Lecture 1: Econ basics, welfare & distribution

Question 1

What does economics study?

Answer 1

studies decision-making and the effect of decision-making on a wide range of topic areas, but central to the study is human beings.

Question 2

What are the three main questions Economics must answer

Answer 2

1. what goods and services need to be produced?
2. how goods & services need to be produced
3. who should benefit from these?

Question 3

What do indifference curves and budget lines explain?

Answer 3

consumer behaviour

Question 4

Why do economists disagree on policy initiatives? (2)

Answer 4

1. disagreement on the validity of positive theories about how the world works
2. different normative views on what policies should be implemented

Question 5

What is marginal thinking?

Answer 5

based on the “1 more” where progressive actions decide the outcome
- marginal benefit decreases
- marginal cost increases
look for equilibrium

Question 6

Effectiveness

Answer 6

accomplishing tasks with precision and quality

Question 7

Efficiency

Answer 7

accomplishing tasks without wasting time, resources or energy

Question 8

Law of demand

Answer 8

is the inverse relationship between the price of goods and the quantity demanded

Question 9

Shifts in demand (5)
(pepin)

Answer 9

1. change in consumer income
2. change in consumer preferences
3. change in price
4. change in the number of consumers
5. changes in expectations
   a change in the quantity influences the demand

Question 10

5 assumptions of Microeconomics

Answer 10

1. individuals act rationally
   
   • completeness of alternatives
   • transitivity of alternatives
2. individuals pursue self-interest
3. ceteris paribus (constant & partial reasoning)
4. marginal decision making
5. decreasing abstraction (increased complexity)

Question 11

what is Completeness of Alternatives?

Answer 11

individuals rank their choices
a>b, b>c, a=b

Question 12

what is Transitivity of Alternatives?

Answer 12

despite changes, individuals’ choices remain the same
a>d

Question 13

Law of Supply

Answer 13

the direct relationship between the price and the quantity supplied

Question 14

Differences in supply between low and high prices

Answer 14

low prices: do not provide enough profit, unable to provide the product
high prices: provide enough profit

Question 15

Relationship between prices and quantity demanded

Answer 15

1. the lower the price, the more demand
2. the higher the price, the less demand

Question 16

Relationship between prices and supply

Answer 16

1. the lower the price, the less supply
2. the higher the price, the more supply

Question 17

Shifts in supply (6)

Answer 17

1. technology
2. taxes
3. prices of related goods
4. resources available
5. number of sellers
6. natural causes

Question 18

What is an indifference curve?

Answer 18

the type of curve showing the different possibilities consumers have to buy certain products given the same level of utility
consumers will always look for the maximum utility

Question 19

MRS
Marginal Rate of Substitution

Answer 19

the rate in which consumers are willing to trade one good for another

Question 20

What is the Consumer Choice Theory? (+ 3 assumptions)

Answer 20

is assumes that consumers are constrained due to budget limitations, thus, their actions are based on availability
- rational actions
- consistent actions
- utility maximisation

Question 21

what is the slope?
how is it calculated?

Answer 21

it measures the relationship between two goods
slope = vertical axis / horizonal axis

Question 22

What is equilibrium price?

Answer 22

quantity demanded is equal to the quantity supplied

Question 23

within equilibrium price:
1. Surplus
2. Shortage

Answer 23

1. Surplus: there is more supply than quantity demanded
   (price fall)
2. Shortage: there is more demand than supply
   (price rise)

Question 24

what is Price Elasticity of Demand?

Answer 24

the quantity demanded responding to a change in price

Question 25

Types of elasticity

Answer 25

1. inelastic demand (necessity goods): even if prices increase the demand does not change radically 2. elastic demand (luxury goods): when prices decrease demand is influenced 3. unit elasticity: changes in price lead to changes in demand 4. perfect elasticity: infinate demand 5. perfect inelastic: changes in price, demand remains the same

Question 26

how is the Elasticity Demand Coefficient calculated?

Answer 26

E = % change in quantity ------------------------------- % change in price **the result must be between -1 and 0**