sensitive to changes in price making them price inelastic. The relationship between price elasticity of demand and total revenue Sales revenue is the sum of money received from the sale of a good or service. profit is the difference between a firm's total revenues and its total costs. Sales revenue= price x quantity demanded Price discrimination occurs when firms charge different customers different prices for the same product due to differences in PED. Price elasticity of supply (PES)\ PES measures the degree of responsiveness of the quantity supplied in response to price changes. To calculate PES: percentage change in quantity supplied divided by percentage change in price. Or annotated as % Qs divided by % P or original price divided by original Qs x Qs divided by P. If PES is greater than 1, supply is price elastic. Manufactured goods. If PES is less than 1, supply is price inelastic. Natural goods. Price inelastic supply (natural Goods) and price elastic supply (manufactured goods) v perfectly price inelastic supply PES=0. Ex: number of rooms in a Hotel and limited edition. Perfectly price elastic PES=∞  Unitary price elastic supply PES=1. Only possible by coincidence. Factors affecting price elasticity of supply Unemployment/full employment in the industry The degree of spare productive capacity- PES \>1. If a firm has plenty of spare capacity it can increase supply with relative ease, without increasing its costs of production. This means that supply is relatively price elastic. The level of stocks- if stocks are available PES \>1. If a firm has unused raw materials that are available for use, then the firm is more able to respond quickly to a change in price as it can supply these stocks on to the market. The time period- short run PES \1. In the short run firms are not able to change their factor inputs, such as the size of their workforce. Hence supply is less responsive to changes in price in the short run because firms can adjust their levels of production according to price changes in the market. The labour market Wage rate is determined by the forces of demand and supply. The demand for labour is the number of workers that are willing and able to work. The demand for labour follows the law of demand. If the wage rate falls the demand for labour will increase, whereas if the wage rate increases the demand for labour will decrease. A change in the wage rate causes a movement along the demand curve. An increase in the wage rate drops the demand and vice-versa The demand for labour is a derived demand- the demand for labour is demanded for the goods and services it produces and not for itself  Example: increase in demand for chefs as more Restaurants open. A decrease in the demand for labour due to Labour being substituted by capital. The supply of labour: the supply of labour are the number of people willing and able to work at a given wage rate. Who is willing and able to work? -- people who are employed, registered unemployed and self-employed. Who is not willing and able to work? -- retired people, children, severely disabled people, full-time housewives and full-time students. The supply of labour follows the law of supply. The supply of labour will increase when the wage rate increases and decrease when the wage rate decreases. A change in the wage rate causes a movement Along the supply curve. An increase in the wage Rate increases the supply and vice-versa. An increase in the number of full/part time Workers results in a rightwards shift in the supply Curve. Factors effecting the supply of labour- the number of workers in the workforce, the official retirement age of the country, the number of workers in the workforce and the number of full-time and part-time workers in the labour force.  In the free market the wage rate will tend towards the Equilibrium. Q=0 unemployment. When the wage rate is lower than the Equilibrium there will be unfilled vacancies And when it is higher there will be Unemployment. Wage differentials: people earn different income based on the work they do. Causes of wage differentials: qualifications and level of education, level of skills and training, level of risk involved, amount of responsibility and long hours. Wage differentials within the same job: seniority and level of experience, number of hours per week, different responsibility, discrimination and career prospects. Fair trade principle four (fair payment): emphasizes the fair payment for workers. SDG 8 -- decent work and economic growth: promotes inclusive and sustainable economic growth, employment and decent work for all. Workers Non-wage factors affecting choice of career. Level of challenge, career prospects, level of danger involved, level of training, level of education, recognition in the job, personal satisfaction, level of experience Factors that influence the demand in the economy -- the level of demand in the economy, the productivity of labour and the cost of labour against the of machinery. The labour force participation rate is various between countries and depends on: the number of full/part-time workers, the number of women in the workforce, the age distribution in the workforce and the retirement age of the country. Level of welfare benefits -- if welfare benefits are high they can discourage people from working. Geographical mobility- the willingness and ability of a person to move from one part of a country to another for work. This depends on family ties and related commitments and costs of living Occupational mobility: refers to the extent to which a person can change jobs. Relative bargaining power: the ability of workers to achieve higher wages depends partly on the ability to negotiate with their employers. This is affected by: trade unions, age and experience and level of education. Definition: a national minimum wage is the lowest legal age a firm can pay its workers and is set by the government. Advantages of the minimum wage: a liveable wage, unemployed people have incentives to work, low income earners have more money to spend. Disadvantages of the minimum wage: workers who earn minimum wage might request higher wages. Reasons for differences in earning: skilled and unskilled workers, primary, ~secondary~ and tertiary workers , male and female workers and differences between public and private sector workers. Division of labour: workers being expert in a particular production process. Specialisation of labour: workers being expert in a particular profession. The property market The property market constitutes of the demand created by the buyers and the supply created by the property owners The factors affecting the demand for property are: the price of property, the consumers income, interest rates on loans, population size, government policies, economic conditions of the country. What are the factors affecting the supply of property: amount of land available, costs of production, time, government policies. If there is a change in a non-price factor for property a shift occurs in the supply/demand curve for property. Private sector: economic activity of private individuals and firms. Main aim is to make profit. Public sector: economic activity directly involving the government. Main aim is to provide a service Market economy -- relies on demand and supply to allocate resources examples: USA, Singapore and New Zealand. Planned economy- relies on the government to allocate resources, with few resources being owned by private individuals ex: North Korea and Cuba Mixed economy- combination of planned and market economy. Some resources provided by private sector while others are provided by the government. Examples: Malta, Italy and Spain. Advantages of the market economic system Efficiency -- competition ensures private firms do what customers want Freedom of choice -- individuals can choose which goods and services to purchase and what career to pursue Incentives -- profit motive for firms and possibility to earn unlimited wealth create incentives to work hard Disadvantages of the market economic system Wasteful competition -- competition can mean firms use unnecessary resources, such as excess packaging and advertising clutter. Income and wealth inequalities -- in a market economy the rich have more economic freedom Social hardship -- the absence of government control means that public goods may not be provided. Environmental issues -- such as resource depletion, pollution and climate change. Advantages of a mixed economic system Necessary services are provided for everyone while most other goods and services are competitively marketed. Producers and workers have incentives to work hard, to invest and to save. There is large degree of economic freedom with plenty of choice for private individuals and firms. Disadvantages of a mixed economic system Consumers still pay higher prices due to the profit motive of private sector businesses. Public sector activities must also be funded by taxes and other government fees and charges. Market Failure Market failure occurs when the market forces of demand and supply are unsuccessful in allocating resources efficiently and cause external costs or benefits. Private and social costs Private costs of production and consumption are the actual of a firm, individual or government External costs are the negative side effects of production and consumption incurred by third parties for which no compensation is paid Social costs are the full costs of consumption or production to society as a whole Social costs = private costs + external costs (negative externalities) Other examples of external costs are: air pollution caused by a factory, noise pollution from a nightclub, cigarette smoke, advertising clutter and litter. Private benefits are the benefits of production and consumption enjoyed by a firm, individual or government External benefits are the positive side effects of production or consumption experienced by third parties for which no money is paid to the beneficiary. Social benefits are the full benefits of consumption or consumption. Social benefit = private benefit + external benefit Causes/examples of market failure Public goods are goods which are non-excludable and non-rivalrous. Examples of public goods: street lighting, road signs, lighthouses and public roads Merit goods are those goods or services which when consumed create a positive spillover effect in an economy. Examples of merit goods: education, healthcare services, vaccines, museums and public libraries. Demerit goods are those goods or services which when consumed create a negative spillover effect in an economy. Examples of demerit goods: cigarettes, alcohol, junk food and gambling. Abuse of monopoly power: without government control, certain private sectors firms could become monopolies and exploit their market power by charging higher prices or reducing supply/ Factor immobility: this occurs when it is difficult for factors of production to move or switch between different uses or locations. The types of factor immobility are geographical immobility and occupational immobility. Government intervention to address market failure Maximum price occurs when the government sets a price below the equilibrium price to encourage consumption. Ex of price ceiling are a face shield during covid Minimum price occurs when the government sets a price above the equilibrium price to encourage supply. Ex of minimum price is the national minimum wage. Indirect taxation: placing an indirect tax on demerit goods such as cigarettes, with the aim of reducing demand. Subsidies: Governments provide subsidies to encourage the consumption of certain goods and services Rules and regulations: governments impose rules and regulations in an attempt to solve market failure. For example, imposing laws on the minimum age that people can buy cigarettes or alcohol. Smoking is also banned in public places. Education: the government can insist that schools educate students about the negative side effects of smoking and passive smoking. Privatisation is the transfer of ownership of assets from the public sector to the private sector. The relevant SDG'S SDG 13: Climate action -- take urgent action to combat climate change. Possible government measures- subsidies and grants on solar panels, BCRS system SDG 14: life below water -- conserve and sustainably use the oceans, seas and marine resources for sustainable development. Possible government measures- policies against overfishing, reduce use of plastic by consumers and producers. SDG 15: life on land -- protect, restore and promote sustainable use of terrestrial ecosystems, manage forests, combat deforestation and halt land degradation. Possible government measures- laws and regulations; market-based strategies to discourage overdevelopment of land. SDG 8: decent work and economic growth -- promote sustainable, inclusive and sustainable economic growth, full and productive employment and decent work for all. Possible government measures -- encouraging the consumption and production of renewable energy.