PRACTICE QUESTION 2: 5:45 starting time

a) Supply is the willingness and ability to sell a product or a service.

b) - A change in taste causing tourist destinations in India to become very popular. An

increase in income, providing people with more
- An increase in income increasing peoples’ ability to stay in these hotels and could
make them make able to afford an hotel instead of living at an apartment or guest house
- Increase in holidays means more people will visit places, increasing stay in hotels.

c) - Environmental failure, which could be due to the large amount of pollution and noise
created while constructing these hotels.
 - Immobility of some capital equipment, unemployment of workers and under-
utilisation of resources might occur if some resources cannot move.
- May lead to high levels of employment which could lead to lower unfair wages to
workers as hotels might want to reduce cost. The labour can be replaced as it is
not a very high skilled job to clean rooms and service in restaurants.

d) PES= %change in supply/% change in price= 8%/8%= 1

PED= %change in demand/% change in price= 16%/8%= 2
This data indicates that PES is unity which indicates that the percentage change in price
is equal to the percentage change in quantity supplied Demand changes more than the
change in price hence demand is elastic as the change in price has resulted in a greater
percentage change in quantity demanded.

e) The diagram below depicts that the supply has increased from S to S1 by 8% and
demand has increased from D to D1 by 16%, which is double the amount.
This has resulted in equilibrium price increasing from e to e1 and price increasing from P
to P1. the quantity of rooms has increased by 8% and moved from Q to Q1.
f) Free market economy

g) Price elasticity of supply is the degree to which the quantity supplied changes as a
result of a change in price. The time taken to accommodate people into hotel rooms and
complete financial transactions, set up bills, reserve a room or a meal plan affects the
PES of hotel accommodation. The less time it takes, the more elastic the supply is.
If it is costly to alter the supply of rooms, meals plans and overall hotel accommodation,
supply will be less elastic and vice versa.

h) Opportunity cost and producers:

-producers have to decide what to make
-producers have to decide how to efficiently allocate their resources so as to not be
punished by the market economic system.
-producers have to decide on investment and how to be dynamically efficient.
For example, a farmer who wants to grow wheat cannot keep cattle on his farm. He has
to decide where to produce his crops so that they all can grow on fertile land and are of
good quality. He also has to make sure that the land he grows his crops on does not
erode too fast and that it is properly taken care of for him to be able to grow crops in teh
future.

Opportunity cost and consumers:

-Consumers have to decide which product to be which is affected by:
-the quality of the product
-the cost of the product
For example, a person buying a pen online has to consider which one is better and
which one costs less. The consumer’s aim here is to get the best quality product for the
lowest possible price.

i) Measures by which government can regulate the private hotel industry:

- Governments need to regulate firms to prevent market failure. They want to optimise
allocation of resources and focus on the welfare of the population.
- -Price ceiling to make sure that the rooms and other accommodation services do not
cost too much.
- Regulations placed on how much waste can be generated by the hotel to prevent
environmental market failure.
Regulation to prevent information failure so that the consumers are not exploited and do
not have inaccurate as well as asymmetrical information
- Demand and supply can be controlled by either increasing taxes (increased cost of
production-demand goes down-prices decrease), or providing subsidies (cost of
production goes down-prices decrease- demand increases).

Limitations of regulating the private hotel industry:

 - Barring the entry and exit of hotel firms in the market.
- Regulations that are too restrictive might reduce market flexibility.
- If the regulations are not easily understood or are opposed by a large number of
people, imposing them will be expensive and difficult as the prosecution of
offenders will be time-consuming and the regulations will grow unpopular.

SECTION B

Q2)
a) -changes in income
b) -subsidies
c) -taxes
d) -weather conditions
e) -advertising campaigns
(Just elaborate)
f) An increase in income leads to increase in disposable income, hence consumers
have the ability to afford luxury items such as flat screen televisions. This leads
to an increase in demand from D to D1 and hence price increases from P to P1.
Quantity shifts from Qto Q1. All this leads to equilibrium price and demand
shifting from e to e1 and.

g) Price elasticity of demand is the degree to which quantity demanded changes as

a result of change in price. Demand can be elastic, which would mean that a
percentage increase in price causes a greater percentage decrease in demand
as they are inversely related and vice versa. For example, if the price of musical
instruments increases by $50, then this will cause the quantity demanded to
decrease by 30% as guitars are not a necessity. Inelastic demand is when
quantity demanded is not largely affected by changes in price. For example, if the
price of rice rises, people will not stop buying it as it is a necessity and will
continue to do so despite an increase in price. Elastic demand is greater than
one and inelastic is lesser than one.

h) Usefulness of PED to suppliers:

-Lower prices to drive other firms out of the market
-Get to know more about what the consumers demand and are able to respond to it efficiently
-Taxes are less likely to be imposed as taxes on demand with elastic demand often do not gain
as much profit and revenue compared to products with inelastic demand.
- Main factor is availability of close substitutes- regulate supply if more or less substitutes
available
- If no close substitutes, will increase price.
- If it a necessity, will increase price- government can provide subsidy also
- Addictive (eg cigarettes), demerit good however supplier will supply due to high demand.
- Purchase cannot be postponed, will increase price

Limitations of PED to suppliers:

-It is hard to predict changes in market
-If they are unable to respond to consumer demand, they can be pushed out of the market
-SInce flat screen TVs are more narrowly defined, there are more substitutes and more
competition, which increases the elasticity of demand and hence increases the risk of being
driven out of the market.
Question 4:

a) A mixed economy is an economy in which the public and private sector both play an
important role.
b) The government would regulate mergers between two companies to stop abuse of
monopoly power. Monopoly power exists when there is a single firm dominating the
market:
-It stops two firms from merging to prevent the lack of competition and incentive that
would cause them to become complacent
-They would begin to exploit consumers by charging high prices and producing low
quality products.
c) The market economic system is an economic system in which land and capital are
privately owned and resources are allocated by the price mechanism. Merit goods are
goods which the government considers the consumers do not fully appreciate how
beneficial they are and so which will be under-consumed if left to market forces. Such
goods generate positive externalities. Private firms tend to not produce them as they do
not yield as much profit and are non-excludable. This means that they cannot stop the
people who have not paid for them from using them. For example, a person cannot be
excluded from walking downa lit street.
d) Advantages:
-easy to communicate
-for the welfare of the people
-base decisions after considering costs and benefits.
-can be used to influence economic activity(increasing the output by increasing their
output)
-does not abuse market power
Disadvantages:
-might grow complacent due to lack of incentive
-large organisations might be difficult to manage and control
-need to be subsidised if they make loss which involved opportunity cost.
Practice Question:

- Age structure of a population also affects it as old people tend to dissave more,
and young people don’t have much disposable income to save as their salaries
are not very high or they tend to spend it on luxury items.
- Disposable Income-the higher the disposable income of a person is the more
they are able to save as the money they don’t spend on consumption.
-Higher disposable income- leads to higher savings
-income
-rate of interest
-age structure (old people dissave more)
-wealth
-tax treatment
-social attitudes

Also known as commercial banks- main function is to act as a financial intermediary

between lenders and borrowers. They take money from people willing to lend. They can
do this by attracting them by increasing interest rates. They use this money and give it to
people requiring it as a loan (to expand business, buy a car etc.) However, they charge
borrowers a higher rate of interest than they give to the lenders.
High street banks are commercial banks that provide banking services such as
accepting deposits and lending money to consumers.
 Their main objective is profit. They allow people to borrow money through overdrafts and
loans and use the profit obtained from the rate of interest for themselves.
They let households and firms deposit money in the bank through current and deposit
accounts. They act as agents of payment and provide money for transmission of
services (credit cards, debit cards, mobile phones etc.)

c) Disposable income and consumption are directly proportional. With increase in disposable
income, the amount consumed also decreases which is why their relation is depicted using a
positive slope. For example, if a person gets a promotion and his/her’s income increases they
have more money coming into their household. They can now spend this money on basic
necessities as well as luxury goods they might have not been able to afford before like a new
phone, laptop, desk.

Disposable income has a significant impact on consumption. Consumption rises with disposable
income as the people have more money left to spend on essentials or luxury items. The
diagram depicts that before point y on the x-axis, there is dissaving. Any point after y indicates
savings.
d)
-National minimum wage ensures that workers are at least paid a certain amount
-affects the public sector more
-private sector might find a way around this legislation
-Increase in national minimum wage leads to increase in costs, hence firms might lay off some
workers which could lead to unemployment.
-might lead to higher supply of labour and cause a surplus, causing unemployment
-Advantage of increasing- low paid labour would receive higher pay, hence this will lead to an
increase in their disposable income and their quality of life will increase.
-High paid workers may be unhappy as the wage differential will reduce, which could lead to
them demanding a higher pay.
-Might lead to more even distribution of income, and therefore consumption as well as saving
-Higher pay leads to higher productivity among workers as they have incentive to work harder.
-Higher pay also leads to excess supply of labour as an increase in wages leads to a higher
demand for the job.

a) Reasons for increased household debt in the UK:

- Decrease in disposable income
- Continuous decrease in disposable income causing a large amount of interest to
build up
- Inflation- inflation rate of 2.9% increased cost of living as price of goods and
services increased more than an increase in income. This led to a decrease in
disposable income as they have less money left to spend after income tax.
- If there is a decrease in disposable income, then the savings rate would
decrease as less money would be left after spending. However, many families
which do not earn much might have more consumption than their disposable
income which would force them to borrow money to meet household needs
which could have probably led to high household debt in the UK as they will have
to make future repayments.
- Low unemployment rates/scarcity of jobs causing workers to receive a low
income

b) Why the government's decision to increase interest rates will benefit shareholders:
- It will benefit individuals willing to lend as they would receive a higher return on
their savings which would increase their disposable income which could increase
standard of living.
- Banks lending money to people would benefit as they receive higher interest on
the money they lend.

- It will reduce inflation as it will help savings rate keep pace with the rising costs of
living by increasing disposable income by providing higher returns on the money
 deposited. Decrease in inflation also benefits the government as it will result in
higher income to help them fund schools and hospitals as they recieve more
money from taxes.

Why the government's decision to increase interest rates will not benefit shareholders:
- This will not help the people who have not been able to save as a result of
already very low disposable income that has been spent on necessities or
luxuries.
- It will not be beneficial for the major high street banks as it will make it easier for
competition to enter the market
- Higher interest rates will harm borrowers as they would have to pay higher
interest on the money they receive. This will lead to a decrease in the disposable
income.
- Banks would not benefit when it comes to lending from the customers as they
would have to pay a higher interest to them on the money they lend from them.