Questions and Answers of Essentials of Economics

The table shows index numbers for real GDP (national output) for various countries (2014 100). Using the formula G = (Yt – Yt–1)/Yt–1 100 (where G is the rate of growth, Y is the index
In terms of the UK circular flow of income, are the following net injections, net withdrawals or neither? If there is uncertainty, explain your assumptions.(a) Firms are forced to take a cut in
Give some examples of events that could shift (a) the AD curve to the left; (b) the AS curve to the left.
Assume that the multiplier has a value of 3. Now assume that the government decides to increase aggregate demand in an attempt to reduce unemployment. It raises government expenditure by £100
At what point of the business cycle is the country now? What do you predict will happen to growth over the next two years? On what basis do you make your prediction?
Why does a booming economy not carry on booming indefinitely. Why does an economy in recession pull out of that recession?
Imagine that the banking system receives additional deposits of £100 million and that all the individual banks wish to retain their current liquidity ratio of 20 per cent.(a) How much will banks
Would it be desirable to have zero unemployment?
Under what circumstances will a reduction in unemployment by accompanied by (a) an increase in inflation; (b) a decrease in inflation? Explain your answer.
Do you personally gain or lose from inflation?
‘The existence of a budget deficit or a budget surplus tells us very little about the stance of fiscal policy.’ Explain and discuss.
Adam Smith, the founder of modern economics, remarked in The Wealth of Nations (1776) concerning the balancing of budgets, ‘What is prudence in the conduct of every private family can scarce be
Imagine you were called in by the government to advise on whether it should attempt to prevent cyclical fluctuations by the use of fiscal policy. What advice would you give and how would you justify
When the Bank of England announces that it is putting down interest rates, how will it achieve this, given that interest rates are determined by demand and supply?
How does the Bank of England or another central bank attempt to achieve the target rate of inflation of 2 per cent? What determines its likelihood of success in meeting the target?
To what extent did central banks face a dilemma in 2008, when faced with rising inflation and the onset of recession?
What is meant by a Taylor rule? In what way is it a better rule for central banks to follow than one of adhering to a simple inflation target?
Under what circumstances would adherence to an inflation target lead to(a) more stable interest rates,(b) less stable interest rates than pursuing discretionary demand management policy?
Define demand-side and supply-side policies. Are there any ways in which such policies are incompatible?
Why might it take time for the benefits of supply-side policies to become evident?
What types of tax cuts are likely to create the greatest(a) incentives,(b) disincentives to effort?
Imagine that you are asked to advise the government on ways of increasing investment in the economy. What advice would you give and why?
How can increasing the effectiveness of labour improve both the productivity of labour and the productivity of capital?
Use the graph to answer the following questions.a. If the government takes no policy actions, what will be the values of real GDP and the price level in 2021?b. What actions can the government take
Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 3.Question 3Give an example in which one person has an
What is investment? How is it related to national saving?
The efficient markets hypothesis assumes that people buying and selling stock rationally process the information they have about the stock’s underlying value.But is the stock market really that
As an illustration of the difficulty in identifying monopolies, try to decide which of the following are monopolies: a train operating company; your local evening newspaper; the village hairdresser;
Will competition between oligopolists always reduce total industry profits?
In which of the following industries is collusion likely to occur: bricks, beer, margarine, cement, crisps, washing powder, or carpets? Explain why.
Draw a diagram like that in Table 5.3, only this time assume that there are three firms, each considering the two strategies of keeping price the same or reducing it by a set amount. Identify the
Having watched the clip from the film A Beautiful Mind, can you work out why the situation that Russell Crow described as being a ‘Nash equilibrium’ is actually not a Nash equilibrium?
Consider the following sequential game. Mr. New-Entrant is about to enter a market where there is an established firm run by Mrs. Incumbent. Mr. New-Entrant has to decide whether to enter the market
Since advertising increases a firm’s costs, will prices necessarily be lower with sales revenue maximisation than with profit maximisation?
Compare and contrast the relative strengths and weaknesses of the partnership and the public limited company.
Choose a well-known company that trades globally and do a Web search to find out how well it has performed in recent years and how it has been influenced by various aspects of its business
Explain why the business objectives of owners and managers are likely to diverge. How might owners attempt to ensure that managers act in their interests and not in the managers’ own interests?
1. In what ways did the defence industries respond to the ending of the Cold War? 2. Using an Internet search, find out how the defence and security industries have responded to the threat of
What is the Standard Industrial Classification (SIC)? In what ways might such a classification system be useful? Can you think of any limitations or problems such a system might have over time?
What challenges is Lidl likely to face in the coming years?
Consider a country other than the UK and investigate the changes in its industrial structure. Are the changes similar to or different from those in the UK?
Give some examples of things we might learn about the likely behaviour and performance of businesses in an industry by knowing something about the industrial concentration of that industry.
Outline the main determinants of business performance. In each case, explain whether it is a micro- or macroeconomic issue.
1. There is a saying in economics, ‘There’s no such thing as a free lunch’ (hence the sub-title for this case study). What does this mean?2. Are any other (desirable) goods or services truly
Virtually every good is scarce in the sense we have defined it, but are water and air exceptions? If they are not scarce, explain whether it would be possible to charge for them. Does the way in
Which of the following are macroeconomic issues, which are microeconomic ones and which could be either depending on the context?(a) Inflation.(b) Low wages in certain service industries.(c) The rate
1. What might prevent you from making the best decision?2. If there are several other things you could have done, is the opportunity cost the sum of all of them?3. Why is the cost of food not
Make a list of three things you did yesterday. What was the opportunity cost of each?
Which of the following are positive statements, which are normative statements and which could be either depending on the context?(a) Cutting the higher rates of income tax will redistribute incomes
Provide some examples of choices that (a) individuals (b) firms and (c) governments had to make during the pandemic. Why were they economic choices?
How would you use the principle of weighing up marginal costs and marginal benefits when deciding whether to (a) buy a new car; (b) study for an extra hour? How would a firm use the same principle
We discuss COVID-19 at points throughout this textbook, but for now, provide a general outline of how a firm and/or industry of your choice has been affected by it.
Referring to Table 2.1, assume that there are 200 consumers in the market. Of these, 100 have schedules like Elizabeth’s and 100 have schedules like John’s. What would be the total market demand
Refer to the list of determinants of demand. For what reasons might the demand for sofas from DFS fall? Is the recession relevant here?
Why do the prices of fresh strawberries fall when they are in season? Could an individual producer prevent the price from falling?
Refer to the list of determinants of supply (see pages 333–4). For what reasons might(a) the supply of potatoes fall;(b) the supply of leather rise?
This question is concerned with the supply of oil for central heating. In each case consider whether there is a movement along the supply curve (and in which direction) or a shift in it (and whether
The price of cod is much higher today than it was 30 years ago. Using demand and supply diagrams, explain why this should be so.
What will happen to the equilibrium price and quantity of butter in each of the following cases? You should state whether demand or supply or both have shifted and in which direction:(a) a rise in
The weekly demand and supply schedules for red dresses (in millions) in a free market are as follows:Price (£)87654321Quantity demanded68101214161820Quantity supplied1816141210864(a) What is the
Why does price elasticity of demand have a negative value, whereas price elasticity of supply has a positive value?
Rank the following in ascending order of elasticity: jeans, black Levi jeans, black jeans, black Levi 501 jeans, trousers, outer garments, clothes.
Will a general item of expenditure like food or clothing have a price elastic or inelastic demand? Explain.
Assume that an iPhone currently sells for £200 and at this quantity, 10 million units are purchased. The price now falls to £170. If the price elasticity of demand (using the formula: percentage
Explain which of these two pairs is likely to have the higher cross-price elasticity of demand: two brands of coffee, or coffee and tea?
Would a firm want demand for its brand to be more or less elastic? How might a firm achieve this?
How would marginal utility and market demand be affected by a rise in the price of(a) a substitute good(b) a complementary good?
How can marginal utility be used to explain the price elasticity of demand for a particular brand of a product?
Why are insurance companies unwilling to provide insurance against losses arising from war or ‘civil insurrection’? Name some other events where it would be impossible to obtain insurance.
Why might premiums for home insurance for those houses that have been flooded and remain at risk of flooding rise? Which factors have caused this change? Is there a role for the government to
How does behavioural economics differ from standard economic theory?
Does the marginal value of a variable (such as cost, revenue or profit) determine the average value of the variable, or does the average value of the variable determine the marginal value? Explain
What economies of scale is a large department store likely to experience? What about Google?
Why are many firms likely to experience economies of scale up to a certain size and then diseconomies of scale after some point beyond that?
Normal profits are regarded as a cost (and are included in the cost curves). Explain why.
What determines the size of normal profit? Will it vary with the general state of the economy?
A firm will continue producing in the short run even if it is making a loss, providing it can cover its variable costs. Explain why. Just how long will it be willing to continue making such a loss?
Would it ever be worthwhile for a firm to try to continue in production if it could not cover its long-run average (total) costs?
The price of tablet computers and digital cameras fell significantly in the years after they were first introduced and at the same time demand for them increased substantially. Use cost and revenue
Illustrate on a diagram similar to Figure 4.6 what would happen in the long-run if price were initially below PL.
In 2020, COVID-19 forced many retailers to close temporarily. This had many consequences, with some firms subsequently shutting down, closing stores, reassessing expansion plans and changing
Think of four different products or services and estimate roughly how many firms there are in the market. You will need to decide whether ‘the market’ is a local one, a national one or an
For what reasons would you expect a monopoly to charge(a) a higher price, and(b) a lower price than if the industry were operating under perfect competition?
Can you think of any studying decisions where students often change their mind with the passage of time once the costs or benefits become immediate?
What are the relative strengths and weaknesses of using (a) market observations, (b) market surveys (c) market experiments as a means of gathering evidence on consumer demand?
You are working for a recording company which is thinking of signing up some new artists. What market observations, market surveys and market experiments could you conduct to help you decide which
You are about to launch a new range of cosmetics, but you are still to decide upon the content and structure of your advertising campaign. Consider how market surveys and market experiments might be
How might we account for the growth in non-price competition within the modern developed economy?
Consider how the selection of the product/market strategy (market penetration, market development, product development and diversification) will influence the business’s marketing mix. Choose a
Think of some advertisements that deliberately seek to make demand less price elastic. How do they do this?
Imagine that ‘Sunshine’ sunflower margarine, a well-known brand, is advertised with the slogan, ‘It helps you live longer’ (the implication being that butter and margarines high in saturates
On balance, does advertising benefit(a) the consumer;(b) society in general?
Are all explicit costs variable costs? Are all variable costs explicit costs?
Roughly how long is the short run in the following cases?(a) A mobile wedding DJ;(b) Electricity power generation;(c) A small grocery retailing business;(d) ‘Superstore Hypermarkets plc’.In each
The following are some costs incurred by a shoe manufacturer. Decide whether each one is a fixed cost or a variable cost or has some element of both.(a) The cost of leather;(b) The fee paid to an
Why does the marginal cost curve pass through the bottom of the average cost curve and the average variable cost curve?
Make a list of six aims that a manager of a high street department store might have. Identify some conflicts that might arise between these aims.
When are increased profits in a manager’s personal interest?
A frequent complaint of junior and some senior managers is that they are frequently faced with new targets from above, and that this makes their life difficult. If their complaint is true, does this
Outline the main factors that might influence the size of the profit mark-up set by a business.

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