Micro economics

Question 1

What’s a positive statement?

Answer 1

Are ‘objective’ statements that can be scientifically tested using available evidence.

Question 2

What’s a normative statement?

Answer 2

Are ‘subjective’ statements which are based on opinion rather than on fact. They cannot be tested.

Question 3

Some key normative vocabulary?

Answer 3

Is unfair/fair, is too big/small, is too high/low, is too many, is not important, should be, ought to,…

Question 4

Some key positive vocabulary?

Answer 4

Was, has, is = there is evidence

Question 5

3 KEY Economic Decisions?

Answer 5

1. What to produce
2. How to produce
3. Who is benefit from the goods and services produced

Question 6

What is opportunity cost?

Answer 6

Opportunity cost is the next best alternate foregone.

The second ranked activity you gave up.

Question 7

What always have an opportunity cost and what doesn’t?

Answer 7

Economic Goods always have an opportunity cost. Free goods doesn’t.

Question 8

What are the factors of production (resources)?

Answer 8

• Land
• Labour
• Capital
• Enterprise

Question 9

What’s PPF’s?

Answer 9

Production Possibility Frontiers - shows maximum of 2 goods that can be produced if all resources are used efficiently, fully employed with state of technology fixed.

Question 10

What’s a market?

Answer 10

A voluntary meeting of buyers and sellers who are ‘willing partners’ to an exchange.

Question 11

What’s Utility?

Answer 11

The satisfaction from consumption

Question 12

What’s Utility theory?

Answer 12

There will come a point where the satisfaction from extra consumption starts to fall.

Question 13

What’s INCOME effect?

Answer 13

If the price increases it is making you ‘Worst Off’ so you BUY LESS

Question 14

What’s SUBSTITUTION effect?

Answer 14

If the price increases but other products haven’t increases in price then they are now becoming more attractive so we BUY LESS of our goods

Question 15

What’s Consumer Surplus?

Answer 15

This is the ‘satisfaction for free’, the satisfaction a consumer gets is greater than the price they have to pay

Question 16

What’s a contraction?

Answer 16

When prices go up we get a movement up the demand curve

Question 17

What’s a extension?

Answer 17

When prices go down we get a movement down the demand curve

Question 18

What are Normal Goods?

Answer 18

• As income increases demand increases

- As income falls demand falls

Question 19

What are Inferior Goods?

Answer 19

• As income goes up demand falls

- As income falls demand rises

Question 20

What are the 2 types of normal goods?

Answer 20

• Normal goods (Essentials/Necessities)

- Normal luxury

Question 21

What’s a Veblen Good?

Answer 21

In the case of a Veblen good, people think ‘expensive goods are better quality’ so people buy more.

Question 22

What are conspicuous goods?

Answer 22

Goods people like to buy to show social status or success.

Question 23

What is income elasticity of demand?

Answer 23

How responsive demand is to changes in income.

Question 24

Scale of elastic and inelastic products on number line?

Answer 24

0 to 1; 0 to -1 = Inelastic (Weakly inferior or weakly normal)
>1 or

Question 25

What is Cross Price Elasticity of Demand (XPED)?

Answer 25

How the demand for good (A) SHIFT in response to price change in good (B)

Question 26

Formula for Cross Price Elasticity of Demand (XPED)?

Answer 26

% Change in quantity demand for good (A) / % Change in price of good (B)

Question 27

What are the 2 types of goods in Cross Price Elasticity of Demand (XPED)?

Answer 27

• Complementary goods - (Joint demand) the cross price elasticity figure is always NEGATIVE
• Substitute goods - (Competing demand) the cross price elasticity figure is always POSITIVE

Question 28

Give an example of a complementary product.

Answer 28

Mobile phones (A) and phone chargers (B). Price for phones (A) decrease will equal to increase in demand for phone charges (B).

Question 29

What is a substitute product? Explain features.

Answer 29

-Substitute product (Competing Demand): Price increase (Good A) equals demand increase (Good B) (always positive)

Question 30

Give an example of a substitute product.

Answer 30

Iphone (A) and Samsung (B). Price for Iphone (A) increase will equal to increase in demand for Samsung (B). (Substitute effect of consumers)

Question 31

The CPEofD for Xbox is +3 relevant to the PS3. Explain the data?

Answer 31

• Figure +3 shows that 2 products are substitutions (Positive)
• Figure is >1 so it is very elastic meaning a decrease in price of one product could help people to substitute to this product.
• This concludes the 2 products have massive competition

Question 32

What is a complementary product? Explain features.

Answer 32

-Complementary product (Joint Demand): Price decrease (Good A) equals demand increase (Good B) (always negative)

Question 33

Whats Price Elasticity of Demand PED?

Answer 33

Only looking at the gradient because gradient has an impact on what happens to total revenue when prices changed

Question 33

All Price Elasticity Figures are?

Answer 33

NEGATIVE. This is because as price rises demand falls, and price falls demand rises - relationship is negative correlation

Question 35

Price elasticity factors?

Answer 35

• Substitutability
• Necessity or Luxuries
• Time
• Percentage of Income
• ‘Width’ or scope of the market

Question 36

Why does travel companies have different prices for each group? (eg.students,workers,pensioners,…)

Answer 36

The travel company is trying to take advantage of the fact that different consumers have different elasticities. To maximise revenue, they would charge different prices for different groups of customers.

Question 37

What is supply about?

Answer 37

Supply is all about COST. A supply curve plots the costs of production at different levels of output.

Question 38

Short-run price elasticity of supply?

Answer 38

In the short-run at least 1 factor of production (land, labour, capital, enterprise) is fixed so the price elasticity of supply in the short-run is always inelastic.

Question 39

Define market failure?

Answer 39

A market failure is whenever the free market equilibrium quantity of output is greater or less than the socially optimal level of output. The free market will produce either too much or too little.

Question 40

Define taxation?

Answer 40

Tax is a compulsory payment imposed by the government in order to achieve objectives such as reducing consumption of demerit goods.