Economics Mid Term Revision

• Define the basic economic problem

  How individuals and firms allocate limited resources to satisfy unlimited wants
• What are the factors of production?

  Land, Labour, Capital, Enterprise
• What is opportunity cost?

  The next best alternative forgone when making a decision
• What does a point on the PPC curve indicate?

  sufficient as resources are fully utilised
• What does a point inside the PPC curve indicate?

  inefficiency, as resources are not fully utilised
• What does a point outside the PPC indicate?

  scarcity, as resources are insufficient
• What does an outward shift of the PPC indicate?

  new resources, technological advancements and higher labour productivity
• What does an inward shift of the PPC curve indicate?

  War, adverse weather conditions and natural disasters
• What is consumer sovereignty?

  The demand of consumers control the output of producers
• What is a free good?

  A good that has no cost or price attached to it
• What is an economic good?

  A good that has a price attached to it as resources are scarce
• What is a capital good?

  A good that is used by firms during the production process to produce other goods
• What is a free market?

  An economic system where prices are determined by supply and demand without government intervention.
• What is a command market?


  An economic system in which the government controls the production and distribution of goods and services.
• What is a mixed market?

  An economic system that combines elements of both a market economy and a planned economy. Public and private sectors combine.
• What is the difference between individual demand and market demand?

  Individual demand refers to the demand of a single buyer while market demand is the total quantity demanded by all buyers in the market
• What does the law of demand state?

  An increase in price results in a decrease in quantity demanded and vice versa.
• What are the factors affecting demand?

  Price of other products, changes in preferences, population size and expected prices of future products.
• What does the law of supply state?

  An increase in supply results in an increase in quantity supplied and vice versa.
• What are the factors affecting supply?

  Cost of production, availability of resources, climate, taxes and subsidies.
• Define the term 'equilibrium'

  It is the equality between demand and supply in which the quantity that producers wish to supply is equivalent to the quantity that consumers wish to buy at that price.
• What is Price Elasticity of Supply?

  It measures the responsiveness of the quantity supplied of a good to a change in its price.
• What is the general formula for PES?$(Q2-Q1/Q1 *100) / (P2-P1/P1 * 100)$
• What does PES>1 indicate?

  PES is elastic as producers are able to increase output with minimal change in price
• What does PES<1 indicate?

  PES is inelastic as a change in price results in a smaller percentage change in output produced.
• What does PES=∞ indicate?

  PES is perfectly elastic as any change in price leads to no quantity supplied at all.
• What does PES=0 indicate?

  PES is perfectly inelastic as any change in price has no effect on quantity supplied.
• What does PES=1 indicate?

  PES is unitary as a change in price results in the same change in quantity supplied.
• What are the factors affecting PES?


  Time period, availability of resources, spare capacity and ability to hold stock.
• How might the knowledge of PES be useful to the producer/government?

  The knowledge of PES can be useful to predict how a change in price affects the quantity traded.