Micro- D, S, Consumer

Question 1

Define demand

Answer 1

the quantity of a good or service that buyers (consumers) are
willing and able to buy at any given price (in a given time period)

Question 2

Define supply

Answer 2

the quantity of a good or service that sellers (…rms) are willing and
able to sell at any given price (in a given time period)

Question 3

Define a market

Answer 3

a set of arrangements by which buyers and sellers are in contact to voluntarily exchange goods or services, prices indicate availability and desire for resources

Question 4

Define the equilibrium price

Answer 4

the price at which quantity demanded equals quantity

supplied

Question 5

Name 5 determinants of Quantity demanded

Answer 5

Price, tastes, income, substitute and complimentary goods

Question 6

Define price elasticity of demand

Answer 6

The responsiveness of quantity demanded of a good to changes in its own
price

%change In Qd / %change in Price

Question 7

What values of price elasticity of demand is elastic, inelastic and unit elastic

Answer 7

Elastic is

Question 8

Name 4 determinants of supply

Answer 8

Price, technology, cost of production inputs (labour and raw materials), gov regulation (taxes, subsidies etc)

Question 9

Define price elasticity of supply

Answer 9

The responsiveness of quantity demanded of a good to changes in its own
price

Question 10

What is a price ceiling

Answer 10

A maximum legal price that sellers can charge

Imposed to the benefit of buyers

Question 11

What’s a price floor

Answer 11

A minimum legal price that sellers can charge

Imposed to the benefit of sellers

Question 12

What’s a consumption bundle

Answer 12

A consumption bundle is simply a collection of particular quantities of
di¤erent goods

Question 13

What are the two axioms of rational preference

Answer 13

Completeness (consumer can’t have no opinion) and Transitivity (ranking must be internally consistent, no cycles)

Question 14

What’s weak monotonicity

Answer 14

when a consumer/agent prefers all consumption bundles that have more
of every good.

Question 15

What’s strong monotonicity

Answer 15

when a consumer/agent prefers all consumption bundles that have more
of at leas5 one good and at least equal amounts of the other goods

Question 16

What’s local non-satiation

Answer 16

Consumer cant prefer a particular amount of a good, must prefer either less or more

Question 17

What is convexity

Answer 17

any two bundles that are each viewed as being at least as good as a third bundle, a weighted average of the two bundles is viewed as being at least as good as the third bundle.

“averages are better than the extremes”. The concept roughly corresponds to the concept of diminishing marginal utility

Question 18

What is strict convexity

Answer 18

for any two distinct bundles that are each viewed as being at least as good as a third bundle, a weighted average of the two bundles (including a positive amount of each bundle) is viewed as being strictly better than the third bundle.

“averages are better than the extremes”. The concept roughly corresponds to the concept of diminishing marginal utility

Question 19

What’s the Marginal rate of substitution

Answer 19

The marginal rate of substitution (MRS) measures the rate at which a
consumer is willing to substitute a small amount of one good for another

Equal to gradient of an IC (indifference curve)

Question 20

When is the MRS constant

Answer 20

Substitute goods, always willing to sub one good for the other.

Question 21

What is the condition for the optimum consumption bundle

Answer 21

Where the MRS (gradient of IC) is equal to the price ratio (which gives gradient of budget line)

Known as the tangency condition

As this puts consumer of highest IC for their given income

Question 22

What’s an ordinary good

Answer 22

a good for which quantity demanded rises as its own
price falls

Demand curve slopes downwards

Question 23

What’s a Giffen good

Answer 23

a good for which quantity demanded falls as its own price falls

An extremely inferior good, as its income effect is so strong that it outweighs its substitution effect

Real life examples are v hard to find!

Demand curve slopes upwards

Question 24

What are the two effects that effect the quantity demanded of a good when it’s price changes

Answer 24

The substitution effect and the income effect.

Question 25

What’s the substitution effect

Answer 25

the change in quantity
demanded that results from the change in relative prices

Shown graphically as a shift along the ORIGINAL IC due to the change in slope of the BL.

Always in the direction of the price change

Question 26

What’s the income effect

Answer 26

the change in quantity demanded that results from the change in purchasing power due to the price change

Shown graphically as a shift from the position on the old IC with the new BL to a new IC with this new BL

Can be either in or against the direction of the price change. Normal good= same direction as price change (consumption increases with increasing income) and opposite for inferior goods.