Microeconmics

Question 1

Compare and contrast homo economicus vs personae socialis.

Answer 1

Homo Economicus
“Economic man”
Rationality, Self-interest, Optimization, Knowledge of outcomes in a given situation
Personae Socialis
“Social people”
Social Influence, Not always rational, Bounded rationality, Multi-faceted Motivation, men are more risky

Question 2

Movement vs shift in demand

Answer 2

Movement:
Change in Quantity Demanded due to a CHANGE IN PRICE while all other factors remain constant.
Shift:
A change in demand as a result of a change in factors other than the commodity’s own price.

Question 3

Demand determinants

Answer 3

• Income:
  Increase income–> Increase demand for normal goods
  Decrease income–> Decrease demand for normal goods
  Increase income–> Decrease demand for inferior goods
  Decrease income–> Increase demand for inferior goods
• Population:
  Increase population–>Increase demand
  Decrease population–>Decrease demand
• Tastes and Preferences:
  In favour–> Increase demand
  Against–> Decrease demand
• Expectations:
  Expected to rise–>Demand increases today
  Expected to fall–>Demand decreases today
• Substitute Goods:
  Price of A rises–> Demand for B increases
  Price of A falls–> Demand for B decreases
• Complementary Goods:
  Price of A rises–> Demand for B decreases
  Price of A falls–> Demand for B increases

Question 4

Movement vs shift in supply

Answer 4

Movement:
- Change in quantity supplied
- Change in price.
Shift:
- Caused by changes in non-price factors/supply determinants

Question 5

Supply determinants

Answer 5

• Input Prices:
  Input price rises–>Decrease in supply
  Input price falls–>Increase in supply
• Number of Sellers/Producers:
  Producers increase–>Supply increases
  Producers decrease–>Supply decreases
• Technology:
  Tech Improves–>Supply increases
• Expectations:
  Expected to rise–>Supply decreases today
  Expected to fall–>Supply increases today
• Substitutes:
  Price of A rises–>Supply for B decreases
  Price of A falls–>Supply for B increases
• Compliments:
  Price of A rises–>Supply for B increases
  Price of A falls–>Supply for B decreases

Question 6

Equilibrium, shortage, and surplus

Answer 6

Equilibrium Price: Quantity demanded equals the quantity supplied.
Shortage: Price is lower than the equilibrium price
Surplus: Price is higher than the equilibrium price

Question 7

Explain the market structures and entry barriers

Answer 7

• Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly
  Entry Barriers:
  Increasing economic returns of scale, Market experience, Restricted ownership of resources, Legal obstacles (patents and copyrights), Market abuses (predatory pricing), Advertising

Question 8

Production Costs

Answer 8

• Fixed Costs:
  Do not change with the level of production.
• Variable Costs:
  Change directly with the level of production.
• Total Production Costs:
  Calculated by adding total direct materials, labor costs, and total manufacturing overhead costs.
• Short-run Costs:
  Include fixed costs, variable costs, and total costs (fixed + variable).
• Long-run Costs:
  All costs are variable, and firms can adjust all factors of production to reach a new equilibrium.

Question 9

Marginal Calculations

Answer 9

• Marginal Productivity (MP):
  (ON - OP)
• Total Cost(TC):
  #workers*Cost of labor
• Marginal Cost(MC)
  ΔTC/ΔTP
• Law of Diminishing Marginal Productivity: The marginal utility from each additional units consumed declines as you increase consumption.

Question 10

Define utility and marginal utility

Answer 10

• Utility: Satisfaction or happiness a consumer derives from consuming a product or service.
• Marginal Utility:
  The change in total utility from consuming an additional unit of a good or service.

Question 11

What are the three sectors of the economy?

Answer 11

The Primary sector consists of industries that extract or cultivate natural resources
The Secondary sector consists of industries that fabricate or process goods
The Service sector consists of trade and
information industries

Question 12

What are the different production
processes?

Answer 12

• Labour-intensive process: Employs more labour and less capital (more physical plant and less equipment)
• Capital-intensive process: Employs more capital and less labour (less physical plant and more equipment)

Question 13

Accounting vs Economic profit

Answer 13

Accounting Profit:
Definition: The difference between total revenue and explicit costs.
Formula:
AccountingProfit = TotalRevenue − ExplicitCosts
- Economic Profit:
Definition: The difference between total revenue and the sum of explicit and implicit costs.
Formula:
EconomicProfit = TotalRevenue −
( ExplicitCosts + ImplicitCosts )

Question 14

Forms of government intervention

Answer 14

• Price Ceilings:
  Purpose: To make goods affordable for consumers when prices are considered too high.
• Price Floors:
  Purpose: To ensure sellers can make a profit when prices are considered too low.
• Subsidies:
  Definition: Grants of money from the government to specific industries.
  Effect: Increases supply, leading to lower prices for consumers and additional revenue for sellers.
• Quotas:
  Definition: Restrictions on the amount of product an individual producer can make.
  Control: Managed by marketing boards (e.g., milk).

Question 15

Elasticity of demand and supply calculations and what elastic and inelastic

Answer 15

How supply/demand responds to a change in price
PED= %ΔQuantityDemanded/%ΔPrice
​PES= %ΔQuantitySupplied/%ΔPrice
PED/PES>1= Elastic
PED/PES<1= Inelastic