• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

ECONOMICS PAST PAPER QUESTIONS WITH ANSWERS - price elasticity and inflation.

Extracts from this document...

Introduction

´╗┐ECONOMICS PAST PAPER QUESTIONS WITH ANSWERS. Q1) Discuss whether inflation is necessarily harmful. (12) ANS 1:- Inflation is usually defined as a situation in which there is a persistent increase in the general price level. During inflation, cost of living rises, and hence, the purchasing power or the value of money falls. Usually inflation is an evil to an economy, and hence, reducing inflation is one of the macro-economic aims of every government. However, the effects of inflation depend on its level, whether it is constant or accelerating and whether it is anticipated or unanticipated. There are lots of economic costs associated with inflation:- 1. Shoe-leather costs: High rates of inflation mean that people and companies may lose considerable purchasing power if they keep money lying idle and not earning interest. Inflation erodes the value of cash and therefore, firms and households prefer to hold less cash but more interest bearing deposits / assets. Shoe leather costs are the costs involved in moving money from one financial asset to another in search of the highest rate of interest. 2. Menus costs: Firms will also suffer from menu costs. ...read more.

Middle

Those unable to pay a higher prices will be eliminated from the market. Price rations scarce goods to those who can afford to pay the price. Hence, for price to act as a rationing mechanism, the effect of a rising price must be to reduce the quantity demanded by some individuals. Secondly, prices act as signals and guides to firms about what should be produced in the future. Producers aim at profit maximisation. If consumers wish to consume more of a particular commodity then its price will tend to rise. This indicates to firms that more should be produced; at the same time it provides and incentive for more factors of production to move into that line of production. Firms making the good will be earning high profits. They will wish to expand output. To obtain more of the new materials, machinery and workers wanted they will be prepared to offer higher prices and thus more resources will be drawn to this line of production to meet the increase in demand. In the process we see the operation of what to Adam Smith was like and ?invisible hand? by which individuals, following their own self interest , led to pursue the interests of the community. ...read more.

Conclusion

This is a statistical measure that expresses the average price of some group of commodities in some year as a percentage of the average price of the same commodities in some other year. Problems in measuring inflation accurately can arise from the following reasons 1. The choice of the base year: The selection of the base year is a very complicated task. The prices in the chosen base year should be reasonably steady. Periods of severe inflation, deflation or recession should be avoided. 2. The price index is not able to take into account changes in quality: A commodity may not have changed in price but its quality may have fallen. Conversely, a good may be more expensive because it is of a better quality than before. Such changes in quality affect the consumer?s standard of living but cannot be reflected in the price index. 3. Finding a representative group of commodities: In selecting commodities to include in the basket of goods, accurate information on expenditure patterns of households is needed. But there are great difficulties in collecting such data. People are unwilling to disclose their expenditure truthfully. Besides, different income groups do not share the same basket of goods. Even people with the same income do not buy the same commodities in the basket. Thus, the construction of consumer price index involves a lot of guesswork. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. The Consumer price index

    The rise in the price of goods and services could therefore be due to a better quality product. Electrical items have become hard to compare lately because of the advances in technology. When items have become more expensive because of an improvement in the quality of the goods the CPI calculated may be over-inflated.

  2. Extended Project - Microcredit

    Presentation * Projector * Laptop Section Four Contingency Plan Firstly, the amount of information available is vast, and therefore I must choose the most accurate and reliable sources to use, as well as speed reading sources and isolating and selecting useful information and statistics.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    This would indicate that interest rates were not the only really important factor in the UK's inflation performance in the last decade. However there is also the case that the high interest rates used to control inflation are the reason that consumers are spending less of their household income on disposable consumption.

  2. Budget 2004-05 and Economic Analysis of Pakistan

    Against an annual average rate of 1.4 percent in 1990s, per capita income grew at an average rate of 13.9 percent per annum during the last two years (2002-04) and 12 percent during 2003-04. The per capita income in dollar terms increased from $526 in 1999-2000 to $652.

  1. Economics - House Prices.

    Front Garden Rear Garden Suitable for Pets Near Train Station Near School Near Shops Balcony/Patio Basement Loft/Attic Cable/Satellite TV Dishwasher Furnished Fireplace Double Glazed Alarm Description Attractive, three storey, flat fronted Victorian terraced house (1870's) in a desirable street very close to London Fields, and within 10mins of Hackney Central station.

  2. Indian Economics

    in Crores) 1951 1,32,364 2001 11,15,157 The growth of PCI is as follows:-- Year % of P.C.I. 1951-1981 1.2% p.a. 1981-2001 3.2% p.a. The Central Statistical Organisation has Classified the economy in three main sectors such as Primary Sector, Secondary Sector, Tertiary Sector.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    An increase in aggregate demand from AD2 to AD3 again increases output and causes the price level to rise. At AD3, the economy is in full employment. If there is a further rise in real expenditure, the aggregate demand curve is increased again to AD4, where the quantity of real

  2. Various Macro-Economic Questions and answers

    To keep inflation low but not necessarily zero as inflation is a signal of economic growth. High inflation can be dangerous as it could cause hyper inflation, which leads to the complete failure of an economy as a whole. In less extreme cases it causes firms minor costs like reprinting catalogues as the price increases so much constantly.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work