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Supply and Demand, the Market mechanism

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Q51Which of the following are explanations for the positive relationship between price and the quantity supplied? 1. Costs tend to rise over time.

2. As prices rise, producers find it is worth incurring the higher costs of producing more

3. At higher prices it is worth using additional less productive factors of production.

4. Technological improvements mean that more can be produced and this in turn will affect prices.

5. As consumers offer higher price for a good or service the more profitable it becomes to supply.


All the above


Q52. A right shift in supply good can occur when:


1. The costs of production decrease

2. Incumbent firms increase their capacity by investing in new capital equipment

3. New firms enter the market

4. The price of a substitute goods fall

5. Suppliers of the good expect the price of the good to fall


1, 2, and 3


Q53 Which of the following will NOT cause a shift in the demand curve for DVDs?

The invention of better ways to record and store music

Q54. Which of the following could account for a rise in the price a good and a drop in the quantity of the good bought and sold over a period of time?

A prolonged strike by workers who make the product.


Q55 Good B is a by-product of producing Good A (i.e. they are in joint supply). All other things being equal, what will happen in the market for Good B if the demand for Good A fell?


There would be a glut of Good B; therefore to clear this surplus the suppliers of Good A would reduce production of Good A.

Q56 In the diagram below, the demand for a given good has shifted left (from D’ to D), the original market price was £1.50 for this product. Given this change in demand which of the following is likely to occur?

There will be a surplus of 10 units; equilibrium will only be restored at a market price of £1.00, where the quantity demanded and supplied equals 10 units per time period.

Q57A category 5 hurricane hits Louisiana, USA and causes widespread destruction to the state’s sugar cane crop. The devastation causes the


supply curve for sugar to shift to the left, causing the price of sugar to rise

Q58 Markets A & B are related in that the products are substitutes (e.g. tea and coffee), there is freedom of entry into both markets. Assume that producers of product B find that their costs of production raise and therefore increase their selling price. Under these circumstances which of the following is correct?


1. The supply curve for product B will shift left up along the demand curve for product B

2. The supply curve for product B will shift left up along the demand curve for product A

3. The rise in the price of product B will see the demand curve for product A shift left

4. The rise in the price of product B will see the demand curve for product A shift right, the price of product A will rise.

5. Over the long-term (all other things being equal), the price of product A will remain high.

1, 4, and 5 are correct

Q59 In 2007, India switched from being an exporter of wheat to the world markets to becoming an importer of wheat. This change would cause which of the following occur?

The supply curve for wheat on the world markets would have shifted left, with no change in demand, resulting in a rise in the world price of wheat.

Q60 If the supply and demand curves for a particular product both shift left (i.e. there is a decrease in both the quantity demanded and supplied) we can comnclude which of the following:


The quantity demanded and supplied must fall, but the equilibrium price may rise, fall or remain constant.


Q61 In a free-market economy, externalities refer to which one of the following?


The conditions (environmental or economic) that are beyond the control of firms and consumers


Q62 A negative externality from consumption occurs when the consumption of a given good or service imposes a cost on others. Which of the following would potentially cause a negative externality from consumption?


1. Smoking

2. Fitting double-glazing 3. Binge drinking 4. Eating unhealthy food

5. Buying a vaccine 6. Cycling to work 7. Attending a premier league football match


A) 1, 3, 4 and 7


Q63 Which of the following might represent a negative externality from production?

1. Using a higher proportion of part time employees.

2. Discharging untreated effluents from production directly in to the environment. 3. Outsourcing production to overseas suppliers who use cheap labour. 4. Operating plant & heavy machinery around the clock near residential areas. 5. The selling of untested products. 6. Selling contaminated food products.


And 4 only



Q64 Which of the following are incorrect?


A)Private benefits are received directly by the parties involved in a market transaction.

B)Private costs are incurred directly by the parties involved in a market transaction.

C)Those parties not involved in a market transaction receive social benefits directly & indirectly.

D)Social costs are things like taxation and local council rates.

E)Externalities occur through a failure of the pricing mechanism to reflect the true cost or benefits of a market exchange.

Q65 With respect to marginal social costs (MSC) and marginal social benefits (MSB), which of the following statements are incorrect?


1. MSC equals the additional cost to society of doing more or less of a given economic activity; it includes the private costs plus the social costs.

2. MSC equals the negative costs to society of a given activity; to find the total cost to society (of any given activity) we have to add the private costs to MSC. 3. To appreciate the extent of a negative externality, at a given output we can deduct the private costs from MSC.

4. MSB equals the additional benefit to society of any given economic activity, if positive externalities are depicted using a diagram, MSB would have a value which was higher than the private benefits. 5. MSB includes the private benefits plus the social benefits of any given economic activity.

6. In stating an activity generates a social dis-benefit we are in fact saying the activity is incurring a social cost, which would then be included in any value for MSC.

A)3 and 4 are incorrect

B)1 and 5 are incorrect

C)2 and 6 are incorrect

D)Only 2 is incorrect

E)Only 4 is incorrect

Slaughter house and processing plant

Feed lots
Q66 Eric Schlosser (2001) in his book, 'The Fast Food Nation' describes how the use of vast feed lots have revolutionised beef production in the USA (pp 201-204). For three months prior to slaughter up to 100,000 cattle will be corralled in feed lots which are next to the processing plants (see picture left). During this time the steers will be fed more than 3000 lbs of grain feed and will put on just 400 lbs in weight, in the process each steer will deposit 50lbs of manure and urine a day. In the processing plant, the slaughtered beast is "dis-assembled" (page 152) on a production line, where the skilled tasks of the traditional butcher have been reduced to simple tasks performed by a series of unskilled and non-unionised workers. In terms of externalities, which of the following are the likely consequences of this whole process?



A)Contaminated meet

B)Contamination of the local water supply and a smell of epic proportions.

C)Cheaper hamburgers

D)Industrial injuries and death

E)Higher unemployment of skilled workers

Q67 When modelling a negative externality of production, and assuming no externalities of

consumption, the diagram below would be labelled in which of the following ways?

A)A = Price, B = MSB, C = Private Costs (or, MC), D = Private Benefits (or, MU),

E = Quantity.


B) A = Price, B = MSC, C = Private Costs (or MC), D = Private Benefits (or MU), E = Quantity.


C)A = Price, B = MSC, C = Private Costs

(or, MC), D = MSB, E = Quantity.

D)A = Quantity, B = MSC, C = Private

Benefits, D = Private costs, E = Price.

E)A = Price, B = MSC, C = Private Benefits

D = Private Costs, E = Quantity.

Q68 Given the wide spread nature of negative externalities, to correct for negative externalities in market economy governments can realistically do which of the following?

A)Fine the companies concerned.

B)Close down the firms responsible for creating the negative externalities

C)Tax the good and/or regulate its production.

D)Lodge a formal complaint with the World Health Organisation (WHO)

E)Run advertising campaigns to discourage people buying goods whose production generates negative externalities

Q69 In the context of positive externalities, governments may wish to subsidies goods that provide a social benefit, in this case subsidies will:


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