Micro economics Flashcards
What’s a positive statement?
Are ‘objective’ statements that can be scientifically tested using available evidence.
What’s a normative statement?
Are ‘subjective’ statements which are based on opinion rather than on fact. They cannot be tested.
Some key normative vocabulary?
Is unfair/fair, is too big/small, is too high/low, is too many, is not important, should be, ought to,…
Some key positive vocabulary?
Was, has, is = there is evidence
3 KEY Economic Decisions?
- What to produce
- How to produce
- Who is benefit from the goods and services produced
What is opportunity cost?
Opportunity cost is the next best alternate foregone.
The second ranked activity you gave up.
What always have an opportunity cost and what doesn’t?
Economic Goods always have an opportunity cost. Free goods doesn’t.
What are the factors of production (resources)?
- Land
- Labour
- Capital
- Enterprise
What’s PPF’s?
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.
What’s a market?
A voluntary meeting of buyers and sellers who are ‘willing partners’ to an exchange.
What’s Utility?
The satisfaction from consumption
What’s Utility theory?
There will come a point where the satisfaction from extra consumption starts to fall.
What’s INCOME effect?
If the price increases it is making you ‘Worst Off’ so you BUY LESS
What’s SUBSTITUTION effect?
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
What’s Consumer Surplus?
This is the ‘satisfaction for free’, the satisfaction a consumer gets is greater than the price they have to pay
What’s a contraction?
When prices go up we get a movement up the demand curve
What’s a extension?
When prices go down we get a movement down the demand curve
What are Normal Goods?
- As income increases demand increases
- As income falls demand falls
What are Inferior Goods?
- As income goes up demand falls
- As income falls demand rises
What are the 2 types of normal goods?
- Normal goods (Essentials/Necessities)
- Normal luxury
What’s a Veblen Good?
In the case of a Veblen good, people think ‘expensive goods are better quality’ so people buy more.
What are conspicuous goods?
Goods people like to buy to show social status or success.
What is income elasticity of demand?
How responsive demand is to changes in income.
Scale of elastic and inelastic products on number line?
0 to 1; 0 to -1 = Inelastic (Weakly inferior or weakly normal)
>1 or
What is Cross Price Elasticity of Demand (XPED)?
How the demand for good (A) SHIFT in response to price change in good (B)
Formula for Cross Price Elasticity of Demand (XPED)?
% Change in quantity demand for good (A) / % Change in price of good (B)
What are the 2 types of goods in Cross Price Elasticity of Demand (XPED)?
- Complementary goods - (Joint demand) the cross price elasticity figure is always NEGATIVE
- Substitute goods - (Competing demand) the cross price elasticity figure is always POSITIVE
Give an example of a complementary product.
Mobile phones (A) and phone chargers (B). Price for phones (A) decrease will equal to increase in demand for phone charges (B).
What is a substitute product? Explain features.
-Substitute product (Competing Demand): Price increase (Good A) equals demand increase (Good B) (always positive)
Give an example of a substitute product.
Iphone (A) and Samsung (B). Price for Iphone (A) increase will equal to increase in demand for Samsung (B). (Substitute effect of consumers)
The CPEofD for Xbox is +3 relevant to the PS3. Explain the data?
- 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
What is a complementary product? Explain features.
-Complementary product (Joint Demand): Price decrease (Good A) equals demand increase (Good B) (always negative)
Whats Price Elasticity of Demand PED?
Only looking at the gradient because gradient has an impact on what happens to total revenue when prices changed
All Price Elasticity Figures are?
NEGATIVE. This is because as price rises demand falls, and price falls demand rises - relationship is negative correlation
Price elasticity factors?
- Substitutability
- Necessity or Luxuries
- Time
- Percentage of Income
- ‘Width’ or scope of the market
Why does travel companies have different prices for each group? (eg.students,workers,pensioners,…)
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.
What is supply about?
Supply is all about COST. A supply curve plots the costs of production at different levels of output.
Short-run price elasticity of supply?
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.
Define market failure?
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.
Define taxation?
Tax is a compulsory payment imposed by the government in order to achieve objectives such as reducing consumption of demerit goods.
