Lecture 7 Topic 7

Question 1

macro = ?

Answer 1

aggregate level

Question 2

firms make choices based on…?

Answer 2

the demand for their goods

micro level - profit maximisation
macro level - production

Question 3

fiscal policies influence…?

Answer 3

both micro and macroeconomic outcomes

Question 4

to make pricing & production decisions, managers need to know what?

Answer 4

the costs of production

Question 5

what shows how total production costs vary with quantity produced?

Answer 5

cost functions

Question 6

average cost (AC) = ?

Answer 6

average cost per unit produced

Question 7

marginal cost (MC) = ?

Answer 7

the effect on total cost of producing one additional unit of output

Question 8

relationship between AC & MC = ?

Answer 8

if AC>MC, AC is decreasing
if AC<MC, AC is increasing

the MC curve always intersects the AC curve at its lowest point on the cost function

Question 9

managers need to know the demand for the firm’s product to…

Answer 9

to make pricing and production decisions

Question 10

demand curve = ?

Answer 10

quantity that consumers will buy at each price

downward sloping

Question 11

profit maximisation can also be described in terms of…

Answer 11

revenue and costs

Question 12

marginal revenue (MR) = ?

Answer 12

change in revenue from selling an additional unit

net effect of decreasing price and increasing quantity sold

Question 13

firm maximises profit by choosing…

Answer 13

by choosing where MR = MC

Question 14

a firm’s pricing decision depends on…?

Answer 14

the slope of the demand curve

Question 15

price elasticity of demand = ?

Answer 15

degree of responsiveness (of consumers) to a price change

Question 16

MR is always positive when demand is…

Answer 16

elastic

Question 17

markup = ?

Answer 17

profit margin as a proportion of the price

Question 18

a firm’s markup is ____ proportional to price elasticity of demand

Answer 18

inversely

Question 19

the effect of good-specific taxes depends on…

Answer 19

the elasticity of demand for those goods

Question 20

governments raise more tax revenue by…?

Answer 20

by levying taxes on price-inelastic goods

Question 21

a firm’s profit margin depends on the elasticity of demand, which is determined by…?

Answer 21

competition

Question 22

demand is relatively inelastic if…?

Answer 22

there are few close substitutes

Question 23

firms with market power have enough bargaining power to…?

Answer 23

set prices without losing customers to competitors

Question 24

competition policy (limits on market power) can be beneficial to consumers when…?

Answer 24

when firms collude to keep prices high

Question 25

what are examples of market power?

Answer 25

when a firm’s selling specialised products:

• they face little competition and hence have inelastic demand
• they can set price above marginal cost without losing customers, thus earning monopoly rents
• this is a form of market failure because there’s a deadweight loss

Question 26

when does a natural monopoly arise?

Answer 26

when one firm can produce at lower average costs than two or more firms

Question 27

instead of encouraging competition, what can policymakers do to avoid monopolisation/market failure?

Answer 27

put price controls or make the firms publicly owned

Question 28

firms can increase their market power by doing what?

Answer 28

innovating or advertising

Question 29

aggregate demand = ?

Answer 29

looks at the demand on a macroeconomic level

Question 30

who are firms’ products consumed by?

Answer 30

people and the government

Question 31

consumption depends on what?

Answer 31

basic needs &
income

Question 32

marginal propensity to consume (MPC) = ?

Answer 32

captures the different effects based on one’s disposable income

Question 33

what does Y stand for in calculation of GDP?

Answer 33

Y represents GDP

y = c + i + g + (x - m)

Question 34

increase in Y will lead to…?

Answer 34

increase in all the components including consumption (c)

the level of the increase in c depends on the overall MPC

an increase in c can lead to further increase in Y (multiplier process) which depends on MPC

Question 35

what does aggregate demand multiplier depend on?

Answer 35

the rate of capacity utilisation and expectations of the private sector

Question 36

how does the government stabilise economic fluctuations?

Answer 36

• higher tax rate lowers the multiplier
• unemployment insurance helps households smooth consumption
• deliberate intervention via fiscal policy

Question 37

what are the two automatic economic stabilisers?

Answer 37

the unemployment benefit scheme and proportional tax rates

they automatically offset an expansion or contraction of the economy

Question 38

the paradox of thrift = ?

Answer 38

the aggregate attempt to increase savings leads to a fall in aggregate income

Question 39

fallacy of composition = ?

Answer 39

what is true for one part of the economy isn’t true for the whole economy (from one household to another)