Micro Flashcards
Explain how PPC shows SCARICITY and OPPO COST
Scarcity is depicted by the frontier. It is impossible to produce beyond this frontier with currently available resources (land, labor, capital, enterprise), thus infinite want beyond this frontier can’t be fulfilled by the finite resource.
Due to the scarcity of resources, choices must be made about how to allocate them. Choosing to produce more wheat means you must reallocate resources away from producing sugar. Such choices give rise to oppo costs in terms of the sugar production forgone.
PPC curves outwards because some resources are better at producing one good than another. This leads to increasing oppo cost: more resources are allocated to producing wheat → becomes less efficient for each extra unit → decreasing MP → increasing oppo cost in terms of sugar production foregone
Explain the shifts and movement along PPC
- on = productive efficiency
- inside = inefficiency, producing below potential output (eg. UE)
- movement along = reallocation of resource
- point shift inside→on = actual growth - efficient utilization of existing resources (eg. full employment)
- curve shift outwards = potential growth - increase in quantity/quality of FOP (eg. discovery of new resource, advance in technology) → increase in potential output
Explain how cognitive biases affect consumer behavior
- Rules of Thumb Bias - consumers make mental shortcuts to make a quick, satisfactory but not perfect decision
- Anchoring Bias - consumer choices are affected by anchor values that are pre-set in their minds
- Framing Bias - consumer choices are affected by how information is presented
- Availability Bias - consumer choices are affected by the most recent available info
Evaluate the limitations of the assumptions of rational consumer choice
- Bounded rationality - we don’t have the ability to weigh up all options due to limited time and info
- Bounded self control - we don’t always have the willpower to resist temptations
- Bounded selfishness - we don’t always act in our own self interest
- Imperfect information - different economic agents only have access to certain levels of information
Explain why changes in price may lead to changes in resource allocation
Covid-19 Pandemic in China
desire to prevent infection/spread of virus increased the preference for masks
→ D increase (D curve shift to the right)
→ D>S = shortage at original price (P1)
→ P increase (to P2)
Increase in P disincentivize some consumers from buying masks and makes consumer ration income as their PP falls and there’s less utility in relation to the $ spent (reduce outdoor activities) → rations scarce supply of mask to those willing + able to pay higher P → QD fall (A to B)
Increase in P creates profit incentive to producers to produce more masks → textile factories allocate more FOP (labor, machinery, raw materials…) to producing mask
→ QS rise (C to B)
In LR, higher P and profit signal potential mask suppliers to enter the market →S increase → S curve shift to the right → reallocation of resource towards masks (PPC) → new equilibrium, eliminates shortage and achieves allocative efficiency
Explain how a increase in supply would lead to a new market equilibrium.
China gov banned all cram tutoring schools outside of curriculum→ UE of cram teachers
→ S of teachers in labor market increase (S shift to the right)
→ S>D = surplus at original price (P1)
→ P decrease (to P2)
Decrease in wage disincentivize some teachers → ration their working hours since there’s less wage earned in relation to the time spent → rations scarce demand to those willing + able to work more hours for low P → QS fall (A to B)
Decrease in P signals surplus and creates incentive for schools to hire more teachers → QD rise (C to B)
In LR, lower P signal some teachers to exit the market to find other jobs with higher wage→ S decrease → S curve shift to the left → reallocation of resource towards education (PPC) → new equilibrium, eliminates surplus and achieves allocative efficiency
Discuss the view that competitive markets will always achieve allocative efficiency.
DEFINE competitive market, MSB/MSC, CS, PS, SS, ME/AE…
No Externality: Competitive Market = AE
- 图 for MSC=MSB → max area
- 反证法：图 for MSC ≠ MSB → DWL
Externality: Market Failure
- PE 图- healthcare (merit - under-p/c)
- NEP 图- overfishing (CAR)
- NEC 图- cigarette (demerit - over-p/c)
- Public Good - national defense - missing market
- Asymmetric Info - 2nd-hand car, insurance - low D/S, missing market
Explain how PED and PES are different for primary commodities & manufacture goods
Primary commodity = natural resources (eg. steel, crops) essential for sruvival/ producing certain goods
* Few substitutes → inelastic PED
* Takes time and limited land to grow + hard to store → inelastic PES
Manufactured goods = man-made goods from raw materials (eg. cars, jewelry)
* More substitutes → elastic PED
* Fast to produce and increase output + easy to store → elastic PES
Evaluate the usefulness of YED for firms and governments
Firms:
Inferior: instant noodle (recession = UE+ = D+ = increase output)
Normal: rice = nessesity = low YED
* Boom: Y rise, 图 D shift right a little, rice producers gain greater but not significant revenue
* LR: agriculture (primary sector) tend to contract → farmers can earn more by increasing the value added to their products eg. agro-tourism, live-streaming in China
Luxury: Hermes = high YED → adjust pricing/marketing strategies to appeal to high-income
Government:
China has experienced rapid EG and undergone a significant sectoral shift from P to S/T → gov uses YED to determine the most effective policies to adapt to ∆D + encourage sustained EG + improve LS
* Service (eg. healthcare, education, entertainment) = high YED → gov increased investments and reducde regulation
* D shift from low- to high-quality manufactured goods as Y+ → gov spending/investment in the development of high-tech manufacturing while phasing out low-value manufacturing industries.
Evaluation:
- YED not absolute + hard to measure!
Discuss the significance of PED on governments’ decisions
*Rememember to include DEFINITIONS!
When gov wants to change consumer behavior, PED is significant
* Cars have elastic D → SG gov regulates car demand uses the COE system to increase the cost of car ownership → regulate traffic congestion → correct NEC
* CN gov impose high tax on petrol than electric cars → EV more attractive than petrol, correct NEC by encoruaging switch from petrol to EV
When gov wants to consider other objectives (equity, LR) PED is less significant
* SG high tobacco tax = inelastic D = not as effective in reducing QD → generates TR to invest in edu/substitute to make PED more elastic in LR
* US indirect tax on luxury = elastic D = won’t gain much TR, why tax? → progressive (tax burden only on rich) → promote EQUITY, improve income distribution
Discuss the significance of PED on firms’ decisions
BMW = luxury = elastic PED= should decrease P to increase QD and R (definition+draw diagram)
* BUT high P is proof of high quality and status
* BUT high COP makes it hard to lower P
Evaluation:
Depends on nature of product +
PED not absolute!
* Is PED really elastic for luxury car? brand loyalty + high income + no close substitute = inelastic D = should raise P instead
* Is PED really inelastic for ‘cheaper’ car? can be small portion of income for rich, but large expenditure for the poor = elastic D = should lower P instead
Meituan: PED inelastic (lack substitute+ small portion of income) should increase P to increase R
* Initially wanted to expand market share + gain more consumers →growth > profit maximization → stay low P → PED insignificant
* LR: increase P and increase TR after growth is achieved → PED significant
Evaluation:
Depends on firm objective + SR/LR
Explain, using a diagram, income elastic, inelastic and inferior goods on an Engel curve
- pork is considered luxury in China 1970s when Y is low → D for pork increases lots as Y increase
- as Y continues to increase it becomes a necessity (2000s) → D for pork becomes stable
- finally becomes inferior good when income is high and better substitutes emerge (beef/seafood healthier) → D for pork decrease
Explain two reasons why a government might impose an indirect tax on a good.
- tax revenue SG tobacco tax
- correct NE: CN petrol car tax
- equity: US, California 3% sales tax on luxury
Explain two reasons why a government might want to subsidize a good
- Protect Producers: US subsidize corn
- Correct PE: US subsidize private healthcare to encourage p+c
Discuss the consequences for different stakeholders of the government providing subsidy on a good/service
Subsidy in efficient market - US corn
* C: lower P, higher Q
* P: higher PxQ=R, but inefficient (no productive efficiency) + grow only the crop that receives subsidy (soil depletion, unsustainable)
* G: OC, may finance subsidy by higher tax; LR surplus will need gov purchase
Subsidy in PE - US healthcare
* merit = under p/c → subsidy corrects PE! AE!
* C: low P high Q, but still regressive
* P: inefficient, but still better than public healthcare (higher quality +efficiency) + 6mn employment
* Gov: costs 20% GDP, OC, but social welfare spending is justified and will gain political support
