Feb/March 2024

What leads economic agents to make decisions?

The nature of the economic problem

The table sets out information on four financial institutions. Which one is most likely to operate as a commercial bank?

Money and banking

Which situation shows a forwards vertical merger?

Firms

The diagram illustrates the demand for, and the supply of, labour for farm workers. The starting equilibrium is X. What will the new equilibrium be if labour productivity rises?

Workers

Which service is most likely to be provided by a small business?

Firms

If a business makes 100 units, its total variable cost comes to $1000 and its total fixed cost is $4000. What is the business’s average total cost?

Firms’ costs, revenue and objectives

When the product is sold at $5, weekly demand for a firm’s product is 1000 units. If the price increases to $10, weekly demand for its product drops to 600 units. How do the firm’s average revenue (AR) and total revenue (TR) per week change when the product price increases?

Firms’ costs, revenue and objectives

A monopoly firm can often make higher profits than a firm operating in a competitive market. Which monopoly characteristic is most likely to lead to this?

Market structure

An economy is going through deflation, with output falling and unemployment increasing. Which policy measure would the government be most likely to use to correct this?

Fiscal policy

What is expected to rise as the economy grows?

Economic growth

An economy is experiencing a high inflation rate. Which monetary policy measure should be used to lower inflation?

Monetary policy

A government states that it plans to allocate an extra $\$10\text{bn}$ to healthcare, with this being funded by lower expenditure on defence. What economic concept is shown by this choice?

Opportunity cost

Three policy-measure statements are shown below. Which supply-side policy measures would allow the government to make the distribution of income more equal?

Supply-side policy

In a mixed economy, the government supplies some goods that markets are unable to provide. What is the term for these goods?

Market failure

Which one of these people would be classified as unemployed?

Employment and unemployment

The table gives the weights assigned to four items in a country's Consumer Prices Index for year 1 and year 2. Which conclusion can be drawn?

Inflation and deflation

The table gives the percentage (%) of income received by different household income groups in a country in two years. What conclusion can be drawn about the change across the period?

Living standards

An economy is experiencing a rapid increase in population. What is the most likely reason for this?

Population

What is the most probable reason for a rise in poverty in developing economies?

Poverty

Two countries want to use their scarce resources to specialise in production and trade with each other. In what conditions is this most likely to occur?

International specialisation

What is one likely effect of introducing a tariff?

Globalisation, free trade and protection

The diagram depicts the foreign exchange market for the Singapore dollar (S$) exchanged for the United States dollar (US$). The starting equilibrium point is at X. In the next month, Singapore buys more goods from the US, while Singapore exports to the US remain unchanged. What is the new equilibrium point?

Foreign exchange rates

The diagram illustrates a production possibility curve (PPC) for digital televisions and CD players. Which movement indicates a rise in the use of existing resources to raise production of both digital televisions and CD players?

Production possibility curve (PPC) diagrams

What items are recorded in the primary income section of the current account of the balance of payments?

Current account of balance of payments

The diagram illustrates points lying on two demand curves. Which movement from one point to another indicates a contraction in demand?

Demand

Which factor would not lead to a shift in the supply curve?

Supply

For health reasons, consumers choose to eat more vegetables and less meat. What price signals would the market system transmit to reallocate resources so that consumers obtain what they want?

The role of markets in allocating resources

What is one probable advantage of a country changing from a mixed economy to a market economy?

Market economic system

What is an external cost associated with smoking cigarettes?

Market failure

A business is considering raising the price of its product to twice the current level. Which price elasticity of demand (PED) for the product would lead to the largest increase in revenue?

Price elasticity of demand (PED)

Study the source material closely before you answer Question 1. Denmark is a North European, high-income country. Danish people enjoy high living standards and relatively long leisure time. They use this time in many different ways, such as cycling, jogging and playing golf. Danish workers are employed across a variety of industries. Denmark was once a major shipbuilding nation, but that industry is now shrinking. Ships have substitutes in other forms of transport. In addition, it may be possible to delay buying ships, they take a long time to build and they are costly to keep in storage. By contrast with shipbuilding, the Danish toy industry has expanded in recent years. Denmark’s shipbuilding and toy industries belong to the private sector. Changes in the public sector also affect Denmark’s economic performance. Table 1.1 shows Danish government spending and GDP between 2015 to 2021. Denmark is strongly involved in international trade. It usually records a surplus on the current account of its balance of payments. International trade influences the availability of goods in the country and its foreign exchange rate. It also affects the country’s GDP and employment level. As in most countries, the way people work in Denmark has altered in recent years. More people now spend at least part of their working hours working from home. This change is expected to influence productivity and help firms retain their workers. Households may be encouraged to move away from cities and purchase larger homes. There may also be changes in demand for transport, demand for food sold in city centres and firms’ need for office space.

Price elasticity of supply (PES)

From 2016 onwards, South Korea’s population has been falling because the birth rate has dropped, and a large share of its people are now aged over 64. The South Korean government has used tax revenue to provide cash payments to couples so that they will have more children. Even so, many parents have decided to have fewer children and to spend more on each one so that they receive a good education. South Korea now has fewer schools, but each school is larger.

Population

Several firms in Monaco have already expanded through external growth. Wages in Monaco are high. Workers there also gain from fiscal policy that helps to keep employment high. The government does charge VAT on food, including fruit. Some economists have argued that, rather than taxing fruit, governments ought to give consumers free fruit.

Fiscal policy

In 2021, one of the world’s largest container ships blocked the Suez Canal. As a result, some firms saw profits fall and a shortage developed for several products. Delivery of luxury chocolate and salt, for instance, was delayed. These two goods differ in their price elasticity of demand. The interruption to international trade created particular problems for countries that import most of the food they eat.

Price elasticity of demand (PED)

New Zealand is a high-income country with a low unemployment rate and imports that exceed exports. More recently, its government has taken some significant economic decisions. In 2022, it prohibited anyone born after 2008 from buying cigarettes. The year before that, it allowed firms to explore for oil in the country.

The role of government