Microeconomics Flashcards
Opportunity cost
The next best alternative lost when an economic decision is made
Basic economic problem
Infinite wants and finite resources
-What to produce?
-How to produce?
-For whom to produce?
Factors of production
Land
Labour
Capital
Enterprise
PPC
shows the maximum combination of two types of goods that can be produced in a given time period in an economy
Assumptions we make about PPCs (3)
-The economy only produces 2 goods
-Resources and state of technology are fixed
-All resources are fully employed
Why is the PPC concave
Opportunity cost is not constant, since not all factors of production are equally suitable
Assumptions of the circular flow of income model (2)
-Households are the owners of all factors of production
-Households buy all the nation’s output
Leakages in the circular flow of income model (3)
-Taxes
-Saving
-Imports
Injections in the circular flow of income model (3)
-Government spending
-Investment
-Exports
Free market economy
all production is in private hands and demand and supply are left free to set prices and wages
Planned economy
all production decisions are made by the government
Market
where buyers and sellers come together to carry out an economic transaction
Demand
the quantity of a good that consumers are willing and able to purchase at a given price at a given time
Law of Demand
as price increases quantity demanded falls, and as price decreases quantity demanded increases
Non-price determinants of demand (11)
Population
Advertising
Substitutes
Income
Fashion/Tastes
Interest Rates
Complements
Seasons
Expectations for price change
Demographics
Income effect
when a price of a product falls, “real income” increases, so more people will buy the product
Substitution effect
people recieve a certain “utility” when consuming a product, which is increased when price decreases as marginal utility increases
Types of cognitive biases
Availability, Anchoring, Herb behaviour, Inertia bias, Loss aversion, Hyperbolic discounting
Availability bias
The availability of recent information and examples
Anchoring bias
When we are given the value of something, which is used as a reference point to influence future choices
Framing bias
The way that information is presented to us
Herd behaviour/Social conformity
The way that others behave can exert a powerful influence on our own choices
Status Quo/Inertia bias
When consumers are faced with a “bewildering” set of choices, most would choose to do nothing
Loss aversion bias
Humans feel losses are far more significant that gains
Hyperbolic discounting
Humans that prefer smaller short term rewards than larger long-term rewards
Nudge theory
The theory that everyone’s choices are slightly “nudged” to choose a different option
What is PED
measure for how much the demand for a product changes when there in a change in price
formula for PED
%ΔQd / %ΔP
Types of elasticity
Elastic
Inelastic
Unitary Elastic
Perfectly Elastic
Perfectly Inelastic
Values for PED
PED=0– Perfectly Inelastic
0<PED<1– Inelastic
PED=1– Unitary Elastic
1<PED<∞– Elastic
PED=∞– Perfectly Elastic
Effect on TR from Elasticity
TR increases when price increases and the product is inelastic, or price decreases and the product is elastic
different values for PED on the same line
the further up you go on a demand curve (linear), the higher the more elastic as proportion of income increases
Determinants of PED (4)
-Number and closeness of substitutes
-Necessity of the product
-Proportion of income spent
-The time period considered
