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Economics > Micro – Basics > Flashcards

Micro – Basics Flashcards

1
Q

What is a market?

A

Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

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2
Q

State the Law of Demand

A

There is a negative relationship between the price and quantity demanded of a good or service over a particular amount of time, ceteris paribus.

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3
Q

What are the Non-Price determinants of Demand?

A
  • Changes in tastes and preferences
  • Changes in income
  • Prices of substitute and complementary goods
  • Number of consumers
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4
Q

What are the Assumptions underlying the Law of Demand?

A

1) Law of diminishing marginal utility

2) Income and substitution effects

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5
Q

What is the Law of Diminishing Marginal Utility?

A

As consumption of a good increases, marginal utility (the extra utility the consumer receives) decreases with each additional unit consumed.

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6
Q

What is the Income and Substitution effect?

A

Both show that a fall in price leads to an increase in quantity demanded. If the price of a good falls the consumer substitutes (buys more) of the good and the consumer’s purchasing power has increased.

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7
Q

State the Law of Supply

A

There is a positive relationship between the price and quantity supplied of a good or service over a particular amount of time, ceteris paribus.

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8
Q

What are the Non-Price determinants of Supply?

A
  • Costs of factors of production
  • Supply Shocks
  • Number of firms
  • Technological innovation
  • Competitive supply (choosing goods to produce)
  • Joint supply (goods produced by the same derivative)
  • Future expectations
  • Taxes and Subsidies
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9
Q

What are the Assumptions underlying the Law of Supply?

A

1) Law of diminishing marginal return

2) Increasing marginal cost

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10
Q

What is the Law of Diminishing Marginal Return?

A

As more units of a variable input (labor) are added to fixed inputs (land), the marginal product of the variable input (labor) at first increases until later decreases.

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11
Q

What is Marginal Cost?

A

The extra additional cost of producing one more unit of output.

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12
Q

What is the relationship between the Law of Diminishing Marginal Return and Marginal Cost?

A

Negative

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13
Q

Describe Competitive Market Equilibrium

A

Where quantity demanded equals quantity supplied and there is no tendency for the price to change.

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14
Q

What are the Functions of the Price Mechanism?

A

1) Resource allocation through signalling and incentive

2) Rationing

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15
Q

How does the Price Mechanism contribute to Resource Allocation?

A

Prices can act as signals and incentives in the allocation of resources. Prices act as signals to communicate information to decision-makers, and as incentives to motivate decision-makers to respond to the information.

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16
Q

How does the Price Mechanism contribute to Rationing?

A

Price mechanism determines that weather or not a consumer will get a good is determined by the price of the good. (Those who can afford the good will have it, those who cannot, won’t).

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17
Q

What is Consumer Surplus?

A

Benefit received by consumers who buy a good at a price lower than the price they are willing to pay.

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18
Q

What is Producer Surplus?

A

Benefit received by producers who sell a good at a price higher than the price they are willing to sell.

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19
Q

What is Social Surplus?

A

The sum of consumer and producer surplus.

20
Q

How does the Market achieve Allocative Efficiency?

A

When social surplus is maximum and marginal benefits are equal to marginal costs (MB=MC).

21
Q

What are the assumptions underlying Rational Consumer Choice?

A

1) Consumer Rationality
2) Perfect information
3) Utility maximization

22
Q

What is Consumer Rationality?

A

Consumers make choices based on their preferences and they are:
• Able to rank goods according to preferences
• Have consistent choices
• Always prefers more rather than less

23
Q

What is Perfect Information?

A

The state in which the consumer has access to all the information regarding all alternatives so that there is no uncertainty.

24
Q

What is Utility Maximization?

A

Consumers will buy the combination of goods and services which maximises their utility.

25
Q

What are the limitations of Standard Consumer Behavior?

A

1) Biases (cognitive bias)
2) Bounded Rationality
3) Bounded Self-control
4) Bounded Selfishness
5) Imperfect information

26
Q

What are the types of Cognitive Bias?

A 
Biases are systematic errors in evaluation, they include:
• Rules of thumb
• Anchoring
• Framing
• Availability
27
Q

What are Rules of Thumb?

A

Simple guidelines based on experience and common sense which simplify complicated decisions.

28
Q

What is Anchoring?

A

The use of irrelevant information to make a decision.

29
Q

What is Framing?

A

How choices are influenced through the way in which they are presented.

30
Q

What is Availability?

A

Use of information that is most recently available.

31
Q

What is Bounded Rationality?

A

The idea that people are rational only between limits.

32
Q

What is Bounded Self-control?

A

The idea that people exercise self-control only within limits.

33
Q

What is Bounded Selfishness?

A

The idea that people are selfish only within limits.

34
Q

What are examples of Policies inspired by Behavioral Economics?

A

1) Choice Architecture

2) Nudge Theory

35
Q

What are Nudges?

A

A method designed to influence consumers’ choices in a predictable way without limiting choice or offering incentives/sanctions.

36
Q

What is Choice Architecture?

A

The design of particular ways or environments in which people make choices.

37
Q

What are the types of Nudges within Choice Architecture?

A

1) Default Choice
2) Restricted Choice
3) Mandated Choice

38
Q

What are the advantages of Behavioral Economics?

A
  • Simple and low-cost
  • Numerous applications and likely successful
  • Freedom of choice
  • Overcomes weakness of consumer behavior theory
  • Reliable (have been tested)
  • Flexible
39
Q

What are the disadvantages of Behavioral Economics?

A
  • Cannot be accountable for each individual
  • Unsystematic approach
  • Risks of manipulation
  • Could be used as substitutes for necessary policies
  • Traditional policies may be more effective
  • Choices may not be a reflection of real preferences
40
Q

What are the Objectives of Businesses?

A

1) Profit Maximization
2) Corporate Social Responsibility
3) Expand Market Share
4) Satisficing
5) Growth maximization

41
Q

What is Rational Producer Behavior?

A

The assumption according to which firms aim to maximise their profit.

42
Q

What is Corporate Social Responsibility?

A

The practice of firms to avoid socially undesirable outcomes. Examples include avoiding of pollution, cruelty free products, etc.

43
Q

What is Market Share?

A

The percentage of total sales in a market that is earned by a single firm.

44
Q

What is Growth Maximization?

A

Making the growth of a firm as high as possible (and reaching economies of scale).

45
Q

What is Satisficing?

A

Achieving satisfactory results instead of maximizing.

Economics (18 decks)

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