CB2 Business Economics

WHAT HAPPENS WHEN MB > MC?
If MB > MC, then we should increase production of respective good, and decrease the production of other goods, since the value of one more unit of good, MB, is greater than the value of goods we must forego to make it, MC.

WHY IS PPC NOT A STRAIGHT LINE?
The shape of PPC depends on the opportunity cost of additional unit produced. If marginal opportunity cost remains constant then PPC will be a straight line owing to constant slope.

WHAT IS MARKET CLEARING?
The process of balancing or clearing the market by setting prices of goods in such a manner that the quantity supplied is equal to quantity demanded is known as market clearing.

HOW GOODS AND FACTOR MARKET ARE INTERDEPENDENT?
The goods and services market drives the factor market. When consumers demand more goods and services, manufacturers increase their purchases of the resources used to make those goods and services. Factor market producers, in turn, step up production of the raw materials that the manufacturers need. Thus, they are closely related to each other.

STATE THE LAW OF DEMAND.
The law of demand states that there is an inverse relationship between price and quantity demanded i.e. if prices of goods increase, the quantity demanded decreases and vice versa.

WHAT IS THE EFFECT ON PRICE WHEN DEMAND & SUPPLY CURVE SHIFT TOGETHER?
If the increase in both demand and supply is equal, the equilibrium price remains the same. In case of increase in demand > increase in supply, both equilibrium price and quantity tend to increase. If the increase in demand < increase in supply, the equilibrium price falls whereas the equilibrium quantity rises.

WHAT IS THE EFFECT OF PRICE ON TR IN CASE OF INELASTIC DEMAND?
If the price for an inelastic good is increased and the demand does not change, the total revenue increases due to the higher price and static quantity demanded.

STATE ANY 2 IMPACTS OF ADVERTISING?
Advertising campaigns generally intend to increase both demand and brand loyalty for a product.

GIVE EXAMPLE OF WHERE ACTIONS OF SPECULATORS TEND TO REDUCE PRICE FLUCTUATIONS.
If a speculator believes that an asset is currently overpriced, they sell as much of the asset as possible while prices are higher. This act begins to lower the price of the asset.

GIVE EXAMPLE OF WHERE ACTIONS OF SPECULATORS TENDS TO MAKE PRICE MOVEMENTS LARGER.
If a speculator thinks the value of a certain asset will rise, they can decide to buy as much of the asset as they can. This activity raises the price of the specific asset depending on the projected increase in demand.

WHAT IS THE RELATION BETWEEN TU AND MU?
The total utility rises with a rise in commodity consumption as long as the marginal utility, or MU, is positive. When MU from each succeeding unit starts to decline, TU starts to rise but at a decreasing rate. The MU zeros out at the maximum TU. In this stage, TU stops expanding; this is the so-called “point of safety.” The MU turns negative and TU begins to decline when consumption exceeds the degree of contentment.

STATE THE FORMULA OF MSC.
Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + Marginal External Costs (MEC)

STATE THE EQUI MARGINAL PRINCIPLE.
The equi-marginal principle states that utility will be maximised if the ratio of the marginal utilities is equal to the ratio of the prices (or alternatively that the marginal utilities per £ spent are equal).

COST = 10, BENEFIT = 20(AFTER 2 MONTHS), DF = 0.9, SHOULD YOU BUY THE PRODUCT OR NOT?
Present value of benefit= 20*0.9^(2/12)= 19.65 approximately which is greater than 10, thus we should buy the product.

IS THE OPTIMUM CONSUMPTION SAME AS EQUI MARGINAL PRINCIPLE?
Yes.

WHAT IS THE SUBSTITUTION AND INCOME EFFECT WHEN PRICE OF INFERIOR GOOD RISES?
When an inferior good’s price increases, buyers tend to buy more of it and less of its substitutes because the income effect outweighs the substitution effect for inferior goods.

WHAT IS CERTAINTY EQUIVALENT?
The amount of money that is guaranteed and that someone would deem to have the same level of desirability as a risky asset is known as the certainty equivalent.

WHAT IS THE PROBLEM OF ADVERSE SELECTION?
Adverse selection describes scenarios where an insurance provider offers insurance coverage to a candidate whose actual risk is significantly higher than the candidate’s estimated risk.

STATE THE RELATION BETWEEN TPP AND MPP?
The following is an explanation of the relationship between TPP and MPP: TPP rises at an accelerating rate as long as MPP rises. (ii) TPP rises but at a declining rate when MPP declines but remains positive. (iii) TPP reaches its maximum when MPP falls to zero.

WHY DOES TVC CURVE START FROM ORIGIN BUT NOT TFC CURVE?
It is because when there is zero production, there will still be some fixed or sunk costs related to the factory or workplace.

HOW TO DEAL WITH THE REDUCTION IN SUPPLY DUE TO PRICE CEILING?
The imposed maximum price a seller is permitted to charge for a good or service is known as a price ceiling. The pricing (and profit) controls must be made up for in some way by the producers. They can restrict supply, reduce output or production quality, or tack on new fees for previously free options and features.

WHAT IS SUBSTITUTION EFFECT ON GIFFEN GOODS?
Giffen products are so inferior that the positive substitution effect surpasses the negative income effect. As a result, even as the price drops, less is still being desired. Giffen products have a demand curve that is favourably sloping (which means that as price decreases the quantity demanded also decreases).

WHAT IS RELATION BETWEEN AVC AND APP?
AVC and AP are negatively correlated, meaning that as AP rises, AVC falls. When AP is at its highest, AVC reaches its lowest point, and when AP is at its lowest, AVC rises.

WHAT DO YOU UNDERSTAND BY ECONOMIES OF SCALE?
The phenomenon known as economies of scale occurs when the scale or magnitude of the production produced by a firm increases while the average cost per unit of output decreases.

HOW ECONOMIES OF SCALE IS DIFFERENT FROM ECONOMIES OF SCOPE?
Economies of scope concentrate on the average overall cost of production of a range of items. In contrast, economies of scale concentrate on the cost advantage that results from a higher level of production for a single good.

WHAT IS MEANT BY CONTAINER PRINCIPLE?
Container Principle states that larger capital equipment, such as pipes, containers, and tanks, has a lower cost per unit of output. This is a result of how surface area and volume are related. The materials used to make the outside of a container determine its expenses, but the volume of the container determines its output. A container’s volume increases by a factor of 3 for every unit increase in surface area, hence the larger the container, the less expensive the average production.

WHAT HAPPENS TO CURVES OF LRAC & LRMC WHEN COSTS ARE CONSTANT?
A U-shaped LRAC curve is consistent with the firm facing diseconomies of scale at higher output levels and economies of scale at relatively lower output levels. The LMC curve measures the change in LRTCs as output is raised and is derived from the LRAC curve. When LAC is decreasing, LMC are below the LAC curve, and when LAC is increasing, they are above the LAC curve.

WHEN DOES SHORT RUN SHUTDOWN POINT OCCUR?
If the price of the good is less than the average variable cost in the short run, a firm that cannot recover its fixed costs will decide to temporarily close. In the long run, if the price is less than the average total cost and the company can recover both fixed and variable costs, it will decide to quit.

HOW RETURN ON CAPITAL EMPLOYED IS CALCULATED?
Net operating profit, or earnings before interest and taxes, is used to assess return on capital employed. The difference between total assets and current liabilities can also be used to determine it by dividing earnings before interest and tax by that amount.

CONSTANT COST INDUSTRY?
A sector with constant costs is one in which the addition or exit of new firms has no effect on the costs of any individual firm.

CAN PERFECT COMPETITION EXIST WITH ECONOMIES OF SCALE?
Economies of scale hold that greater production per unit of input will arise from the application of additional resources, such as capital and labour.It also indicates a long-term oligopolistic situation since, if economies of scale are available, the market will be dominated by a small number of very large companies. Perfect competition makes the assumption that all inputs, including labour, can be moved from one activity to another without incurring any costs in order to increase profitability. This frictionless shifting of inputs means that as market conditions change, profit is squeezed out of the market, and suppliers will make no profit over the long term because any markets that generate profit will soon see an infusion of labour and capital until there is no profit left.

HOW EQUILIBRIUM PRICE IS CALCULATED?
The equilibrium price formula is based on amounts of supply and demand; to find the price, put quantity demanded (Qd) equal to quantity supplied (Qs) and find the price (P).

WHAT IS INDIFFERENCE CURVE?
A combination of two items in different quantities that gives a person equal satisfaction (utility) is represented by an indifference curve.

HOW MARGINAL UTILITY IS CALCULATED?
The additional satisfaction that a consumer experiences when they consume an additional unit of a good or service is referred to as marginal utility. It is calculated by subtraction of a unit’s total utility from the unit’s total utility before it.

WHAT IS MEANT LAW OF DIMINISHING RETURNS?
An economic principle known as the law of diminishing returns states that as investment in a certain area increases, the rate of profit from that investment can no longer increase at a certain point assuming other variables remain constant.

WHAT IS LIMIT PRICING OF A PRODUCT?
A limit price, also known as limit pricing, is a pricing strategy in which a supplier sells goods at a price so low as to make it unprofitable for rival suppliers to enter the market.

WHAT ARE THE CONDITIONS NECESSARY FOR PRICE DISCRIMINATION TO OPERATE?
Businesses must inhibit resale, be able to function in an imperfect market, and show demand elasticity for price discrimination to be effective.

WHAT IS FIRST, SECOND AND THIRD DEGREE PRICE DISCRIMINATION?
The business conducts first-degree discrimination by charging the highest price attainable for each consumed unit. Discounts for goods or services purchased in bulk constitute second-degree discrimination, whereas varying rates for various consumer groups constitute third-degree discrimination.

WHAT IS PARETO OPTIMALITY?
When no decision or action can be made makes one individual better off without making another worse off, this is known as Pareto efficiency or Pareto optimality.

WHAT ARE CLUB GOODS?
Club goods are a category of good in economics that are excludable yet non-rivalrous, at least up until a point where congestion arises. They are frequently categorised as a subclass of public goods. These products frequently show great excludability but low consumption rivalry.

WHAT IS THE RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT?
Historically, there has been an inverse correlation between inflation and unemployment. This implies that unemployment decreases as inflation increases. Conversely, higher unemployment results in reduced inflation. When more individuals are employed, they have more disposable income, which raises demand. Inflation in prices then quickly follows. When unemployment increases, the opposite is true.

WHAT IS THE LAW OF DEMAND?
It states that there is an inverse relationship between price and quantity demanded, assuming all other factors remain constant (ceteris paribus). If the price rises, demand falls.

WHY IS THE PRODUCTION POSSIBILITY CURVE (PPC) USUALLY BOWED OUTWARD?
Because of the Law of Increasing Opportunity Cost. As you produce more of one good, you must give up increasing amounts of the other because resources are not equally efficient in producing all goods.

EXPLAIN PRICE ELASTICITY OF DEMAND (PED).
PED measures the responsiveness of quantity demanded to a change in price. If $|PED| > 1$, the good is elastic (sensitive to price); if $|PED| < 1$, it is inelastic.

HOW DOES AN INCREASE IN PRICE AFFECT TOTAL REVENUE (TR) FOR AN INELASTIC GOOD?
If demand is inelastic, a price increase leads to an increase in total revenue because the percentage drop in quantity is smaller than the percentage increase in price.

WHAT IS THE DIFFERENCE BETWEEN A NORMAL GOOD AND AN INFERIOR GOOD?
Normal Good: Demand increases as consumer income rises (e.g., organic food).
Inferior Good: Demand decreases as consumer income rises (e.g., instant noodles).

DEFINE MARGINAL UTILITY (MU) AND THE LAW OF DIMINISHING MARGINAL UTILITY.
MU is the additional satisfaction gained from consuming one more unit of a good. The law states that as consumption increases, the utility gained from each additional unit decreases.

WHAT IS “MARKET CLEARING”?
It is the equilibrium point where the quantity supplied equals the quantity demanded, leaving no surplus or shortage in the market.

EXPLAIN THE “EQUI-MARGINAL PRINCIPLE.”
A consumer maximizes utility when the ratio of marginal utility to price is equal across all goods:
MU_A / P_A = MU_B / P_B

WHAT ARE ECONOMIES OF SCALE?
These are cost advantages that a firm experiences when production becomes efficient. As output increases, the average cost (AC) per unit decreases.

DIFFERENTIATE BETWEEN ACCOUNTING PROFIT AND ECONOMIC PROFIT.
Accounting Profit: Total Revenue minus explicit costs (actual payments).
Economic Profit: Total Revenue minus both explicit and implicit costs (opportunity costs).

WHAT CHARACTERIZES A PERFECT COMPETITION MARKET?
Many buyers and sellers, homogeneous (identical) products, perfect information, and no barriers to entry or exit.

WHAT IS A MONOPOLY AND WHY MIGHT IT BE INEFFICIENT?
A monopoly is a single seller of a product with no close substitutes. It is often inefficient because it produces less and charges more than a competitive market, leading to deadweight loss.

DEFINE AN OLIGOPOLY.
A market structure dominated by a few large firms. Key features include interdependence (firms watch each other’s moves) and high barriers to entry.

WHAT IS GAME THEORY IN THE CONTEXT OF CB2?
It is the study of strategic decision-making where the outcome for one player depends on the actions of others. It is frequently used to analyze firm behavior in an oligopoly.

WHAT ARE EXTERNALITIES?
Costs or benefits that affect a third party who did not choose to be involved in that activity.
Negative: Pollution from a factory.
Positive: A neighbor’s beautiful garden increasing your property value.

DEFINE GROSS DOMESTIC PRODUCT (GDP).
The total market value of all final goods and services produced within a country’s borders in a specific time period.

WHAT IS THE “CIRCULAR FLOW OF INCOME”?
A model showing how money flows through the economy between households (who provide labor) and firms (who provide goods/services).

EXPLAIN THE DIFFERENCE BETWEEN NOMINAL AND REAL GDP.
Nominal GDP: Value of goods at current market prices (includes inflation).
Real GDP: Value of goods at constant (base-year) prices (adjusted for inflation).

WHAT IS INFLATION AND HOW IS IT MEASURED?
Inflation is the sustained increase in the general price level. It is commonly measured using the Consumer Price Index (CPI).

WHY IS A LOW, STABLE INFLATION RATE (E.G., 2%) CONSIDERED GOOD?
It encourages consumers to buy now rather than wait (stimulating growth) and gives firms the confidence to invest without fearing sudden price shocks.

WHAT IS THE MULTIPLIER EFFECT?
The phenomenon where an initial injection of spending (like government investment) leads to a larger final increase in national income.
Multiplier = 1/ (1- MPC)

DIFFERENTIATE BETWEEN FISCAL AND MONETARY POLICY.
Fiscal Policy: Government use of spending and taxation to influence the economy.
Monetary Policy: Central Bank use of interest rates and money supply to control inflation and growth.

WHAT IS THE “NATURAL RATE OF UNEMPLOYMENT”?
The level of unemployment that exists even when the labor market is in equilibrium, consisting of frictional and structural unemployment.

EXPLAIN THE PHILLIPS CURVE.
Historically, it shows an inverse relationship between the rate of unemployment and the rate of inflation. In the short run, lower unemployment often leads to higher inflation.

WHAT IS AGGREGATE DEMAND (AD)?
The total demand for all goods and services in an economy:
AD = C + I + G + (X – M).

WHAT HAPPENS WHEN THE CENTRAL BANK RAISES INTEREST RATES?
Borrowing becomes more expensive, leading to decreased consumption (C) and investment (I), which slows down AD and helps reduce inflation.

DEFINE “BALANCE OF PAYMENTS” (BOP).
A record of all economic transactions between residents of a country and the rest of the world. It consists of the current account and the capital/financial account.

WHAT IS A “TRADE DEFICIT”?
When a country’s imports exceed its exports (M > X), meaning more money is flowing out of the country to pay for foreign goods.

HOW DOES A DEPRECIATION OF THE CURRENCY AFFECT EXPORTS?
A weaker currency makes exports cheaper for foreigners and imports more expensive for locals, which usually improves the trade balance over time.

WHY DO ACTUARIES STUDY CB2?
Actuaries must understand the economic environment to set realistic assumptions for long-term models (like inflation for pensions or interest rates for pricing) and to manage the financial risks of an insurance firm.