Economics Key Points

(Past Papers MJ2012P32-2015)

1.
2.
3.
4.
5.
6.

7.
8.
9.
10.
11.

12.
13.
14.
15.
16.
17.
18.
19.

20.

21.
22.
23.
24.

Economically inefficient = Allocatively inefficient

Average Wage = Supply Curve (Labour Theory)
Marginal Product = Demand Curve
(Labour Theory)
Marginal Product of Labour (MPL) = Demand Curve of labour (gives number of labourers
employed at any given wage rate)
A lower capital-output ratio is desirable as it shows the efficient use of capital. (resources
allocated properly)
In an imperfectly competitive market a firm produces at the level of output where the price
elasticity of demand for its product is equal to unity. The firm has achieved revenue
maximization. (PED=1 where MR=0)
When the price of a perfectly elastic good increases the revenue falls to zero.
Increase in quantity of goods but revenue remains unchanged that means PED = -1
Fiscal - legal, official treasury (government revenue)
Cash Reserve Ratio - CRR is the percentage of money which the bank has to keep with the
Central Bank in the form of cash.
There will be no change in the money supply if the securities are purchased by the non-bank
private sector. The change in the money supply depends on the sale to the central bank and the
reserve ratio.
Demand = Average Revenue
(Production Theory)
Sales Revenue Maximization - MR=0
(Production Theory)
I+G+X=S+T+M (Equilibrium level of national income)
One factor input doesnt increase output. All factors need to be simultaneously increased if
output has to be increased. One factor increased alone will cause diminishing returns.
Predatory pricing, drive out small firms.
MV=PT=QT=GDP
(Quantity Theory of Money)
Sales tax is most regressive.
A regressive tax is a tax that takes a larger percentage from low-income people than from highincome people. A regressive tax is generally a tax that is applied uniformly. This means that it
hits lower-income individuals harder.
It is more effective to increase regressive taxes rather than progressive taxes when pursuing a
deflationary fiscal policy because low income households spend a larger proportion of their
incomes.
Increase in money supply causes inflation in the long run.
Increase in money supply increases employment in short run due to more investment but in
long run due to inflation employment doesnt change.
Firms long-run production function describes a firms output and the quantities of factor inputs
employed.
Oligopolys product can be considered homogenous.

25. Society has achieved an equitable distribution of income when the society believes that the
distribution of income is fair.
26. When quotas are imposed and trade of quotas is allowed profits increase and productive
efficiency improves but total production remains unchanged. Without trade of quotas the
productive efficiency would be less as the industry may not be able to reach the full production
potential. The total production remains unchanged as that had been already fixed by the quota
system and cannot be altered.
27. Govt regulation to force consumers and producers to behave in a certain way.
28. Pivotal shift of demand of money will not be due to any other factor than price (such as
investment). They are due to changes in factors like national income. National income and
interest rate are directly proportional.

29. Always consider all aspects of all options when uncertain is mentioned in any of them.
30. Allocative efficiency is achieved when producers produce those products that provide maximum
utility to our needs (necessity goods).
31. The product specification demanded by each customer is different makes it easier for a small
firm to compete against large firms in the same industry.
(Customised products)
32. To calculate MR = (TR2)-(TR1) = (P2xQ2) (P1XQ1)
33. Increase in injections government spending will increase national income but it will lead to a
deficit in the governments budget.
34. Economic cost of an increase in unemployment is the output the unemployed workers could
have produced.
35. The short-run production function in the diagram shows the relationship between the total
product of labour and labour hours worked. The stock of capital is held constant when drawing
this function.

36. The diagram shows the relationship between a firms output and the number of workers
employed at different levels of capital stock (K). The diagram shows A the firms long-run
production function.

37. The short-run marginal cost (MC) of providing a service remains zero in the case where the total
costs of production in the short run are fixed.
38. Introduction of a minimum hourly wage for all workers over 21 years of age is expected to
increase the average wages of these workers. This will decrease unemployment for under 21s as
firm can hire more of them, the hours worked would be likely to increase and the average wage
would be likely to rise. (They will replace the ones above 21 as their wages are less in
comparison. The working hours will be increased in order to cover up. Their wages will also be
increased as an incentive but the firm prefers them over those above 21 years of age as these
wages will be increased according to the company's choices and not because of the minimum
wage introduction. This wage increment will not be a major loss to the firm as was the
introduction of the minimum wage.)
39. Price discrimination decreases consumer surplus.
40. Higher MU, less consumption. Hence people with higher MU of money are the poor ones and if
income is redistributed from those with higher MU to those with lower MU, income is being
redistributed from poor to rich thus reducing equity.
41. Reduction in domestic interest rates results in higher level of economic activity which is likely to
increase imports and thus have an adverse effect on a countrys balance of payments on the
current account.
42. Inflation causes a reduction in the demand for money hence the currency depreciates and
as the currency depreciates investments increase which is only possible when the interest rate
falls.
OR
according to the liquidity preference approach curve, a decrease in demand for money
decreases interest rates.
Thus inflation is inversely proportional to exchange rate and interest rates.
43. Negative income tax is a progressive income tax system where people earning below a certain
amount receive supplemental pay from the government instead of paying taxes to the
government. This not only increases equity but decreases incentive to work hence decreasing
employment and total production thus worsening efficiency.
44. MC = Supply (for a monopolist's curve where marginal cost pricing or maximum price is
imposed)

45. There is net improvement in the workers welfare if he were allowed to choose the number of
hours he wished to work per week which were basically more than those marked by his initial
wage rate the net improvement will be the area between the supply curve and the initial wage
rate line.
46. Keynesian and Monetarist both aim to increase aggregate demand or aggregate monetary
expenditure.
47. Keynesians control unemployment in order to increase AD.
48. Monetarists control inflation in order to increase AD.
49. Fiscal and monetary policies to decrease unemployment will cause inflation. For deflationary
motives the policies will be reversed.
50. Unemployment is dependent on inflation only if the price elasticity of demand of the product is
defined.
51. Demand of labour is solely dependent on Marginal Revenue Product (MRP) or the other factors
studied.
52. If we maximize sales revenue our market share increases (output increases) but the price of the
firms shares decreases due to reduction in profits.
53. Government expenditure and government tax revenue are a part of governments fiscal
balance.
54. When unemployment benefits are provided the autonomous consumption increases and the
MPC decreases.
55. Expansion in bank credit will increase money supply and decrease the demand for money.
56. FDI reduces investment for production for the owner of the firm. The profits are remitted back
to the investors country hence a worsening of net income flows from investments takes place.
57. A balance of payments surplus lowers the interest rate due to increase in money supply and
increased investments.
58. Maximum amount of loans that the bank can create (loanable funds) = Total Credit Creation
Deposit
59. According to the accelerator model, a decrease in the rate of growth of national income will
cause the level of investment to fall.
60. As government spending increases the government deficit increases.
61. Money supply and money income are two separate things.
62. Money supply effects real income, money income is affected as a result of this.
63. For internal growth increasing productive capacity is a better option in comparison to launching
new products.
64. An increase in the highest rate of income tax (progressive tax) increases equity but it acts as a
disincentive to work hence efficiency decreases.
65. Gross is without tax or other contributions having been deducted.
66. Curve X1 shows an economys initial trade-off between inflation and unemployment (Philips
Curve). A leftward horizontal shift is caused by a decrease in the natural rate of unemployment.

67. Income Tax Direct Tax

68. Sales Tax Indirect Tax
69. As inflation increases, money supply increases. (MV=PT where M and P are directly
proportional)
70. Present Earning = X + A + Z
Transfer Earning = A + Y + Z
Economic Rent = Present Earnings Transfer Earnings = (X + A + Z) (A + Y + Z) = X Y

71. Change in anything on the axis of a curve will cause movement along the curve. Change in any
other factor will cause the curve to shift.
72. A decrease in interest rates will increase the demand for money and increase investments. As
AD increases due to higher demand there is demand pull inflation which decreases
consumption. Since investment and consumption will move in opposite directions the real
income will remain constant.
73. As interest rate decreases, investment increases. But an increase in investment will increase
interest rates. Just as a decrease in price causes an increase in demand but an increase in
demand also causes demand pull inflation (increase in price level).
74. Economic benefit of a major trading company of imposing tariff on imported goods would be an
increase in pressure on foreign suppliers to reduce their prices.
75. Governments need to keep welfare benefit rates and tax rates unchanged in order to allow
automatic stabilizers to work.
76. Formally, a production function \ F(K,L) is defined to have:
Constant returns to scale if (for any constant a greater than 0) \ F(aK,aL)=aF(K,L)
Increasing returns to scale if (for any constant a greater than 1) \ F(aK,aL)>aF(K,L)
Decreasing returns to scale if (for any constant a greater than 1) \ F(aK,aL)<aF(K,L)
Where
F(aK,aL)= Output ,
aF(K,L)= Input
and
constant=a
77. Developing countries - high birth rate and a dominant primary sector
78. High ratio of government debt to GDP is likely to cause a decline in a countrys economic growth
because it will increase the cost of borrowing to both the government and the private sector.
79. At an x-inefficient point a firm is producing its current output at minimum cost.
80. GNP is inflation adjusted.
81. GNP uses purchasing power parity exchange rates rather than using market exchange rates.
82. Marginal Cost and Marginal Product are inversely related.
83. Firms profits will be volatile and subject to substantial fluctuations if fixed costs are a high
percentage of total costs. Recognize that in the case of industries such as the steel industry
where fixed costs account for a high proportion of total costs, fluctuations in demand will have a
disproportionate impact on profits.
84. High ratios of saving to GNP is most likely to contribute to high long-term growth rates of GNP
per head.
(imports reduced)
85. When GNP is considered, the first point you should think of is imports and exports.
86. Substitution effect and income effect are inversely related.
Substitution Effect
When an individual substitutes his leisure hours with working hours due to increase in the wage
rate this is positively related to the wage rate.
Income Effect
When an individual substitutes his working hours with leisure hours due to increase in the wage
rate this is negatively related to the wage rate. (MCQ5-S)
87. Govt. aims to maintain stability in investment and savings.
(MCQ23-S)

88. Adjustments to allow for differences in the relative size of the hidden economy in different
countries makes real GNP per more reliable indicator when comparing standards of living in
different countries.
89. Country's budget deficit = Expenditure > Revenue Generated (GDP decreases)
90. Government's budget deficit = Government spending > Revenue
(GDP increases)
91. Higher interest rates offer lenders in an economy a higher return relative to other countries.
Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
(Increase in demand of local currency leads to appreciation)
92. A rise in interest rates will result in the fall of the price of bonds because investment would be
high (condition of high interest rate) hence demand of bonds would rise thus decreasing their
price.
93. An economist would include changes in mental health when using social cost-benefit analysis to
assess policies to reduce the level of unemployment.
94. An increase in the expected future rate of inflation will decrease national output as producer
will produce less due to fear of decrease in demand during inflation. It will also increase the rate
of inflation.
95. An increase in the budget deficit = An increase in the government's budget deficit
96. Reducing direct taxes will increase consumption hence this leads to demand pull inflation.
97. Nominal exchange rate - Inflation = Real Exchange rate
98. Economies of scale is a concept of bigger firms and long run production.
99. Investment is of two types, FDI and domestic.
100.
Inflation reduces GDP.
(Consumption and Exports would decrease)
101.
European Union imposes a quota on the volume of garments imported from Brazil this
will lead to the closure of Brazilian-owned textile factories.
102.
Main objective of supply side policies is to increase potential output by increasing
efficiency.
103.
Deregulation is the reduction or elimination of government power in a particular
industry, usually enacted to create more competition within the industry.
104.
Net welfare gain = Opposite of dead weight loss
(quantity will be same)
105.
When a firm fires an employee due to change in structure of industry if they are
violating the contract they will pay the redundancy cost
(money enough to survive until
he finds next job).
106.
As income increases MPS increase, more income more saving.
107.
MC = AC
(Productive Efficiency)
108.
MC = AR
(Allocative Efficiency)
109.
A 6% increase in the money supply leads to a 4% increase in the level of money income
since there has been a decrease in the velocity of circulation.
110.
A result of rising unemployment in an economy will be that inflationary pressure will be
reduced.
(Less people employed, Aggregate Demand (National Income) would decrease
which would decrease the demand pull inflation)
111.
In 2009 the US central bank, the Federal Reserve, increased the money supply. A
purchase of government securities in the open market is a policy measure taken by the Federal

Reserve which would have achieved this outcome. Purchase of government securities in the
open market - Central Bank is the buyer of the bonds which are being sold by commercial banks.
(money supply increases whenever Central Bank buys government securities)
112.
Lower costs in raising capital is a financial economy of scale.
113.
A five firm concentration ratio for an industry changes from 50% to 60%. The industry
will become more oligopolistic.
114.
A manufacturing firm has one plant of optimum size. The firm builds a second plant
identical to its first plant. The firm then finds that its long-run average cost has risen. Managerial
diseconomies of scale could account for the change in its long-run average cost.
115.
Labour turnover is the rate at which employees leave a workforce and are replaced.
116.
A firm that is growing rapidly is likely to pay a low percentage of profits as dividends to
shareholders. This could be due to requirement to increase the investment rapidly hence
greater inputs required and so the percentage of profits paid as dividends to shareholders
would decrease.
117.
During a recession, a government increases its expenditure on goods and services by
$10 million but leaves tax rates unchanged. Increased government borrowing (from other
countries or financial institutions like Word Bank or IMF) increases interest rates (cost of
borrowing), this might subsequently increase the national income by less than $10 million (rest
spent on repayment of loans and their interests).
118.
When the price of a good changes, the effect on quantity demanded is the result of an
income and a substitution effect. For normal goods, the income effect and substitution effect
work in the same direction, for an inferior good they don't work in the same direction.
119.
The quantity demanded increases when the price of a normal good falls as the income
and substitution effects both are positive.
120.
The quantity demanded decreases when the price of a normal good rises as the income
and substitution effects both are negative.
121.
When the price of an inferior good falls the income effect is negative and the
substitution effect is positive.
122.
When the price of an inferior good increases the income effect is positive and the
substitution effect is negative.
123.
Usually income effect is too weak to outweigh the substitution effect.
http://www.economicsdiscussion.net/cardinal-utility-analysis/price-demand-relationshipnormal-inferior-and-giffen-goods/1069
124.
In short run production both fixed and variable costs exists, in long run only variable
costs exist.
125.
According to monetarist theory, price stability and full employment are policy objectives
that are in conflict in the short run, but not in the long run.
126.
Increase in savings by people in short run will increase economic growth in the long run.
127.
A perfectly competitive firm is currently producing at a level of output where its
marginal cost is above both its average total cost and the market price. Price remains unchanged
and output of the firm decreases if the firm were to maximise its profit. As output would

decrease the additional marginal cost would be covered hence price doesn't need to be
changed.
128.
An increase in the number of students would cause the number of people employed in a
country and the level of unemployment both to decrease.
129.
Quantity
Total Cost / Variable Cost
ATC / AVC
1
10
10
2
12
6
3
14
4.7
4
15
3.75
5
20
4
6
30
5
7
45
6.4
8
60
7.5

130.
When money supply is held constant the inflationary process will be brought to a halt as
money supply and price level are directly proportional and when one is constant the other one
will also be constant. When price level is constant the inflationary process is halted. When
money supply and price level are constant the demand for transaction motives (day to day uses)
will rise. This rise in demand of money will cause the interest rate to rise.
131.
If the trade union operates under in a monopsonistic labour market it strengthen the
union's negotiating power. Monopsonist is a single buyer, hence the union can force it to agree
to it's conditions
132.
When an injection is decreased a leakage will also be decreased or vice versa.
(I+G+X=S+T+M)

133.
When an injection is decreased and it's MPC is greater than that of a leakage the
leakage will be decreased by a greater value.

134.
Increase in business confidence increases demand for money.
135.
When there is a reduction in propensity to save, government will increase interest rates
in order to decrease investments and increase savings as government has to maintain a balance
between investments/consumptions and savings.
136.
Multiplier = (30-25)/1 = 5
Multiplier = 1/MPS
MPS = 1/Multiplier
MPS = 1/5
MPC = 1- (1/5) = 4/5

137.
Imports cannot be considered as it depends on the type of good being imported. If it's a
necessity, it will still be imported despite the tariff and hence the expenditures will not be
dampened rather will rise.

138.
For free floating exchange rate, the currency may appreciate or depreciate but the
foreign currency reserves will remain unchanged as any changes in them will alter the exchange
rate and will be considered as a part of government intervention.
139.

140.
In a slump the government has to cover up the deficit by government expenditure. For
this the government generates greater revenue by increasing taxation. In a boom the case is
opposite.
141.
As income increases the Average Propensity to Consume (APC) decreases.
142.
Factors effecting demand of labour
(Shifts)
a) Price of Product (as it increases the curve shifts rightwards)
b) Productivity of labour (as it increases MRP of labour increases hence shifting the curve
rightwards)
c) Productivity of capital
d) Price of capital
e) Government policies for employing labourers

143.

Factors effecting supply of labour

(shifts)
a) Size of labour
b) Labour participation rate
c) Tax and benefit levels
d) Pecuniary (relating to or consisting of money) and non-pecuniary advantages
144.
Fringe Benefits (Non pecuniary advantages) are a form of wage differential.
145.
If there Is an $8 million loss of consumer surplus, all should be given to producer
surplus. But instead the producer got a benefit of only $5 million which means the remaining $3
million got lost somewhere, so it makes it the dead weight loss.
Dead weight loss = $3 million.