Micro and Business Economics (Theme 1 and 3)

Question 1

What are the qualities of money

Answer 1

1. store of value
2. means of exchange
3. standard for deferred payments

Question 2

What is a positive statement

Answer 2

A fact or statistic that can easily be proven or disproven

Question 3

what is a normative statement

Answer 3

A statement that is a valued judgement (opinion)

Question 4

Price Mechanism

Answer 4

1. Producers are signaled that that their price is too low by excess demand. firms notice excess demand with waiting list for products and products quickly selling out
2. Producers are then incentified to increase prices as they will get more profit, this leads to higher prices
3. This decreases or if priced correctly removes excess demand
4. This then results in proper allocation of scarce goods, known as the invisible hand by Adam Smith.

Question 5

Consumer surplus

Answer 5

The difference between what the price that the consumer is willing to pay and the price they actually pay. Triangle bellow demand curve and above price

Question 6

Producer surplus

Answer 6

The difference between what the price that the producer is willing to produce at and the price they actually produce the good at. Triangle above supply curve and bellow price

Question 7

How does an indirect tax affect consumer and producer surplus

Answer 7

They both decrease

Question 8

What is asymmetric information

Answer 8

When the producer knows more about the product than the consumer.

Question 9

Define Externalities

Answer 9

When prices of a good or service do not represent its true cost to society.

Question 10

define quasi public good

Answer 10

A good which has the characteristics of a public good but isn’t a public good. E.g a park

Question 11

Types of market failure

Answer 11

1. Underprovision of public goods
2. Externalities
3. Information gaps

Question 12

Cross elasticity of demand formula

Answer 12

%change in demand for product A / %change in demand for product B

Postive
Substitute
Negative
Complementary

Question 13

Price elasticity of demand

Answer 13

% change in quantity demanded/ %change in price

Question 14

Income elasticity of demand

Answer 14

% change in quantity demanded / %change in income

less than 0 = inferior good
greater than 0 but less than 1 = necessity
greater than 1 = luxury good