IGCSE Economics Paper-2: Specimen Questions with Answers 48 - 49 of 100

Passage

Setting prices of the product is difficult. Too high prices can lead to reduction in sales.

Question 48 (2 of 5 Based on Passage)

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Short Answer▾

Effect of sales volume increase or decrease on unit fixed cost.

Explanation

Profits of a firm are dependent on sales and cost incurred by a firm i.e.. fixed and variable cost. Variable cost is dependent on sales volume as they include direct raw materials and cost of labor. A business whether small or large incurs fixed cost even if the production has not started.

The Effect of Sales Volume on Unit Fixed Cost Is

  • Unit fixed cost are inversely proportional to sale which means cost per unit falls when sales increases.
  • In contrast to it, if the sales fall the fixed cost per unit increase as the cost is spread over few units.

The following effect can be explained with the help of an example:

If a bat manufacturer՚s total fixed cost is $ 1 million and annually it sells 500,000 bats, its fixed cost per unit will be $ 2. If a new partnership leads to increase in the sales volume to 550,000 the new per unit cost will be $ 1.82 on the other hand if the sales volume lowers to 450,000, the unit fixed cost will be $ 2.22.

Question 49 (3 of 5 Based on Passage)

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With example explain the four factors of production

Explanation

Factors of Production

The Different Factors of Production Are

  • Land/Natural Resources: Land is a broad area as a factor of production. Land refers to all the natural resources. These resources are a gift of nature. Examples of Land (natural resources) are coal, gas, forest, natural gas, oil, copper etc. Land can be used from agricultural purpose to commercial real estate use as well as the other natural resources derived from nature. The resources can be renewable form of resources, like forests, or non-renewable resource like as oil or natural gas. The income earned on land or any other natural resource is called rent.
  • Labor: As a factor of production labor means, involvement of any human input. Labor does the work of production and contributes to the total output. Skills, education, motivation, and other factors help in determining the quality of labor. The higher the quality of labor is directly proportional to the better productive workforce. Examples of labor are- artists producing art, or programmers creating software, food service workers, construction workers, or factory workers etc.
  • Capital: Capital means the manufactured resources such as factories and machines. These are man-made goods which are used in the production of other products. The modern, economists consider capital as the main source of resource. Examples of capital are- hammers, forklifts, conveyor belts, computers, and delivery vans etc. The income earned on capital resources is known as interest.
  • Entrepreneurship: Entrepreneur is a person who takes the economic risk in combining all the other three factors of production together. Entrepreneurs are an important factor of production which helps in the economic growth different scales. Entrepreneurs contribute to the growth of the economy. Government puts in lot of efforts to promote entrepreneurship by utilizing the right combination of policies to make starting a business accessible. An entrepreneur receives payment in the form of profit. It is the reward of taking risk.

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