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Summary ALL A LEVEL MICROECONOMICS TOPICS - questions and answers
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Microeconomics questions + answers1) Scarcity & choice
1.1) BASIC ECONOMIC PROBLEM
Q: What is the basic economic problem?
A: There are unlimited wants and needs but limited resources, so how can these
resources be distributed most effectively?
Q: What are positive and normative statements?
A: Positive statements – objective statements that can be tested by referring to the
available evidence (e.g. a reduction in income will increase the amount of people
shopping in pound shops)
Normative statements – subjective statements that contain a value judgement
(opinions) (e.g. fossil fuel users should be taxed more highly)
Q: What is meant by opportunity cost?
A: the cost of any choice in terms of the next best alternative forgone
Q: What is the difference between command and free market systems in terms of
resource allocation?
A: In a command economy, macroeconomic and political considerations (the state)
determine resource allocation, whereas, in a market economy, the profits and losses
of individuals and firms (market forces) determine resource allocation.
Q: What is the invisible hand and how does the price mechanism allocate resources?
A: a metaphor used by Adam Smith to describe how free markets (the price
mechanism) will determine an equilibrium in the supply and demand for goods, which
at this point, resources will be allocated from.
Q: What are the benefits and limitations of allocating resources using the price
mechanism?
A:
benefits Costs
Shortages do not occur because the price Does not consider irrational behaviour -
mechanism rations demand. invisible hand suggests consumers and firms
Entrepreneurship are rational. However, in industries, such as
Increased choice finance we can see individuals get carried
Efficiency - Private business will follow their away with irrational exuberance. Leading to
profit motive to find the most efficient use of booms in asset prices – and prices distorted
investment funds. from economic realities
Those with wealth, will be led by some Capitalist inequality / selfish actions /
invisible force to redistribute their wealth – externalities
either through charity or paying workers The tragedy of the commons. This is a
higher wages / trickle-down economics situation where people pursuing self-interest
can lead to depletion of natural resources
Free trade is beneficial. Free trade enables Monopoly power - Without sufficient
firms to specialise in goods where they have competitive pressure, firms could become
a comparative advantage. stagnant, inefficient and exploit customers
through higher prices.
1.2) ppfS
Q: What is a PPF and how does it illustrate scarcity/limited resources? Opportunity
cost?
A: Production Possibilities Frontier (PPF) shows the maximum possible output of two
goods/service an economy can achieve when all resources are efficiently employed. It
shows the opportunity cost of different levels of production for certain goods.
Q: Why are PPFs drawn as curves? What would a straight line PPF imply?
A: Curved PPF - increasing opportunity cost that comes with switching the production
from one good to another
Linear PPF – there is a constant opportunity cost / marginal gain when switching
production between goods due to perfect factor substitutability.
, Q: What is the law of diminishing marginal returns?
A: a theory in economics that predicts that after some optimal level of capacity is
reached, adding an additional factor of production will actually result in smaller
increases in output.
Q: Can you apply the law of diminishing marginal returns to your explanation of the
concave shape?
A: Some factors of production are better suited to producing some goods more than
others. When switching from the production from one good to another, increasingly
smaller gains will be made
Q: Why might a PPF shift outwards? Why might it pivot? Why might it shift inwards?
A: Outwards –long run economic growth (the quantity / quality / efficiency of the
factors of production increase)
Pivot – caused by a change in the productivity of only one good or service (long run
economic growth for the production of one of the goods)
Inwards – damage to long term growth (the quantity / quality / efficiency of the factors
of production decrease)
Q: What does a movement to a point inside a PPF mean? What about a movement
around the existing PPF?
A: Inside curve = there are idle factors of production / space capacity / inefficiency
Movement outside of the curve = unattainable
Q: What is the difference between actual and potential economic growth? How can
this be shown using a PPF?
A: Actual growth – growth of real output by using idle/unemployed resources (the
reality A to B)
Potential Growth – if all factors of production were used (productive potential C to D)
Q: What is the difference between capital and consumer goods?
Capital goods –products bought by consumers (e.g. food / clothes)
Consumer goods – products used in the production process of other goods (e.g.
machinery / tools)
1.3) specialisation & THE DIVISION OF LABOUR
Q: What is specialisation?
A: a particular area that a worker, firm, region, or country concentrates their resources
on.
Q: What is the division of labour?
A: A type of specialisation where tasks are divided between workers so that different
stages of the production process are conducted by different individuals.
Q: What is the significance of specialisation at an individual, national and
international level?
A: individual – people become specialised at a task they are best at or by doing it over
time, become better at it.
National – a region can produce more output per unit of input, giving them a
competitive advantage and allowing them to trade. Allows for job creation and GDP to
rise.
,International – international trade occurs, world output increases, more efficient
production – resources are used more effectively.
Q: What are the advantages and disadvantages of specialisation?
A:
advantages Disadvantages
Individual Individual
no risk of skills atrophy / no stress from Workers can end up doing repetitive tasks
change of routine leading to worker fatigue.
job security Risk of structural unemployment if task
specialised in is no longer in demand
Producers Producers
Specialisation increases revenues and profits Labour turnover – firms have to spend a lot
(input per unit of output falls) to recruit and train staff
Firms achieve economies of scale Risk of bankruptcy if demand changes
Increase productive efficiency
Training costs reduced if workers only
perform one task
Country Country
Brings in income (FDI / TNCs investing in Over exploitation of resources
local infrastructure) Exploitation of workers
Increased local jobs / income Profits driven back to TNC HIC
Exports rise (tax revenue rises can be re Primary product dependency – if demand /
invested into public services) prices change or fluctuate – whole nation is
at risk
Dutch disease (rapid increase in the
production of raw materials (like oil and gas)
causing a decline in other sectors of the
economy.)
1.4) rational decision making
Q: What are the features of ‘rational’ economic thinking?
A: Individuals compare the costs and benefits of possible decisions and choose the
one which maximises their utility / personal net benefit.
Q: Why is so much of economics based on these features?
A: Rational choice theory is associated with the concepts of rational actors, self-
interest, and the invisible hand.
Q: Why might individuals not act rationally in reality?
A: Imperfect information / information overload / too long to calculate cost-benefits /
altruism + loyalty / behavioural nudges / act upon emotion
2) demand & supply
2.1) Demand
Q: What is demand?
A: The quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period.
Q: What is effective demand?
A: demand backed up with the ability to pay.
Q: What is meant by a demand curve? Can you draw it?
, A:
Q: What is the law of demand?
A: a higher price leads to a lower quantity demanded and that a lower price leads to a
higher quantity demanded.
Q: What is utility? What is the principle of diminishing marginal utility? How can it
be used to explain why the demand curve is downward sloping?
A: utility - the total satisfaction or benefit derived from consuming a good or service
Law of diminishing marginal utility – the more of an item that you use or consume, the
less satisfaction you get from each additional unit consumed or used. If there are
diminishing marginal returns, then people's willingness to pay will also decline. Hence
the individual demand curve will be downward-sloping.
Q: What are the substitution and income effects? How can they be used to explain
why the demand curve is downward sloping?
A: substitution effect - the decrease in sales for a product as consumers switch to
cheaper alternatives (substitutes) when the original product’s price rises. Hence, at
high prices, there is minimal quantity demanded, as consumers have switched to
buying substitutes.
Income effect – the resultant change in demand for a good or service caused by an
increase or decrease in a consumer's purchasing power or real income. As one's
income grows, the income effect predicts that people will begin to demand more (and
vice-versa).
Q: What is the difference between a movement along and a shift in the demand
curve?
A: movement – contraction/extension along the curve – occurs when there is a change
in price, and a resultant change in the quantity demanded.
Shift – a non-price factor that impacts the willingness and ability of a consumer to buy
more or less units of a good or service at every given price.
Q: What are the factors that may cause the demand curve to shift? (PASIFIC)
A: Population – if population demand
Advertising – if advertising demand
Substitutes – if the cost and availability of substitutes are more favourable demand
Income – if disposable incomedemand
Fashion / trends – if a trend is prominent in society demand
Interest rates + availability of credit – if interest rates are low and access to credit is
easy demand
Complements – if a complementary good’s demand demand
Q: Can you show and calculate total expenditure using the demand curve?
A: price x quantity
Q: What is consumer surplus? How do you calculate it?
A: an economic measure of consumer benefit. It occurs when the price a consumer
pays is less than what they were originally willing to pay. It is always the area above
market price (equilibrium) and below the demand curve.
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