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Pro Econ Final Exam > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

What is demand?

A

The quantity of a good or a service that a consumer is willing and able to purchase at any given price level

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2
Q

What is supply?

A

Supply is the quantity of a good or service that a producers is will and able to sell at any given price level

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3
Q

What is the equilibrium price?

A

The intersection of supply and demand - the price at which quantity demanded is equal to the quantity supplied

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4
Q

What does the assumption that consumers/producers are price takers mean?

A

No single consumer/producer can influence the market price, hence they can only chose the quantity and take the price as given

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5
Q

What is consumer surplus?

A

Difference between the price consumers are willing to pay and the price they actually pay

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6
Q

What is producer surplus

A

Difference between the price sellers are willing to sell for and the price they actually receive

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7
Q

What is own price elasticity and how can it be estimated?

A

Own price elasticity measures the demand response of a good to a change in its price

change in quantity demanded / change in price

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8
Q

What does an own price elasticity of demand smaller than 1 suggest?

A

Inelastic demand e.g., necessities

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9
Q

What does an own price elasticity of demand greater than 1 suggest?

A

Elastic demand e.g., luxury goods

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10
Q

What is the cross price elasticity of demand and how is it estimated?

A

Cross price elasticity measures the responsiveness of the quantity demanded of one good (x) to the change in price of another good (y)

change in quantity demanded of good x / change in price of good y

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11
Q

If the cross price elasticity of a good is positive what type of goods are they?

A

substitutes

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12
Q

If the cross price elasticity of a good is negative what type of goods are they?

A

complements

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13
Q

What is income elasticity of demand and how is it estimated?

A

Income elasticity of demand measures the responsiveness of quantity demanded to a change in income

change in quantity demanded / change in income

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14
Q

What does it suggest if the income elasticity of a good is greater than zero?

A

it is a normal good

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15
Q

What does it suggest if the income elasticity of a good is greater than one?

A

it is a luxury good

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16
Q

What does it suggest if the income elasticity of a good is less than zero?

A

it is an inferior good

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17
Q

What causes a shift in the demand curve?

A

Factors that change the quantity demanded at a given price e.g., change in tastes, population, income, prices of substitutes of complement goods and expectations of future prices

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18
Q

What causes a movement along the demand curve?

A

A change in the price of the good or service

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19
Q

What is the budget constraint?

A

All possible consumption bundles the consumer can afford with their income (usually focused on two goods)

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20
Q

What causes a pivot in the budget constraint?

A

Price of one good becomes relatively cheaper

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21
Q

What causes a shift in the budget constraint?

A

Change in income

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22
Q

What is a consumption bundle?

A

A combination of different quantities of the various goods a consumer wants to consume

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23
Q

What is utility?

A

The satisfaction that a consumer derives from consuming a particular consumption bundle

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24
Q

What assumptions does consumer demand theory make about utility?

A

Completeness - bundles can be ranked in terms of their utility
Transitivity - the utility ranking of bundles is internally consistent
Preference for more over less

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25
Q

What is ‘diminishing marginal rate of substitution’

A

In order to hold utility constant, diminishing quantities of a good or service need to be sacrificed so as to obtain successive equal increases in the quantity of another good

26
Q

What is the budget constraint line?

A

A line showing all possible consumption bundles which are affordable and exploit all the resources available to the consumer

27
Q

What does the non-satiation assumption about taste imply?

A

Consumers will chose a point on the budget constraint and certain points will be preferred to others

28
Q

What is an indifference curve?

A

A line that shows combinations of two goods that give a consumer the same level of satisfaction

29
Q

What concept measures the slope of the indifference curve?

A

Marginal rate of substitution

30
Q

What is the income effect?

A

the change in consumption that happens when a person’s income changes

31
Q

What is the substitution effect?

A

the change in demand for a product when its price increases relative to other products

32
Q

What is absolute advantage?

A

When one firm can produce a given quantity of a good with fewer inputs compared to another firm

33
Q

What is comparative advantage?

A

When one firm can produce a good at a lower opportunity cost compared to another firm

34
Q

How is overall output maximised according to comparative advantage?

A

Specialising to achieve comparative advantage and then trading

35
Q

What is an isoquant?

A

A line showing all possible combinations of inputs that can produce a given efficient level of output

36
Q

What is the isocost line?

A

A line showing different input combinations with the same total cost

37
Q

What do we assume about how firms make production choices?

A

Firms wish to minimise the cost of producing their given level of output
Firms will produce an output where marginal cost equals marginal revenue

38
Q

What is the marginal rate of technical substitution in production?

A

the rate at which one input can be replaced with another while keeping the same level of output

39
Q

What is constant returns to scale?

A

When an equal proportionate increase in all inputs gives the same proportionate increase in output

40
Q

What is decreasing returns to scale?

A

When an equal proportionate increase in all inputs gives a smaller proportionate increase in output

41
Q

What is increasing returns to scale?

A

When an equal proportionate increase in all inputs gives a larger proportionate increase in output

42
Q

What is short run marginal cost?

A

The increase in short run total cost if output increases by one unit

43
Q

What is long run marginal cost?

A

The increase in long run total cost if the output increases permanently by one unit

44
Q

Where does the marginal cost curve intersect the average cost curve?

A

at the minimum point

45
Q

Assumptions of perfect competition (6)

A

Firms produce homogenous products
Firms are price takers
No barriers to entry or exit
Average cost curves eventually end up sloping upwards
Perfect information between buyers and sellers
Firms maximise profits

46
Q

What level of output do firms choose in perfect competition?

A

Where marginal cost equals marginal revenue, under perfect competition the marginal revenue is always equal to the price

47
Q

Under perfect competition, how should firms respond when marginal cost is less than marginal revenue?

A

increase output to increase profits

48
Q

Under perfect competition, how should firms respond when marginal cost is less than marginal revenue

A

reduce output to increase profits

49
Q

Characteristics of a monopoly (4)

A

One firm supplies the whole market
Significant barriers to entry
Firm is price maker
No close substitutes

50
Q

How do price and output differ between perfect competition and monopoly market structures?

A

Price is higher and output is lower under a monopoly

51
Q

Characteristics of monopolistic competition (3)

A

Many firms
Free entry and exit
Differentiated product but high degree of substitutability

52
Q

Characteristics of an oligopoly (4)

A

Market power held by a few firms
High barriers to entry
Product differentiation
Interdependence of firms

53
Q

What is a ‘Game’ in the context of game theory?

A

A situation in which decision by rational agents are necessarily interdependent

54
Q

What is a ‘Strategy’ in the context of game theory?

A

A detailed game plan describing how the agent will act or move in every conceivable situation

55
Q

What is a ‘Dominant Strategy’ in the context of game theory?

A

Where an agent’s best strategy is independent of those chosen by others

56
Q

What is the Prisoners’ Dilemma?

A

A paradox that shows how two rational people making decisions in their own self-interest can lead to a worse outcome for both - highlighting the incentive for collusion

57
Q

What is a cartel?

A

An agreement between a group of producers to control supply or manipulate prices

58
Q

Why are cartels unstable?

A

It is the dominant strategy for all firms involved to cheat the agreement by reducing their price and then increasing their market share

59
Q

Example of perfect competition

A

Agricultural markets

60
Q

Example of monopolistic competition

A

Soft drinks industry

61
Q

Example of an oligopoly

A

Airlines

62
Q

Example of a monopoly

A

Public utilities

Pro Econ Final Exam (9 decks)

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