Lecture 2

Question 1

Define innovation

Answer 1

• Use idea to change economic/social landscape
  Most important factors => vision (seeing what others don’t) , overlapping (create new ideas through different visions), unknown

Question 2

Define cost

Answer 2

• What you really pay for project i.e. including cost of not choosing alternative
  Most important factors => prices (estimating costs) , categories and scales (fixed and variable costs, how scale changes cost), time (how costs incurred and the way they change over time)

Question 3

Define income

Answer 3

• What you gain from project
  
  • Most important factors => prices, quality and marketing (how do you set your price), revenue (what it adds up to), time (when you get income and how it changes over time)

Question 4

Define choice

Answer 4

• Choice
- How to use economics to make right decision?
Most important factors => evaluation (cost, income, benefits), comparison (alternatives), time

Question 5

Define demand curve

Answer 5

· Inverse relation between demand quantity Q and price P
i.e. if you charge more, customers afford less
· Assumptions - isolated product, customers budgets
unchanged, supply unchanged etc.

Question 6

Define supply curve

Answer 6

· Relation between supply quantity Q and price P
i.e. supplies produce more if they price they can get
is higher
· Assumptions - suppliers can respond to price and are not
Limited by resources, customers budgets unchanged etc

Question 7

Define equilibrium price

Answer 7

· Equilibrium - demand quantity and supply quantity match
=> curves define expected price

· Price rises, supply rises but demand falls => supply adjusts 
and decreases again
· Price falls, supply falls but demand rises => supply adjusts 
and increases again Kept at equilibrium if other things are unchanged

Question 8

Define shifts in demand

Answer 8

• Outside factors causing change e.g. technology
  
  • Demand for product increases but customers budgets and
    costs unchanged so prices don’t
  · Substitute products
  - product A price increase but substitute B doesn’t
  Demand for B increases

Question 9

Define shifts in supply

Answer 9

• E.g. factory making iphones burns down (exogenous)
  
  • Supply curves shift to lower quantities
    Demand curve unchanged => higher price, low quantity