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From ZuluNotes - Free Leaving Cert Notes

SECTION A (100 Marks)

Answer six of the nine short response type questions.

1. State FOUR possible economic effects of rising price inflation on the Irish economy.
   1. Reduced standard of living: due to reduced purchasing power.
   2. Increased wage demands: workers will try to negotiate wage increases.
   3. Loss of competitiveness: if inflation in Ireland is higher than with our trading partners / ↓exports.
   4. Loss of employment: Employers may be forced to reduce costs and reduce the numbers employed.
   5. Government Finances: as prices rise, the government may collect increased indirect tax revenues/ if wages do increase people may move to a higher tax rate and revenue increases.
   6. Savings discouraged: the real rate of interest available to savers may fall, discouraging savings.
   7. Speculation encouraged: people may invest in property to protect the value of their investment.
   8. Borrowing encouraged: the real rate of interest charged on borrowings falls, encouraging borrowing
   9. Increased disparity between sectors of the population: Poorer sections suffer most when inflation increases.
   10. Pressure on social partnership/ industrial relations unrest: trade unions may want a free for all.
   11. Balance of Payments problems: if our volume of exports falls & volume of imports rise.
   12. Uncertainty for investment decisions makers: business planning & profit calculation difficult.
2. State THREE assumptions underlying the Law of Comparative Advantage.
   1. Transport costs do not exist.
   2. The law of diminishing marginal returns (LDMR) does not apply.
   3. Free trade takes place.
   4. The complete mobility of labour/factors of production exists.
   5. Alternative employment is available.
   6. An equal distribution of benefits occurs.
3. Consumers buy 50 units of a product when the price is €1.50. When the price is reduced to €1 the consumer buys 90 units. Using an appropriate formula, calculate the consumers’ PED. Show your workings and explain your answer.
   1. Workings:(9 marks) x
   2. Explanation:(6 marks) The consumer's PED is elastic. Why? Because the PED is greater than 1. This good is a Normal good. Why? The PED is negative (i.e. It obeys the law of Demand.
4. Firms attempting to enter a monopoly market must overcome barriers to entry. Outline THREE such barriers to entry.
   1. Legal / Statutory / Government Monopoly: Government confers the sole right to supply a good or service/ CIE.
   2. Ownership of a patent / copyright: A firm has the sole right to a manufacturing process.
   3. Sole rights to raw materials: Firm may have complete control over the source of raw materials
   4. Large capital investment:
      1. minimum size of a firm required to operate efficiently is so large there is no room for competitors.
      2. competitors are discouraged from entering because of the high initial start-up costs.
   5. Entering Trade agreements [ collusion / cartels ]: ensures that no competition exists within members’ segments of the market.
   6. Mergers / takeovers: A firm may ensure their survival by merging / taking over other (rival) firms in the same line of business, such that it becomes a monopolist and no competition exists within the industry.
   7. Brand proliferation: Through advertising a firm’s consumers are convinced that there is no suitable alternative to their particular brands
5. Outline THREE functions / responsibilities of the European Central Bank (ECB).
   1. 'Maintain Price Stability: Monitor inflation in member countries and adjusts the base ECB interest rate so as to adjust spending.
   2. Implements EU’s monetary policy: ECB monitors and advises on: rates of interest, money supply, credit availability & protects the value of the euro.
   3. Holds and manages the official reserves of the euro area countries: These are the EUs official holdings of gold, foreign currencies and other reserves held as security against the issue of the euro. The ECB manages these reserves on behalf of the countries.
   4. Financial stability and supervision: The member authorities must provide prudential supervision of credit institutions and ensure stability in the financial system.
   5. Sole right to issue euro currency: The ECB has exclusive right to issues euro bank notes and coins within the euro area.
6. Outline TWO circumstances under which a factor of production can earn Economic Rent.
   1. Shortage in the supply of any factor of production: if land / labour is in short supply – its price will increase.
   2. Possession of a rare skill or talent: if a person has a skill which is in great demand e.g. a professional soccer player then they can command high fees.
   3. Rent of Ability: an entrepreneur who invents a much sough after commodity may command high income e.g Bill Gates and the invention of the ‘windows’ operating systems.
   4. Completely specific factors of production: there is no opportunity cost in the use an existing factor of production which is completely specific (not adaptable to other uses e.g. a railway station). If a payment is made for the use of this specific factor then this entire payment would be economic rent as the opportunity cost is zero.
   5. Super normal profits earned in the short run (will be eliminated with the entry of firms) / long run if barriers to entry exist e.g. in monopoly.
7. An Irish banking group owns thirty branch offices. There is no opportunity cost to the banking group using these offices as they are fully owned.
   1. False
   2. The branch offices could be sold and the money invested or The branch offices could be rented out and an income earned.
8. Define Social Costs. State TWO significant examples currently facing the Irish economy.
   1. 'Definition: Cost/Price which society has to pay for the existence of a particular product.
   2. Examples
      1. Pollution of air/water e.g. the current water pollution in Galway.
      2. Disfigurement of the landscape e.g. construction of roads disfigures the landscape.
      3. Possible loss of cultural heritage e.g. the construction of M3 through Hill of Tara.
      4. Traffic congestion in cities and towns with resulting problems.
      5. Reduction in public amenities / urban sprawl: communities have less public spaces.
      6. Global warming: increased carbon emissions affects global weather patterns.
9. Energy costs (e.g. electricity) increased significantly in Ireland during 2006. Outline TWO economic reasons for the increase and TWO economic consequences of this specific development for the Irish economy.
   1. Economic Reasons:
      1. Increase in international oil prices: caused by political instability and supply shortages.
      2. Increase in wage costs within the industry: workers wage increases are passed on in the form of higher prices.
      3. Further regulation by government: the addition of surcharges e.g. public service obligations levy by the ESB.
      4. Increased investment costs in the industry: Firms must invest for future production.
      5. To make the company a more profitable investment opportunity for investors.

SECTION B (300 Marks)

Q1. Supply

(a) Define the economic terms: individual (firm) supply; market supply.

(b) Explain, with the aid of labelled diagrams, the relationship between individual (firm) supply and market supply.

1. Individual supply: the quantity of a good an individual firm is willing to supply at different prices.
2. Market supply: the total quantity of a good that all firms are willing to supply at different prices.

To derive the market supply we add the quantity supplied by each individual firm at each price to calculate the overall quantity supplied to the market at each price.

(b)Explain, with the aid of a labelled diagram, the supply curve of an individual firm in each of the following circumstances. State one example in each case.

1. A firm is willing to increase supply as price rises, but there is a minimum price below which the firm will not supply at all.
2. A firm can supply only up to a maximum production capacity
3. The product is fixed in supply (e.g. perishable good) and a firm is operating in the short run.

(c) Outline FOUR factors, other than price, which affect the supply curve of an individual firm. In each case explain how the factor affects the supply curve. (25 marks)

1. The cost of producing the product.
   1. If there is an increase in costs of factors of production, which a firm uses in the production of their good, then it will be more costly to manufacture the good. They will not continue to supply the same quantity of the good at the old prices – there will be a reduction in the quantity supplied.
2. The state of the firm’s production technology.
   1. As new machinery is invented, as labour becomes more specialised and efficient the factors of production become more efficient. It becomes possible to increase their output even thought the payments they receive remain the same.
3. The price of related goods.
   1. If there is an increase in the selling price of other goods, which the manufacturer could produce through using his existing factors of production, he may switch from producing the present commodity to that for which the price has increased.
4. Unplanned factors.
   1. There may be changes in the quantity supplied, which were never intended by the producer. ##Examples include agriculture – due to changes in the weather; diseases etc.
   2. In industry there may be shortages of raw materials, strikes etc.
5. Taxation / Subsidy.
   1. If the government were to reduce the rates of taxation on the raw materials used in the manufacture of a commodity, this represents a reduction in the cost of production and hence quantity supplied would increase.
   2. If a subsidy is granted on the raw materials or on the labour employed by the firm, this has the effect of reducing costs and thereby resulting in an increase in the quantity supplied.
6. Number of sellers in the industry.
   1. If the number of firms in the industry decreased e.g. due to rationalisation then the overall quantity supplied to the market would decrease.
7. Objectives of the firm.
   1. If the objectives of the firm changed from that of profit maximisation to a deliberate reduction in output by firms in the industry then quantity supplied would fall.

Q2. Perfect Competition & Product Differentiation

(a) (i) A firm operating under conditions of perfect competition is a ‘price taker’. Explain the concept of being a ‘price taker’.

• This means that the individual firm must accept the price as it is set on the market.
• Each firm supplies such a tiny fraction of the market it cannot influence the market price.

(ii)Explain, with the aid of labelled diagram, the equilibrium position of a firm in short run perfect competition.

(b) With the aid of a labelled diagram(s), explain the impact which the entry of new firms would have on the market and on the equilibrium position of this firm.

(c) (i) Many firms today engage in product differentiation. Explain this underlined term showing, with suitable examples, how it can be achieved.

Product Differentiation

The goods which are produced are close substitutes / similar goods / not identical goods.

Product differentiation can be achieved by:

(ii) Explain the effect of product differentiation on the AR and MR curves of a firm, which previously operated under conditions of perfect competition

As a result of product differentiation: • A firm’s AR will be downward sloping from left to right.

• Because products are close substitutes:
• If a firm lowers price it can expect to attract some but not all customers from other firms; if the firm increases prices it may expect to lose some but not all customers – so the firm will sell less at higher prices and more at lower prices. Consequently the demand curve (AR curve) facing the firm is downward sloping.
• If AR is falling then MR is also falling and lies below AR. To encourage more customers the firm must drop the price. The AR Curve is falling. The revenue from the increased sales will be reduced by the falling revenue on each unit previously sold at a higher price but now at a reduced price.

Factor Market: demand, supply & mobility

(a) The demand for labour as a factor or production is a derived demand and is affected by that factor’s Marginal Revenue Productivity (MRP)

(i) Explain each of the underlined terms.

• Derived demand:Where labour is demanded for its contribution to the production process or from the demand for the goods it produces.
• Marginal Revenue Productivity: The extra revenue earned when an additional unit of factor of production is employed.

(ii) Outline TWO developments, other than a fall in MRP, which may result in a firm reducing its number of employees.

• Demand for Pay increases - If the workers are successful with such demands, costs of production will increase and profitability will fall. This may result in the firm having to make workers redundant.
• Introduction of new technologies / mechanisation - Increased mechanisation of the production process / introduction of cost saving technologies will reduce the demand for labour.
• Fall in demand for the firm’s output -Any factors that causes a drop in the demand for the firm’s output e.g. higher prices for the commodity, may lead to a reduction in demand for workers.
• Government Policies - If the government pursued policies which make it more expensive to employ workers then the employer may reduce the workforce e.g. raising the minimum wage rate.
• Increased competition on the market - If new firms enter the industry existing firms may suffer a reduction in demand, resulting in a loss of jobs in that particular firm e.g. opening of new supermarkets in many towns around the country.
• Increases in the costs of production - Any factor which causes a firm to become less competitive will result in a loss of sales, leading to job losses. e.g. currently oil/petrol costs are increasing which may result in job losses.

(b)(i) State/explain THREE factors which are currently affecting the supply of labour to the Irish economy.

1. Wage levels within the economy / Backward bending supply of labour. Higher wage levels in recent years act as an incentive for more people to supply their labour. For some workers as wage levels increase they may prefer increased leisure and reduce their supply.
2. Size / Structure of population. Ireland’s population has increased with more citizens within the working-age bracket. S. of Labour increases.
3. Participation Rate. The number of people willing to work within the 16-65 age group has increased. More women working; people who once retired are willing to take up part-time employment.
4. Rates of income tax within the economy. In recent years these have fallen acting as an incentive for people to join the workforce.
5. Labour mobility. The workforce in Ireland has become more occupationally mobile: there are less barriers in place preventing the movement of workers. With EU enlargement, the free movement of labour is increasing.
6. Government Policies. The government has moved to ease restrictions on the entry of immigrants to Ireland; they are reducing the rate of PRSI on employers and are aiming to liberalise entry requirements into certain occupations e.g. pharmacies; hospital consultants; decreasing the average length of the working week i.e. nurses.

(ii) The demand for labour has increased significantly in certain sectors of the Irish economy in recent years e.g. construction. Discuss THREE economic consequences of this situation.

1. Pressure on wage levels to rise. Employers will be forced to increase wage levels in order to attract workers into those areas where shortages are occurring.
2. Deterioration / Loss of services. Where workers are not available it will result in either a deterioration of services in those areas or atotal loss of certain services.
3. Loss of investment. Indigenous and foreign entrepreneurs may see such shortages of labour as a deterrent to investing and starting a business.
4. Inflationary pressures. If wage levels increase such increases may be passed on to the final consumer in the form of higher prices.
5. Immigration. Shortages of labour in the Irish labour market are reported internationally. FAS has attempted to entice foreign workers to Ireland. The number of applications for refugees’ status has also increased.
6. Difficulty in attracting / keeping workers in some sectors. With current labour shortages and the attractiveness of higher pay in alternative employments certain sectors find it increasingly difficult to attract workers e.g. in the hotel, catering, tourism industries. May require state intervention for the re-training of workers to fill sectors with vacancies.
7. Inability to maintain development of the state’s infrastructure. Because of the shortage of workers, developing the infrastructure at the pace necessary to sustain economic growth is not possible and this may affect future investment.