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Explain two causes of price inflation

One cause of inflation is due to the wage rate increasing at a faster rate than output. The cost of production for firms increases and to maintain profits they are likely to raise prices. When the prices rise, wage increases are demanded by employees to maintain their standard of living. This subsequent increase in wages … Read More»

Discuss the view that nationalisation of the railway services in the UK would be beneficial for consumers.

[This is an exam style essay question, with the response being just one paragraph of multiple the student would have to write]One significant advantage to UK consumers of nationalising railway services could be that greater levels of economic efficiency, and in particular dynamic efficiency, would be achieved, allowing for lower prices and consumer welfare gain. … Read More»

Why is the marginal cost curve shaped the way it is?

First of all let’s define Marginal Cost:-It is the cost to a firm to produce one additional unit of output e.g. the cost of Volkswagen to produce an extra carInitially due to the law of increasing marginal returns (extra unit of input produces a more than proportional amount of output) the MC curve dips. However, … Read More»

What is the difference between the RPI and CPI rate of inflation

Both the Consumer Price Index (CPI) and Retail Price Index (RPI) are ways of measuring inflation which is the average change in price of a basket of goods. The RPI, however, includes the costs of housing such as mortgage mortgage repayments, rent and council tax, which take up a large proportion of someone’s income. The … Read More»

What are the factors affecting Cross-Price Elasticity?

First, it is important to understand the difference between own price elasticity and cross-price elasticity.Own price elasticity concerns about the responsiveness of the the quantity demanded of good X to a change in its own price; while cross-price elasticity concerns with the responsiveness of demand of good X to a change in price of good Y.So the size of cross-price … Read More»

Can you explain the concept of the Price Elasticity of Demand?

The price elasticity of demand, also known as PED for short, is a measure of how responsive consumers of a product are to a change in price. In a competitive business market, its important for producer to be aware of the PED of their product, so that they can make decisions that will maximise their … Read More»

Explain how a reduction in interest rates affect AD.

Interest rates are the cost of borrowing money expressed as a percentage of the amount borrowed. A reduction in the bank rate by the MPC (Monetary Policy Committee) would result in banks offering lower interest rates to consumers as the cost of them borrowing money would decrease. As such, this would decrease the cost of … Read More»

Explain using a diagram the price/output of a firm competing in a perfectly competitive market during the long run. Is this equilibrium point beneficial?

A firm competing in a perfectly competitive market is considered a price taker and is unable to set their own prices due to characteristics such as selling homogeneous goods with many buyers and sellers , therefore they must set the price of goods/services equal to the markets demand, which is a perfectly elastic curve meaning … Read More»

Evaluate whether globalisation must benefit everybody

Here is how I would set out an answer for this question:Define the term globalisation, and the word everybody (put it into economic terms, e.g. individuals, large/small firms, developed/developing countries)Choose one of the following above (e.g. large vs. small firms), and say how it benefits them and how it does not. e.g. Globalisation has enabled … Read More»

Why are market-based policies not always the best way to solve the issue of unemployment?

The market based policies aimed at reducing the unemployment include reducing the unemployment benefits, which should motivate the unemployed to take up the already existent vacancies, or removing legislations businesses must follow while employing workers, helping companies employ people more freely and increasing the general “labour market flexibility”. While effective to some extent it is … Read More»

How would an increase in interest rates impact aggregate demand

An increase in interest rates would impact aggregate demand (AD) by impacting consumer spending, business investments and exports-imports. When interest rates rise borrowing becomes more expensive and saving become more profitable. Therefore, if interest rates were to increase we would expect to see both businesses and consumers borrowing less and spending more. This in turn … Read More»

What does consumer surplus mean?

Consumer surplus can be thought of as the feeling of getting a really good deal or a bargain. It happens when you would have been willing to pay an amount for something but the price was actually lower. What happens here is that your value of the good (what you were willing to pay) is … Read More»

Should maximising profits be the main objective of a business?

In order to answer, one should consider the benefits of profit maximisation. These may include: satisfying shareholders, using money for savings in order to stay afloat, reinvesting profits into technology (among others). In addition, one should also consider alternative objectives which major businesses instead employ, such as sales maximisation (this is Amazon’s stated goal)or revenue … Read More»

What does the term Aggregate Demand mean and how is it calculated?

Aggregate Demand or AD is the total cumulative demand of an entire economy. This comprises demand for all goods and services that are sold within this economy.It is calculated using the formula AD = C+I+G+(X-M)C represents the consumption component of AD, this is the entire level of consumption of an economy i.e. goods and services … Read More»

How do higher interest rates affect economic growth

Higher interest rates affect economic growth in several ways. It is important to note that interest rates fall into the category of monetary policy, that is policy that is set by the central bank. It is the primary policy tool that the central bank (e.g. the Bank of England or Federal Reserve) have of driving … Read More»

What is division of labour, and why do businesses utilise it?

Division of labour is a kind of specialisation in relation to employees, involving splitting the process of production into various different tasks, with an employee assigned to each one. These workers combine to make the final product. In the area of services, the same idea applies – for example, when you go to a restaurant … Read More»

Describe a cost and a benefit of globalisation for the UK. (5 marks)

Globalisation is the process in which economies have become increasingly interconnected and interdependent.One benefit of globalisation for Uk consumers is the availability of a larger and cheaper range of imported goods and services. Therefore consumers will have a larger purchasing power parity due to the lower prices and consequently have a higher standard of living.On … Read More»

Explain how the use of fiscal policy can stimulate economic growth

This is a classic higher economics question.Economic growth is an increase in the value of goods and services produced in an economy within a period of time.Fiscal policy is the use of government spending and taxation to achieve government aims.first examine final policy through an increase in spending: Increase spending would increase circular flow of … Read More»

What is the basic economic problem?

The basic economic problem finds that demand is infinite whilst resources are scarce:Infinite Demand + Scarce Resources = The Basic Economic Problem Demand refers to a consumer wanting to buy a particular good/service. Total demand (in an economy) is often infinite due to consumers’ infinite wants. We always seem to want more. Scarcity is the … Read More»

Distinguish between disinflation and deflation

Disinflation is a fall in the rate of inflation. I.e. it is when the rate at which the general price level increases falls.Deflation, on the other hand, is sustained fall in the general price level in an economy over time.

What is the difference between fiscal and monetary policy?

Fiscal policy concerns changes in levels of taxation and government spending, whilst monetary policy concerns changes in the interest rate. These are both tools used by the government/ central bank to influence key macroeconomic indicators.The purpose of fiscal policy may be to influence aggregate demand, since taxation affects aggregate demand through consumption and investment, and … Read More»

How does a change in interest rate impact aggregate demand in an economy?

The components of aggregate demand are: consumption, investment, government spending and net exports. An increase in interest rate makes it more attractive to save money (not spend) and less attractive to borrow as the payback rate will be higher; therefore consumption in the economy falls. A higher interest rate will also decrease investment in the … Read More»

What are internal economies and diseconomies of scale?

Internal economies of scale are when a firm’s long run average costs (LRAC) decrease due to increase in output/production.*This will then be shown via the LRAC decreasing and then increasing diagram.Internal economies of scale are usually of 6 types: Risk-bearing, Managerial, Financial, Purchasing, Technical, and Marketing. (I make this easy to remember by using Richard’s … Read More»

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