Intro

Question 1

Economic assumptions to markets

Answer 1

• Perfect competition.
• Rational actors.
• Full information.
• Homogenous product

Question 2

Aggregate demand

Answer 2

The sum of all individual demand curves

Question 3

Demand - A price increase results in

Answer 3

movement on the demand curve - the demand changes but the curve stays the same

Question 4

Aggregate supply

Answer 4

Sum of all individual supply curves

Question 5

Excess supply

Answer 5

the area above the equilibrium -> Producers produce for a price no one is WTP

Question 6

Excess demand

Answer 6

The area below the equilibrium - No producer is WTS at price below eq

Question 7

efficiency

Answer 7

maximizing utility of all market participants

Question 8

distribution

Answer 8

Distribution of resources and fairness
Depends, e.g., on 
property rights and 
initial distribution of
resources.

Question 9

Pareto efficiency

Answer 9

A situation which no party can be made better off without another party being worse off

Question 10

Pareto improvement

Answer 10

At least one party can be made better off and no other party will be worse off

Question 11

Consumer surplus

Answer 11

Area below the demand curve and above the price

• > The amount that customers are WTP - the actual price in the market
• > Reflects customers utility

Question 12

Producer surplus

Answer 12

Area below the price and above the supply function

-> Price paid to the produced - production costs

Question 13

Total welfare in the market =

Answer 13

CS+PS

Question 14

Deadweight loss DWS

Answer 14

loss in welfare to perfect competition

Question 15

Perfect competition vs monopoly

Answer 15

Perfect competition: producers produce at marginal cost,
price as givenMonopoly: producer produces at marginal revenue, price set
by monopolist

Question 16

Elasticities are useful measure informing about

Answer 16

how suppliers and

consumers react to changes in the market (e.g., prices).

Question 17

Elasticities

Answer 17

1. Elasticity of demand (price elasticities, income elasticities)
2. Elasticity of supply (price elasticity)

Question 18

Price elasticity of demand

Answer 18

Measures how demand changes if the p increases by 1 unit

= the % change in demand quantity / % change in price

Question 19

Perfectly inelastic demand

Answer 19

Elasticity = 0

An increase in p leaves the quantity demanded unchanged

Question 20

Inelastic demand

Answer 20

Elasticity < 1

A 22% increase in price leads to an 11% decrease in quantity demanded

Question 21

Unit elastic demand

Answer 21

Elasticity = 1

A 22% increase in p leads to 22% decrease in quantity demanded

Question 22

Elastic demand

Answer 22

Elasticity > 1

A 22% increase in p leads to 67% decrease in quantity demanded

Question 23

Perfectly elastic demand

Answer 23

Elasticity equals infinity
At any p > $4, quantity demanded = 0,
at exactly $4, customers will buy any quantity
At p < $4, quantity demanded is infinite

Question 24

Cross price elasticities of demand

Answer 24

CPED = & change of quantity of good 1 / % change of p for good 2

if + : goods are substitutes
if - : goods are complements
if 0: goods are independent

Question 25

Perfectly inelastic demand

Answer 25

Elasticity = 0 | An increase in p, leaves the quantity supplied unchanged

Question 26

Inelastic supply

Answer 26

Elasticity < 1 | A 22% increase in p leads to a 10% increase in quantity supplied

Question 27

Unit elastic supply

Answer 27

Elasticity = 1 | A 22% increase in p, leads to a 22% increase in Q supplied

Question 28

Elastic supply

Answer 28

Elasticity > 1 | A 22% increase in p leads to 67& increase in Q supplied

Question 29

Perfectly elastic supply

Answer 29

Elasticity equals infinity At any p > $4, Q is infinite At exactly $4, producers will supply and Q At p < $4, Q=0

Question 30

Why do we have regulatory interventions

Answer 30

Market failure (efficiency criteria): • No existing market. • Incomplete competition (e.g., monopoly). • Externalities. • Public goods. • Incomplete information, transaction cost. Equality criteria (social justice): • Equal distribution of wealth. • Redistribution • Allocation of property rights.

Question 31

What are the regulatory interventions

Answer 31

• Interventions targeted at prices. - > Maximum price. - > Minimum price. • Taxes. - > To generate public income. - > To steer and influence market outcomes. • Subsidies. - > To increase income of certain groups. - > To increase the supply/demand of certain goods.

Question 32

Minimum price

Answer 32

State sets min Ps, resulting in excess demand Qg, and to keep Ps, the state needs to buy Qg Consequences for consumers and suppliers: Consumer surplus is reduced Producer surplus increases Welfare loss: D - (Q2-Q1)Ps Potential savings for society: (Q2 - Q1)Ps- D

Question 33

Taxes

Answer 33

Direct and Indirect

Question 34

Direct taxes

Answer 34

Collected directly at the taxpayer: income tax, earnings tax, inheritance tax

Question 35

Indirect taxes

Answer 35

Collected with the sale from goods and services: VAT, Fuel duty, CO2 tax, Dividend tax

Question 36

Price inelastic demand means that

Answer 36

buyers have few alternatives to the product

Question 37

Price inelastic supply means

Answer 37

producer dont have good alternatives

Question 38

Subsidies

Answer 38

The opposite of a tax.  A subsidy for the producer reduces production cost.  Subsidies change market equilibria.  Subsidies allow consumers to pay lower prices and producers to pay lower production cost.  Consumers and producers benefit from subsidies.  But they might also lead to a DWL.

Question 39

Externalities

Answer 39

Uncompensated effects of economic decision making on the wealth of independent third parties  Are usually not included in the economic decision making process of parties.  Are a form of market failure. Consequence: inefficient allocation of resources and welfare losses

Question 40

Negative externalities

Answer 40

− Emmisions − Cigarette smoke − Dogshit on the street − Loud music

Question 41

Positive externalities

Answer 41

− Scientific discoveries − Renovating of historic buildings − Planting trees

Question 42

Coase theorem

Answer 42

under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome. Allocation of property rights. Private negotiations. Trade (of C02 certificates, e.g.,)

Question 43

Coase theorem May not always work, because of

Answer 43

transaction cost, asymmetric information, bargaining power, free-rider problems