Introduction to microeconomics

Question 1

Define microeconomics

Answer 1

The study of how households and firms make decisions and how they interact in markets

Question 2

What are 4 economic constraints?

Answer 2

Income
Labour
Capital
Land

Question 3

What are the 3 fundamental economic problems?

Answer 3

What goods and services should be produced?
How should they be produced?
Who should get the goods and services produced?

Question 4

What is a market economy?

Answer 4

An economy that allocates resources through decentralized decisions of many firms and households as they interact in markets in order to answer the 3 fundamental economic problems.

Question 5

What do households decide?

Answer 5

What to buy and who to work for

Question 6

What do firms decide?

Answer 6

Who to hire and what to produce

Question 7

What does a pure market economy not have?

Answer 7

It doesn’t have government intervention

Question 8

What is a centrally planned economy?

Answer 8

One where those in charge guide economic activity

Question 9

Why have some initiatives not worked?

Answer 9

They have failed because they did not allow the market to work.

Question 10

Who is the theorist behind “the invisible hand”?

Answer 10

Adam Smith

Question 11

What is the invisible hand theory?

Answer 11

When self interest individuals interact in a free market, it can provide socially desirable results as if guided by an invisible hand.

Question 12

What decides price and allocation?

Answer 12

Interaction of supply and demand

Question 13

What is demand?

Answer 13

How much someone wants something

Question 14

What is supply?

Answer 14

How much of something there is to have

Question 15

Explain the water diamond dilemma

Answer 15

The demand for water is higher than that for diamond, but the supply of water is also larger. Therefore, whilst water is more important, it is still cheaper.

Question 16

What causes the water diamond dilemma?

Answer 16

There is a different perceived utility from consuming different goods and services for example, diamond is often used as a gift for a special occasion whereas water is an abundant resource used every day.

Question 17

What do governments aim to promote when trying to improve market outcomes?

Answer 17

Efficiency and equity

Question 18

When does market failure occur?

Answer 18

When the market fails to allocate resources efficiently

Question 19

What is externality?

Answer 19

The impact of one person or firm’s actions on the well-being of a bystander

Question 20

What is market power?

Answer 20

This is the ability of a single person or firm to unduly influence market prices.

Question 21

What can market power lead to?

Answer 21

A monopoly

Question 22

Why was the sugar tax imposed?

Answer 22

To improve health and put less pressure on the NHS

Question 23

What is the sugar tax going to fund?

Answer 23

Sports activities for primary schools

Question 24

Who is the sugar tax imposed on?

Answer 24

Manufacturers which then leads to an increase in price for consumers

Question 25

How can the producers change in response to the sugar tax?

Answer 25

They can increase their prices or reduce the sugar content of their drinks

Question 26

What will affect whether or not consumption will decrease as a result of the sugar tax?

Answer 26

Elasticities of supply and demand

Question 27

What is an ethical implication of the sugar tax?

Answer 27

There could be welfare implications for different groups of consumers

Question 28

What is elasticity related to?

Answer 28

The response of consumers and producers as a result of a (price) change

Question 29

What could happen as a result of the sugar tax?

Answer 29

Firms could close

Impacts on importing and exporting