Micro Revision

Question 1

Define Price Elasticity of Demand.

Answer 1

Percentage change of quantity demanded over percentage change in price.

Question 2

Define elasticity more than, less than, and equal to 1.

Answer 2

Elastic: Change in P causes a proportionally larger change in Q.

Inelastic: Change in P causes a proportionally smaller change in Q.

Unit elastic: P and Q change by equal proportion.

Question 3

There are three key determinant last of Price Elasticity of Demand - name them.

Answer 3

The number and closeness of substitute goods.

The proportion of income spent on the good.

The time period.

Question 4

Describe how the number and closeness of substitute goods affects price elasticity of demand.

Answer 4

The more substitutes there are for the good and the closer they are, the more people will switch to alternatives.

Question 5

Describe how the proportion of income spent on the gold impacts Price Elasticity of Demand.

Answer 5

The higher the income spent on a good, the more we will be forced to cut consumption.

Question 6

Describe how the time period impacts Price Elasticity of Demand.

Answer 6

When prices rise, people may take time to adjust their consumption patterns and find alternatives. I.e. a rise in oil prices - inelastic in the short run but more elastic in the long run as alternatives are sourced.

Question 7

When demand is elastic, describe what happens when price rises and falls.

Answer 7

P rises: Q falls proportionally less - total expenditure falls.

P falls: Q rises proportionally larger - total expenditure increases.

Total expenditure moves with Q.

Question 8

When demand is inelastic describe what happens when prices rises and falls.

Answer 8

P rises: Q falls proportionally smaller - total expenditure rises.

P falls: Q rises proportionally smaller - total expenditure falls.

Total expenditure moves with P.

Question 9

Define Price Elasticity of Supply.

Answer 9

Percentage change in quantity supplied over percentage change in price.

Question 10

There are two key determinant ms of Price Elasticity of Supply - name them.

Answer 10

The amount of spare capacity a firm has.

Time period.

Question 11

Describe how the amount of spare capacity in a firm determines price elasticity of supply.

Answer 11

If firms have more spare capacity the will be more elastic as they can adapt.

Less spare capacity leaves less room for adapting.

Question 12

Describe how the time period can impact price elasticity of supply.

Answer 12

In the short run firms will be more inelastic as they may find it difficult to increase supply as other variables may be fixed.

In the long run they are more elastic as all variables can be changed. New firms can also enter the market to meet supply.

Question 13

Loosely describe a perfectly inelastic, inelastic, elastic, and perfectly elastic supply curve.

Answer 13

In order:

Vertical line.

Steep rightward slope.

Shallow rightward slope.

Horizontal line.

Question 14

Define income elasticity of demand.

Answer 14

Percentage change in quantity demanded over percentage change in income.

Question 15

Describe how, as income increases, demand changes for normal and inferior goods.

Answer 15

Normal goods: Demand rises with income. Positive income elasticity of demand.

Inferior goods. Demand falls with income. Negative income elasticity of demand.

Question 16

Define cross-price elasticity of demand.

Answer 16

Percentage change in quantity demanded of good A over percentage change in price of good B.

Question 17

Describe how demand for good A changes with a rise in price for good B when B is either a substitute or compliment to good A.

Answer 17

Substitute: Demand for good A rises as price of good B rises. Positive cross-price elasticity.

Compliment: Demand for good A falls as price of good B rises. Negative cross-price elasticity of demand.

Question 18

How does the closeness of goods A and B impact cross-price elasticity of demand?

Answer 18

The closer goods A and B are, the greater the cross-price elasticity will be - be they substitutes or compliments.

Question 19

Define point elasticity.

Answer 19

The elasticity at a point on a straight demand curve.

PE = (change X / change P) * (P / X)

Question 20

Define Pareto improvement.

Answer 20

Where changes in production or consumption can make as least one person better off without making anyone else worse off.

Question 21

Define Pareto optimality.

Answer 21

Where all possible Pareto improvements have been made - no one can be made better off without making someone worse off.

Question 22

Define rational consumer behaviour.

Answer 22

Doing more activities where marginal benefit exceeds marginal costs and doing less of the opposite.

Question 23

Define social efficiency.

Answer 23

A situation of Pareto optimality where marginal social benefit equals marginal social cost.

Question 24

Define private efficiency.

Answer 24

Where an individual’s marginal benefit equals marginal cost.

Question 25

Define total social surplus.

Answer 25

The total benefit to society from consuming a good less the costs of producing it.

Question 26

Define external costs and benefits.

Answer 26

External cost: Cost of production borne by people other than direct producer or consumer.

External benefit: vice versa.

Question 27

Define social costs and benefits.

Answer 27

Social cost: Private costs plus externalities of production.

Social benefit: Private benefits plus externalities of production.

Question 28

Define a public and merit good.

Answer 28

Public: A good/service with non-rivalrous and non-excludable features. As a result would not be provided by free market.

Merit: Goods the government feel people will under-consume and therefore out to be subsidised or provided free.

Question 29

Describe the two core tenants of public goods and problem why they wouldn’t be produced privately.

Answer 29

Non-rivalrous: The consumption of a good/service by one does not prevent others doing so.

Non-excludable: It’s not possible to prove a good/service to one person without it being made available to others.

Free-rider problem: You can’t stop one person consuming a good another has bought.

Question 30

Define common resources and the tragedy of the commons.

Answer 30

Common resources: Resources not owned but are available free of charge to all.

Tragedy of the commons: When resources are available free of charge they are likely to be over-exploited.

Question 31

Define market power.

Answer 31

Whenever markets are imperfect (monopoly, oligopoly, etc.) the market fails to equate marginal social benefits and costs.

This leads to the under-production of goods and higher prices which damage consumer welfare.

Question 32

Define deadweight loss.

Answer 32

The loss of consumer and producer surplus in imperfect markets when compared to perfect competition.

Question 33

Define the imperfect information and equity issues market failures.

Answer 33

Imperfect information: A lack of information leads to inefficient choices being made that would not be in perfect information scenarios.

Equity issues: Free markets can generate an unacceptable distribution of income and consequent social exclusion which requires government intervention.

Question 34

Define economies and diseconomies of scale.

Answer 34

EoS: When increasing the scale of production leads to lower cost per-unit of output.

DoS: Vice versa.

Question 35

Describe the three main reasons for economies of scale.

Answer 35

Division of Labour: Production is broken down into a number of simpler and more specialised tasks.

Indivisibities: The impossibility of dividing a factor into smaller units I.e. a combine harvester is only economical on large farms.

Machines: Large machines may be more efficient therefore more output can be produced with given inputs.

Question 36

Describe the three main reasons for diseconomies of scale.

Answer 36

Management problems: Long inefficient communications hinder activity.

Division of labour: Workers become alienated if their jobs are repetitive and boring.

Interdependencies of mass-production: Can lead to disruption of a portion of supply lines is held up.

Question 37

Define economies of scope:

Answer 37

When increasing the range of goods can reduce per-unit costs for each as costs can be split.

Question 38

Define potential benefits of Monopoly.

Answer 38

Economies of scale: Marginal cost curve is below that of an identical firm in perfect competition therefore more produced at a lower price.

R&D: Monopolies command supernormal profits which can be reinvested.

Question 39

Define potential disadvantages to monopoly.

Answer 39

Higher price and lower output than perfect competition in long run.

Lack of competition could lead to X-inefficient behaviour and high costs.

Question 40

What is a natural monopoly?

Answer 40

When long-run average costs are lower in a monopoly that other market structures I.e. construction of rail networks.

Question 41

Describe monopolistic competition.

Answer 41

A market structure where many firms are in competition each with small degree of market power.

Question 42

Describe oligopoly.

Answer 42

A few firms sharing large portions of the market.

Question 43

How do firms behave in oligopoly?

Answer 43

Firms are interdependent - each is aware their actions directly impact the actions of others.

This can lead to either competition or collusion.

Question 44

Define the main two tax types.

Answer 44

Specific tax: An indirect tax of a fixed sum per unit sold.

Ad Valorem: An indirect tax of a certain percentage of the price of the good. .

Question 45

How does a rise in specific and Ad Valorem tax impact the supply curve?

Answer 45

Specific: Supply curve moves up by tax amount - restricting demand through higher price.

Ad Valorem: Pivots supply curve up effectively making elasticity of supply inelastic - changes in price of the good now reduce demand extra-proportionally.