micro - intro concepts

Question 1

What is the main economic problem?

Answer 1

Allocation of scarce resources that have alternative uses.

Question 2

What is an opportunity cost?

Answer 2

The next best alternative being forgone alongside the concept of a trade off - the exchange of something as part of a compromise.

This is determined by incentives to sure that policies for example follow future consumer incentives.

Question 3

What are 3 microeconomic issues?

Answer 3

1. Strategic behaviour of firms - where firms make a decision leading to a pay off for example game theory with the incentive to profit maximise
2. Determinants of the demand for specific good - whether the demand is in/elastic which is influenced by 5 factors a) income b) price c) preference d) price of related goods e) expectations
3. Effect of specific taxes - the increase of an ad valorem (percentage) tax causes a pivotal rotation of the supply curve influencing its elasticity. This therefore increases the price and makes the demand the desired quantity reduce.

Question 4

Why can the UK’s GDP be larger than another considering only economic agents?

Answer 4

Can be improved my knowledge to improve labour productivity for example Adam Smith’s concept of division of labour. It can also be impacted by the size of the workforce (population) so if the population grows slower than the GDP then the average GDP (per capita) would decrease overall.

Question 5

What microeconomic factors impact the inflation rate?

Answer 5

Cost push inflation and demand pull inflation show the general comparison of costs overtime and is measured with the consumer price index due to the percentage change of a basket of goods consumed by households.
Demand pull inflation can occur from an increase in demand from higher wages etc therefore more consumer spending leaves a scope for firms to increase prices. A supply pull inflation occurs when there is a decrease inn aggregate supply of goods and services, this often stems from an increase in the cost of production due to a disruption in a factor of supply.

Question 6

What are the consequences of a large fiscal deficit ?

Answer 6

This is when government total expenditure is greater than its total revenue for the fiscal year so must borrow money. This can lead to increased government debt with accumulated interest rates. This creates less investor confidence that leads to higher borrowing costs and reduced investments. This can implement crowding out investment that the government would need to compete with the private sector for available funds with the bank that causes higher interest rates and discourages private investment that will have a toll one the future generation because the government must repay debts.

Question 7

What is voluntary trade and what are the implications with it?

Answer 7

Voluntary trade is when both parties are rational and gain from the trade because they are both willingly participating

However voluntary trade is often associated with having an option but it may be the case where the options are manipulated so the gain is restricted