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Principles of Economics > All Notes > Flashcards

All Notes Flashcards

1
Q

What factors effect demand?

A 
Px=Price of good x
Py=Price of other goods
Y=Income of consumer
T=Tastes
N=Population & Demographics
E=Expected future Prices
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2
Q

What factors effect supply?

A 
Px=Price of good x
Pa=Price of substitutes in production
	• What else could the factory be used for?
Pi=Price of inputs
Te=Technology
Z=Number of sellers
E=Expected future prices
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3
Q

What factors effect PED?

A

Availability of Substitutes (Many Substitutes = Elastic) Time (In the long run price elastic)
Advertising (More = Inelastic)
Type of product (Essential = Inelastic, Luxury = Elastic)
% of Income (Less = Inelastic)
Durability (More = Inelastic)

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4
Q

What factors effect YED?

A 
Level of Income (Less income = greater proportionate change)
Product Perception (Snob goods, Veblen)
Lifestyle changes
The Economic Climate
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5
Q

Who bares the tax incidence?

A

If the product is elastic, the producer will bare more of the tax

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6
Q

What is the formula for tax incidence?

A

Producer: |Ed|/Es+|Ed|
Consumer: |Es|/Es+|Ed|

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7
Q

Define Completeness

A

Consumers can compare bundles of goods and rank them in order of preference

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8
Q

Define Transitivity

A

Consumers ranking of goods are consistent, if A>B B>C then A>C

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9
Q

Define Monotonicity

A

Having an extra unit of a good is at least as beneficial as the last

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10
Q

Define Continuity

A

There are no “sudden jumps” in utility

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11
Q

What is the difference between ordinal & cardinal ranking?

A

Ordinal: Best to worst
Cardinal: Exactly how much better one thing is

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12
Q

What is the slope of a budget constraint?

A

-Px/Py

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13
Q

What is the point of satiation?

A

Where the consumer is consuming an infinite amount of the goods

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14
Q

Why is the indifference curve not a straight line?

A

DMU

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15
Q

What is the slope of the indifference curve?

A

MRSxy= -Change Y/Change X= MUx/MuY

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16
Q

How do you derive a demand curve from an IC?

A

Marshallian Demand: Plot the old and new equilibrium

Hicksian Demand: Plot old equilibrium and substitution equilibrium

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17
Q

Describe the Net effects of an IC and budget constraint movement.

A

Both positive = Normal Good
Substitution > Income = Inferior good
Substitution < Income = Giffen Good

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18
Q

What is the difference between risk and uncertainty?

A

Risk: Where possible outcomes and their probabilities are known
Uncertainty: Where we cannot assign probabilities to outcomes

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19
Q

How would you calculate expected utility?

A

Use the Bernoulli function:
U(x)= P1 U(X1 )+P2 U(X2 )…Pn U(Xn)
P1 is the probability of Number 1
U(X1 ) is the utility derived from number 1
U(x) is how many utils consumption provides

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20
Q

What is the utility of expected payoff and the expected utility of the payoff?

A

The utility of the expected payoff: U[E(x)]
The utility obtained by expenditure/income

The expected utility of the payoff:E[U(x)]
The expected utility of the utility of the possible income

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21
Q

What are the risk attitudes?

A

Risk Neutral:
U[E(X])=E[U(X)]

Risk Averse:
U[E(X)]>E[U(X)]

Risk Loving:
U[E(X)] < E[U(X)]

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22
Q

What are the risk attitudes graphs?

A

Risk Averse: Concave
Risk Loving: Convex
Risk Neutral: Straight line

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23
Q

What is a certainty equivalent and how is it calculated?

A

This is the amount of risk free income that we need to receive to get the same amount of utility of risk income.
Calculate expected utility of good, preform the inverse utility function

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24
Q

What is the Markowitz risk premium?

A

The difference between certainty equivalent and the expected utility of the good

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25
Q

What is the slope of the isoquant?

A

MRTS = MPL/MPK

If MRTS = 12, for every one unit of labour there must be 12 capital

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26
Q

Illustrate economies of scale using the production function.

A

Qnew = f (2K, 2L) vs Qbase = f (K, L)
Decreasing returns to scale: less than double output (Qnew < 2Qbase )
Constant returns to scale: double output (Qnew = 2Qbase )
Increasing returns to scale: more than double output (Qnew > 2Qbase )

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27
Q

What is a firms shutdown condition?

A

Operating Profit = TR-VC<0

P-AVC<0

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28
Q

How do you derive a firms supply curve?

A

Firms supply curve is the part of its MC curve that lies above its AVC
If P = MC < AVC the firm will close

The market supply curve is a horizontal summation of all firms supply curves
At each price, add together all outputs that firms are willing to supply at that price

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29
Q

Why must a firms long run supply curve lie above the ATC?

A

If price is lower than this, firm will exit industry

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30
Q

Give examples of regulation used against monopolies

A

Policy intervention to reduce barrier to entry ○ “Antitrust laws”; tax breaks for new entrants
MC pricing rule Require firm to charge P = MC.
Direct price regulation: ATC pricing rule

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31
Q

What is the Lerner index and how is it calculated?

A

A measurement of market power:
(P-MC)/P=-1/Ed
Larger value = more market power

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32
Q

Name the three oligopoly models

A

Bertrand, Cournot and Stackleberg

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33
Q

What is the Bertrand model?

A

Price Competition - EC efficent

Each firm sets price, undercut each other until P=MC

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34
Q

What is the Cournot Model?

A

Quantity Competition - Not EC efficient, better than monopoly
Both firms set Quantity, reaction curves are created.
Efficient equilibrium occurs at intersection of reaction curves

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35
Q

What is the Stackleberg Model?

A

Quantity Competition - More efficient than Cournot

Each firm sets quantity, Qa is set before Qb therefore A works backwards and maximises own gain

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36
Q

Why would a kinked demand curve occur?

A

Limits on Quantity
Non-linear pricing
Discounts
Varying Income

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37
Q

Describe the varying shapes of an IC?

A

Positive Slope: One good you like, one you don’t

Negative Slope: Two goods you like/dislike

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38
Q

How would you calculate output max and cost min?

A

For Output Max:
Hold isocost fixed and shift isoquant
For Cost Min:
Hold isoquant fixed and shift isocost

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39
Q

What is Grim Trigger and Tit for Tat

A

Grim trigger: If you ever Defect, I Defect in all subsequent periods
Tit-for-tat: If you Defect this period, I Defect next period. If you Cooperate this round, I Cooperate next round.

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40
Q

What is a more realistic version of the multiplier?

A

1/ (1-c(1-t)+m)

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41
Q

What is the formula for investment?

A

I=Ibar-bi

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42
Q

What will happen if IR increases?

A

Investment will fall therefore downwards transaltion of AE

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43
Q

What is Hicks model?

A

Three markets: Goods, Money and Bonds

If two are in equilbrium the third must be

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44
Q

What is the formula for the demand of money?

A

Ld=kY-ih

If IR go p, people will get bonds thus D falls

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45
Q

How would you increase the money supply?

A

Open Market Ops:

Print money and purchase bonds

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46
Q

Illustrate the effect of Open Market Ops on Bonds.

A

Bank prints money to purchase bonds
This raises their price, causing the ROR to fall
This causes IR to fall

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47
Q

How do you calculate the ROR on bonds?

A

(Maturity - Current Price) / Current Price

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48
Q

What are the different IR?

A

iD=RoR on a savings account
iB=RoR on a bond
iL=Bank lending rate
iCB=Central bank lending rate

49
Q

What are the two types of money supply?

A 
Exogenous = Vertical
Endogenous = Horizontal
50
Q

Algebraicly, what are the different money supplys?

A 
M0=CU+CRES
CU=Currency held in pocket
CRES=Currency held by commercial banks
M1=CU+DEP
DEP=Deposits in bank accounts
M2=M1+DEP*
DEP*=Special Deposits
51
Q

What is the money multiplier?

A

M1/M0 = [CU/DEP + 1]/[CU/DEP + CRES/DEP]

52
Q

What is the LM Curve?

A

Illustrates here the demand for liquidty = M0

53
Q

What is the IS equation?

A

i=(I+G)/b −(1−c)Y/b

IS=Intercept - Slope

54
Q

What factors effect the slope of the IS curve?

A

b=Sensitivity of invesment with regards to IR
c=MPC
tax and MPM

55
Q

What is the equation for the LM curve?

A

i=k/hY −M/ℎ
LM=Slope-intercept
A bigger h will yield a flatter curve

56
Q

What effect will expansionary market ops have on ISLM model?

A

M increases shifting LM1 outwards

57
Q

What is the effect of expansionary fiscal policy on ISLM model?

A

IS shifts upwards

58
Q

What is the effect of expansionary fiscal policy on ISLM & Keynesian cross>

A

IS shifts upwards
Higher income increases money demand therfore CB raises IR
Higher IR therefore AE shifts upwards
Investment is depressed, AE shifts to a point between A and B
Private sector may be crowded out

59
Q

What is the equation for the economy at equilibrium?

A

Y= 1/1−c+(bk/h) * (I+G+b/hM)

this is ^ the multiplier

60
Q

What is monetary retro action?

A

The extent to which the money supply diminishes due to the multiplier

61
Q

What is the equation for the monetary multiplier?

A

∂y/∂M=(p/h) / 1−c+(bk/h)

62
Q

What are the key points of Reaganomics?

A

Increase in defence expenditure therefore IS right
Reduce taxes therefore IS right / Slope changes
Contraction Market Opps to quell inflation therefore LM left

63
Q

What effect would maintaining the money supply have on a goods market shock?

A

Shock causes IS to shift
Constant money supply increases/decreases output with a change in interest rates
This method is the best

64
Q

What effect would maintaining the IR have on a goods market shock?

A

IS shifts, expansionary/contractionary opps causes the buying/selling of bonds which shifts LM Right/left returning market to original position with higher/lower output

65
Q

What factors shift the LM Curve?

A

A reduction in demand for money will shift LM to right
Increase in demand for money will shift to left

A reduction in supply will shift LM to left
A increase in supply will shift LM right

66
Q

What effect would fixing the money supply have on a money market shock?

A

Curve will shift due to change in demand and remain at that level

67
Q

What effect would fixing the IR have on a money supply shock?

A

Countering the increase in money supply through contractionary market ops will shift LM back to original position

68
Q

Why does demand for liquidity have a non linear shape?

A

As IR falls, the demand for liquidity tends to infinity, you keep all income

69
Q

What is a critical rate and how does it effect the demand for liquidity?

A

A critical rate of a bond determines the rate at which it is sold. Above this, the demand for liquidity is zero and all funds are invested
Below this, the demand for liquidity is infinite and none are invested
Smoothing this relationship gives the curve
At a flat point of the curve, you have a liquidity trap where monetary policy is ineffective

70
Q

Discuss the liquidity trap?

A

When IR has reached its lower bound, monetary policy is no longer effective

71
Q

At which points on the Non-Linear LM curves are policies ineffective?

A

At the vertical section, expansionary fiscal policy is ineffective as an IS curve only raises IR
Here, monetary policy will shift the LM curve, improving output

At the horizontal position, expansionary monetary policy will shift the LM curve, causing no change due to zero lower bound
Here, fiscal policy will shift IS curve, improving output

72
Q

Discuss the effects of a run on the banks.

A

A run on the bank will increase the demand for money, shifting LM left
A collapse of confidence will raise the risk premium, shifting LM upwards - now in liquidity trap
Only option is fiscal policy

73
Q

Discuss negative IR

A

Commercial inter bank lending rates can be negative

Bank IR can be negative however if too negative people will not store money in banks

74
Q

What is the term for competetiveness?

A

R=E x P/P
E = Exchange rate (P/P)
P* = foreign price level

75
Q

Show a depreciation

A

1$=£0.85 -> $1=£0.89

Here, the pound has devalued

76
Q

What are the improved formula for X and M

A

X=x1Y*+x2R

M=m1Y*-m2R

77
Q

What is the IS equilibrium using the improved X, M equations?

A

i=−(1−c+m_1)/b x Y + (I ̅+I ̅+x_1 Y∗)/b + ((x2+m2)R)/b

I=Slope + Intercept + exchange

78
Q

What effect does a depreciation have on IS curve?

A

A depreciation will shift IS curve upwards

A appreciation will shift IS curve downwards

79
Q

What is the equation for the balance of payments?

A 
BP=CA+KP
x1 Y*+X2R − (M1Y-m2R)=0 
X1=MPM for rest of world
X2R=Competitiveness
M1Y=MPM of our income
80
Q

What is the uncovered interest parity condition?

A

Real interest rates will equalise globally
i=i+(ETe−Et)/E
ETe is the future expected rate
k(I−i)>0 =there will be a finanical inflow

81
Q

What is the Balance of Payments Equation including the UIP?

A

BP=x1 Y+x2R−(m1Y − m2R) + k(i−i)=0
Solving for I
i=i+(m1Y)/k − (x1Y)/k − (m2+x2)R)/k

82
Q

How do you represent the CA & KP graphically?

A

CA=Verticle

KP=Horizontal

83
Q

What are the key terms for currency movements?

A

Devaluation and revaluation are fixed only

Appreciation and depreciation are free float only

84
Q

What effect will increasing government spending have on a fixed ER?

A

G shifts IS to right
Higher IR cause financial inflows causing D£ up
This shifts LM to right until return to FE line
Effective policy

85
Q

What effect would monetary policy have on fixed exchange rates?

A

LM shifts outwards
Lower IR cause financial outflows S£ up
CB buy back £, returning M

86
Q

What effect would an increase in G have on flexible exchange rates?

A

IS shift right
Higher IR causes D£ up
£ apprecites, depressing exports
IS shifts back to original

87
Q

What effect would monetary policy have on flexible exchange rates?

A 
Increased money supply therefore LM shifts outwards
IR falls causing a fiscal outflow
£S up therefore depreciation
Demand for exports increase
IS shifts right back to FE line
Effective policy
88
Q

Where does the equilibrium occur in a fixed ER?

A

FE=IS

89
Q

What effect would raising IR have in a fixed ER

A 
IR up therefore FE up
FE=IS is new equilbrium
Higher IR D£ up
CB buys foreign currencies
LM shifts left
90
Q

Why would you commit to a fixed ER?

A

Rely on imports, avoid depreciation - will run out of foreign reserves
Rely on exports, avoid appreciation - can print infinite domestic reseves

91
Q

Where does the equilbrium occur in a free exchange rate?

A

FE=LM

92
Q

What are the IS, LM & FE Equations?

A

IS: (EP)/P = R = (1−c+m1)/(m2+x2 )Y − (I ̅+G ̅+x1 Y)/(m2+x2 ) + b/(m2+x2)i
LM: Y=m/k + hi/k
FE: i=i*
R,Y&I are the three variables that have to be determined
Depending on which exchange rate mechanism, one of the equations becomes redundant

93
Q

What does a flexible ISLMFE equibrium look like?

A

Y=m/k + hi/k
Sub (Y) and (i,i) into equation IS for real exchange rate
Most important variable is M

94
Q

What does a fixed ISLMFE equibrium look like?

A

(EP)/P = R = (1−c+m1)/(m2+x2 )Y − (I ̅+G ̅+x1 Y)/(m2+x2 ) + b/(m2+x2)i*
Sub into LM to work out Y
Most important variables are I, G, x1Y

95
Q

Derive AD in a flexible ER

A 
Prices rise
Real money supply falls therefore LM shifts left
Endogenous appreciation occurs
IS1 Shifts right due to reduced demand
Price has risen and output has fallen
96
Q

Derive AD in a fixed ER

A 
Prices increase
Less money available therefore demand falls
IS shifts inwards
IR lower, therefore financial outflows
CB buys £, money supply contracts
LM inwards
Higher price, lower output
97
Q

What are the shift variables for each exchange rate?

A

In fixed, shift variable is G

In float, shift variable is M/p

98
Q

What is the production function for an economy?

A

Y=f(A,K,N)
As capital and tech are fixed
Y=f(N) - man hours

99
Q

What are the neoclassical properties of the neoclassical labour market model?

A

INADA
Constant Returns to scale?
Positive but diminishing returns

100
Q

What is the equation for the demand of labour

A 
π=P∗Y
π=P∗f(N)−W∗N
∂π/∂N=P∗fN′−W=0
Condition for optimal
w/p=fN′=MPN or W=PfN′
More hours will be demanded until wage = MPN
101
Q

What is the equation for the supply of labour?

A 
Households are the determinant
U=U(c,L) s.t
W∗N=P∗C
12=L+N
Combining the above:

U=U(c,L)
s.t. c=w/p^e (12−L)

102
Q

Discuss LF

A

LF is a point of full employment, a vertical line

The distance between the equilibrium and LF is unemployment

103
Q

Discuss the effect of bargaining power.

A

Bargaining power shifts the supply curve upwards

High unemployment diminishes bargaining power

104
Q

What is the optimal conditon for labour demand

A

Optimal Condition:
w/p=(1+dP/dy∗y/p[y] )∗f_N^′
The middle section is PED

105
Q

What is the formula for Aggregate Supply

A

P=P^e+λ(Y−Y ̅ )

106
Q

What factors shift the LRAS & SAS

A

Improvements in Tech will shift LRAS

Expected prices will shift SRAS

107
Q

Define and discuss the AD curve under flexible ER

A 
P=a−bY+h(M,i*,ε^e )
Logging
p=m−bY+h(i*,ε^∗ )
M is Primary Shift Factor
M, I, and We are shift factors
M=Money supply
I* = Global interest rate
ε^e=Expected exchange rate
An improvement in all 3 will shift the curve to the right
108
Q

Define and discuss the AD curve under fixed ER

A 
P=a−bY+(E,P*,Y*,I*,ε* )
Logging
p=e+p*−by+δY* δG−f(I*,ε^e )
G is main shift factor
P* is foreign prices
Y* is foreign output (+)
I* is foreign interest rates
ϵ^∗ is expected ER
Apart from foreign interest Rates and Expected ER, an increase will cause a rightwards shift
109
Q

What is monetary Neutrality?

A 
Flexible ER
CB increases m - Lower IR
AD shifts outwards
Customers Raise wages
AS shifts upwards to SREquilbrium=LRAS
Repeats
Y only shifted in SR, LR = inflation
On ISLM, both curves shift outwards then slowly backwards
110
Q

What is the equation for SRAS when plotting inflation?

A 
p=p^e+λ(Y−Y ̅ )
Subtract previous price levels
p−p_(−1)=p^e−P_(−1)^e+λ(Y−Y ̅ )
This can be combined to yield
π=π^e+λ(Y−Y ̅ ) SRAS
111
Q

Derive EAS?

A

For an equilibrium π=π^e ⁆therefore 0=λ(Y−Y ̅ ) and (Y=Y ̅ ) therefore no output gap

112
Q

What shifts a SRAS when plotting inflation?

A

Differences in expected inflation rates

113
Q

What is the equation for DAD under flexible exchange rates

A

p=m−bY+h(i+ε)
p_(−1)=m_(−1)−bY_(−1)+h(i_(−1)+ε_(−1) )
p−p_(−1)=m−m_(−1)
π=μ−b(Y−Y_(−1) )+h(Δi+Δε )
m−m_(−1)=μ is the growth of the money supply

114
Q

What is the equation for the Philips curve

A

π=π^e−g(μ−μ_N )

π^e=π_(−1)

115
Q

Discuss Solows neoclassical exogenous growth model

A 
Y=K^a L^(1−a ) 
First Derivate is positive
Second is negative
More output at a diminishing rate
Constant returns to scale - PC
116
Q

What is the capital accumulation equation

A

K ̇=sK^a L^(1−a)−dK

117
Q

What is the steady state?

A

Where the change in K =0

k*=(s/(d+n))^(1/(1−a))

118
Q

What is the requirement line?

A

The amount of investment required to maintain a constant level of GDP
If rate of savings increases, steady state rises
If population growth increases, requirement pivots left and steady state falls

Principles of Economics (1 decks)

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