Marginalists and Neoclassical Economics (L4) Flashcards
Describe the role of marginal utility in determining consumer choices. How does the law of diminishing marginal utility influence demand curves?
Answer:
Marginal Utility: The additional satisfaction gained from consuming one more unit of a good.
Decision-Making: Consumers allocate resources to maximize total utility, choosing goods with the highest marginal utility per dollar spent.
Law of Diminishing Marginal Utility: As more of a good is consumed, the additional utility from each unit decreases.
Impact on Demand:
As marginal utility decreases, consumers are willing to pay less for additional units, creating a downward-sloping demand curve.
Explain the concept of marginal productivity. How does it determine the distribution of income among the factors of production?
Answer:
Marginal Productivity: The additional output produced by an extra unit of a production factor (e.g., labor or capital).
Wages: Determined by the marginal productivity of labor.
Rents: Based on the marginal productivity of land.
Profits: Reflect the productivity of capital investments.
Income Distribution: Each factor is paid according to its contribution to total output
What is general equilibrium theory? How did Léon Walras contribute to its development?
Answer:
General Equilibrium Theory: A framework analyzing the simultaneous equilibrium of supply and demand across all markets in an economy.
Walras’ Contribution:
Developed mathematical models to demonstrate how markets achieve equilibrium collectively.
Introduced Walras’ Law: If all but one market are in equilibrium, the remaining market must also be in equilibrium.
Discuss the significance of elasticity in economic analysis. How do different types of elasticity impact pricing decisions?
Answer:
Elasticity: Measures the responsiveness of quantity demanded or supplied to changes in price, income, or other factors.
Types:
Price Elasticity of Demand: Affects revenue and pricing strategies—higher elasticity means sensitive consumers.
Income Elasticity: Differentiates between normal and luxury goods.
Cross-Price Elasticity: Indicates substitute or complementary relationships between goods.
What is the difference between partial equilibrium analysis and general equilibrium analysis? Provide examples.
Answer:
Partial Equilibrium: Examines a single market in isolation, holding other markets constant.
Example: Analyzing the wheat market without considering the labor market.
General Equilibrium: Considers the interdependence of all markets simultaneously.
Example: Walras’ model of interconnected markets for goods and inputs.
Explain consumer and producer surplus. How do they relate to market efficiency?
Answer:
Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: The difference between the price producers receive and their minimum acceptable price.
Market Efficiency: Maximized when total surplus (consumer + producer) is at its highest, typically under perfect competition.
What is Pareto efficiency, and why is it a central concept in welfare economics?
Answer:
Pareto Efficiency: A state where no one can be made better off without making someone else worse off.
Application: Evaluates resource allocation to ensure no further improvements are possible without trade-offs.
Relevance: Used as a benchmark for economic policy and welfare analysis.
How does the neoclassical concept of opportunity cost differ from earlier economic theories of value?
Answer:
Opportunity Cost: The value of the next best alternative foregone when making a decision.
Difference:
Earlier theories (e.g., Labour Theory of Value) focused on production inputs to determine value.
Neoclassical approach emphasizes individual trade-offs and choices.
What are indifference curves, and how do they represent consumer preferences?
Answer:
Indifference Curves: Graphs showing combinations of two goods that provide the same level of satisfaction.
Properties:
Downward-sloping (trade-offs between goods).
Higher curves represent greater utility.
Application: Illustrates consumer preferences and optimal choices within budget constraints.
Explain the concept of isoquant curves in production theory. How do they illustrate input trade-offs?
Answer:
Isoquant Curves: Graphs showing combinations of inputs (e.g., labor and capital) that produce the same level of output.
Properties:
Downward-sloping (inputs are substitutable).
Convex shape reflects diminishing returns.
Application: Helps firms determine cost-effective input combinations.
