1.1-1.4 Edited Exam Flashcards
What is meant by a model in economics?
A model is a simplified version of reality used to predict or describe what will happen in an economy if one of the variables changes.
What does ‘ceteris paribus’ mean?
All other things being equal, and it means that when we change one variable then we hold all others constant in order to isolate the consequences of the variable we changed.
Give an example of when you would use the ceteris paribus assumption?
e.g. when we change the price of a product we assume that no other variables, such as income change at the same time, so we can look at the effect just of the price change.
Why do economists use models, assumptions and ceteris paribus?
In order to analyse clearly the effect of a change in one of the variables, we need to simplify reality otherwise predicting and describing cause and effect becomes too complicated e.g. when drawing a PPF we assume that an economy only produces 2 goods, and that when we look at a movement along the PPF we assume that nothing else changes.
How does Economics differ from a science such as Physics?
It is not possible to conduct laboratory experiments in most areas of economics, particularly with macroeconomics where we are looking at the whole economy in aggregate, which is why economics relies on the collection of statistics to analyse the effects of a change in a variable.
What is the main objective of consumers when making economic decisions?
To maximise utility.
What is the main objective of producers when making economic decisions?
To maximise profit.
What is meant by effective demand?
Demand backed up by an ability to pay.
What are the main determinants of demand (the demand function)?
Price (p), Income (y), Tastes and preferences (t) and the prices of ‘other’ goods (p1……..pn).
What does a point on a demand curve show?
The amount/quantity of a good that will be bought at that price.
What would cause a movement along a demand curve?
A change in the price of the product itself is the only thing that causes a movement along a demand curve.
What would cause a shift in a demand curve?
A change in the conditions of demand would cause a shift in a demand curve. This would mean that more or less of a good would be bought at each and every price level.
E.g. real incomes, size age and distribution of the population, tastes fashion and preferences, prices of substitutes and complements, advertising and promotions, interest rates.
Give an example of something that would shift the demand curve for potatoes to the right?
A shift to the right indicates an increase in demand. Demand for potatoes would increase if it was revealed that potatoes could be classed as one of the five a day, or if the price of a substitute increased e.g. the price of rice increased, or if the price of a complementary good fell such as cod (fish and chips).
Give an example of something that would shift the demand curve for potatoes to the left?
A shift to the left indicates a decrease in demand. Demand for potatoes would decrease if potatoes were found to be unhealthy or the price of a substitute decreased.
Define Price Elasticity of Demand (PED)
PED measures the responsiveness of demand to a change in price. Alternatively you can use the formula for calculating PED instead of the definition. (% change in Qd)/(% change in P).
