Micro L7 - 12 Flashcards
What 2 approaches can assumptions follow?
- Deduction, which starts w/ hypothesis
- Induction, which involved collecting evidence
Compare the two schools of economic thought
- In classical and neoclassical economics decision makers are assumed to be rational (deductive)
- In behavioural economics decision makers are assumed to have bounded rationality, which is a lack of time, info or ability to process info
What do economic agents require to make rational decisions?
- Time
- Info
- Ability to process info (computation)
What is utility in general and what is it for firms?
Utility = Satisfaction/Benefit derived from consuming a good
Utility for firms = Profit
What other behaviours prevent rational decision making?
- Habitual behaviours –> used to consuming good/service
- Consumer inertia –> fear of changing to smth new
- Social influence
What is demand?
Quantity of good/service purchased at a given price over a given time period
Ceteris paribus what is the relationship between price and demand?
As price increases, demand decreases vice versa
How is a decrease in price shown on a supply/demand curve?
There is an extension in demand and contraction in supply. Movement up the curve for demand and movement down the curve for supply
How is an increase in price change shown on a supply/demand curve?
There is a contraction in demand and an extension in supply which is movement down the curve for demand and movement up curve for supply
How is a decrease in non-price change shown on a supply/demand curve?
Shift to left
How is an increase in non-price change shown on a supply/demand curve?
Shift to right
What are the non-price changes that can affect demand?
- Advertising
- Change in incomes
- Change in pop structure
- Change in tastes/preferences
What are the non-price changes that can affect supply?
- Weather conditions
- Improvement in tech/innovation
- Changes in production costs
- Number of firms in market
- Change in price of related goods
- Expected price changes in future
What is supply?
Quantity of good/service firms are willing to sell at a given price over a given time period
How is total revenue calculated?
Price x quantity
Ceteris paribus what is the relationship between price and supply?
As price increases, supply provided increases
What assumptions does the supply diagram make?
- Firms are motivated to produce by profit
- Cost of production of one unit increases as output increases
What is excess demand and how is it shown on a supply and demand diagram?
Quantity of goods/services purchased exceeds the quantity of goods/services firms are willing to sell at a given price over a given period of time.
Bottom half of graph past equilibrium
What is excess supply and how is it shown on a supply and demand diagram?
Quantity of goods firms are willing to sell exceeds the quantity of goods purchased at a given price over a given period of time
Upper half of graph past equilibrium
What is equilibrium price and what does this look like on a graph?
Supply and demand are (close to) equal shown by (Q1, P1) or S and D1 intersection or D and S1 intersection
What is market-clearing price?
Clears goods at the price they have been set
Describe a supply and diagram shift when there is a rise in incomes
A rise in incomes results in
- greater demand shown by shift from D1 to D2
- greater quantity demanded shown by shift from Q1 to Q2
- pushes a price increase shown by shift from P1 to P2
Describe a supply and diagram shift when there is worsened weather conditions
Worsened weather conditions result in
- decreased supply shown by shift from D1 to D2
- decreased quantity supplied shown by shift from Q1 to Q2
- pushes a price decrease shown by shift from P1 to P2
Subsidy
A payment made by the gov to encourage certain economic activities/industries
Direct tax
Tax levied directly on an individual/organisation
Indirect tax
Tax levied on good/service
Specific tax and the shift it causes
Fixed amount of tax that causes a parallel shift in supply curve
Ad Valorem tax and the shift it causes
Tax that increases as the amount sold increases, which causes a non-parallel shift in supply curve
Give two examples of a direct tax
Income tax + Corporation tax
Give two examples of a indirect tax
Fuel duty + VAT
Give two examples of a specific tax
fuel duty + beer duty
Give two examples of an ad valorem tax
VAT + import tariffs
Check graph calculations for tax and subsidy graphs
Inferior goods
Goods where demand decreases as income rises eg. value brand products
