Microeconomics Flashcards
Equilibrium equation
Qd=Qs
What is comparative statics used for?
Comparative statics is used to analyse the effects of particular events on the market equilibrium.
PED Formula
PED = (% Change in Quantity Demanded)/(% Change in Price)
%Change = New-Old/Old
How do you calculate %Change?
New-Old/Old
What is a giffen good?
Giffen good is a product that people consume more of as the price rises and vice versa.
Factors affecting PED?
–Proportion of income devoted to the good.
–Availability of close substitutes.
–Definition of the market (shoes versus Adidas shoes).
–Time horizon. Most goods are more price elastic in the long run. However, for certain types of goods known as durable goods, the reverse is true. Why?
–Necessities versus luxuries.
Factors affecting PES?
–The time horizon. –Productive capability of the firm. –Size of the firm/industry. –Mobility of factors of production. –Ease of storing stock.
PES/PED are elastic when?
Value = >1
PES/PED are inelastic when?
Value = <1
Price tends to be more volatile when the elasticity is?
If a product has a very inelastic supply or demand, its price will tend to be more volatile.
How do you calculate PES?
PES = (% Change in Quantity Supplied)/(% Change in Price)
%Change = New-Old/Old
How do you calculate XED?
XED = (% Change in Qd of good B)/(% Change in Price of good A)
If XED is positive, the goods are?
Substitutes
If XED is negative, the goods are?
Complements
How do you calculate YED?
YED = (% Change in Quantity Demanded)/(% Change in Income)
If YED is positive, the good is?
Normal
If YED is negative, the good is?
Inferior
What is utility measured on?
An ordinal scale. E.g. –“I prefer Xbox over PlayStation”. All it cares about is the order.
What is the difference between an ordinal scale and a cardinal scale?
A cardinal scale is concerned with the magnitude as well as order. E.g. I prefer Xbox 10 times more over PlayStation.
How do you calculate the price ratio?
It is the price of the good on the horizontal axis divided by the price of the good on the vertical axis
How is the Marginal Rate of Substitution calculated?
How many A you’re giving up/How many B you’re getting.
MRS = MuA/MuB
Define Axiom of Comparison
Axiom of Comparison: The consumer is able to compare any two bundles. The consumer can state that A is preferred to B, B is preferred to A, or that they are indifferent between the two.
Define Axiom of Transitivity
Axiom of Transitivity: If Bundle A is preferred to Bundle B and Bundle B is preferred to Bundle C, the Bundle A must be preferred to Bundle C.
The slope of the budget constraint is given by the…?
Price Ratio
The slope of the indifference curve is given by the…?
The Marginal Rate of Substitution.
The optimal consumption
bundle (the bundle which maximises utility) occurs at…?
the highest indifference curve that is affordable.
At the point where the two curves are “barely kissing,” the slope of the
indifference curve and the slope of the budget constraint are exactly the
same. This is called…?
The point of tangency
What is the income expansion path?
The income expansion path
summarises how a rational consumer responds to
income changes. The income expansion path is a curve which connects all optimal bundles for different levels of income.
If both goods are normal, the income expansion path is sloping…?
If both goods are normal, the income expansion path is upward sloping.
If one good is inferior and the other is normal, the income expansion path is sloping…?
Downwards.
Engel curves for normal goods slope ______ – the flatter the slope the more ________ the good, and the greater the ______ ______. In contrast, Engel curves for inferior goods have a _______ slope.
Engel curves for normal goods slope upwards – the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.
What does the Engel curve show?
The Engel curve shows the
relationship between the quantity of a good consumed and income.
The price consumption curve shows…?
the price consumption curve is a curve which shows the optimal bundles as the price of one good changes.
In the case of normal goods, the income and substitution effect work in…?
The same direction
In the case of inferior goods, the income and substitution effect work in,,,?
Opposite directions
Define the substitution effect.
The substitution effect is the economic understanding that as prices rise — or income decreases — consumers will replace more expensive items with less costly alternatives.
Define the Income effect
As the income of an individual increases, the lower-priced or inferior commodities are eschewed for more expensive, higher-quality goods and services
When combining the two effects (I + S) after a price decrease, good A consumption will…?
Unambiguously increase if good A is a normal good and Not clear what will happen if it’s an inferior good.
The marginal product of labour measures the…?
Increase in production that results from a one unit increase in the amount of labour used.
Example of a simple production function equation
Q = K + L
Total cost = ?
Fixed Cost + Variable Cost
Average Total Cost = ?
Total Cost/Q
Average Fixed Cost = ?
Fixed Cost/Q
Average Variable Cost = ?
Variable Cost/Q
Marginal Cost = ?
Change in TC/Change in Q
Marginal costs are _____ in the short-run.
Increasing.
ATC curves are..?
U-Shaped
The quantity of output that minimises average total cost is called the…?
Efficient Scale
What does a Long-run ATC curve look like?
U-Shaped comprised of the Short-run ATC’s
As more is produced, average total costs eventually increase due to…?
The diminishing marginal product of labour.
What are some sources of economies of scale?
• If the firm operates on a larger scale, workers can
specialise in the activities in
which they are most productive.
• The firm may be able to acquire some production inputs at lower costs because it is buying them in large quantities and can therefore negotiate better prices.
What are some sources of diseconomies of scale?
• Managing a larger firm may become more complex and inefficient with unnecessary layers of bureaucracy. Communication and decision - making become
more dysfunctional.
• The advantages of buying in bulk may have disappeared. And at some point, available supplies of key inputs may be limited pushing their costs up.
Profit = ?
TR - TC
Average Rev = ?
TR (P x Q)/Q
A firm should continue to produce so long as…?
The marginal revenue is greater than the
marginal cost.
Profit maximisation occurs when…?
MR = MC
MR in competitive markets is equal to…?
The price
The MC curve is also the…?
Competitive firm’s supply curve.
In the short run, firms only care about covering their _____ costs.
Variable.
In the short-run, the firm will shut down if…?
MR falls below the AVC curve
In the long-run, the firm will exit if…?
P is less than ATC
How do you calculate the profit area?
(P - ATC) x Q
What is the difference between economic profit and accounting profit?
Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.
The value of consumer surplus = ?
1/2Base (q) x Height (p)
The group that is more price _____ will share the larger part of a tax burden
Inelastic
What does the Laffer Curve represent?
The relationship between the tax rate and revenue - Inverted U
Price Floor
Minimum Price - Above equilibrium
Price Ceiling
Maximum Price - Below equilibrium .
Phillips Curve
A supposed inverse relationship between the level of unemployment and the rate of inflation.
Endogenous Variable
Value determined within the model
Exogenous Variable
Value determined outside the model
Positive Statements
How the world is (facts)
Normative Statements
How the world ought to be (opinions)
Bounded rationality
Humans make decisions under the constraints of limited and often unreliable information.
Heuristic
Shortcut in decision making
Expected Utility Theory
In the presence of risky outcomes, a human decision maker does not always choose the option with higher expected value investments. For example, suppose there is a choice between a guaranteed payment of $1, and a gamble in which the probability of getting a $100 payment is 1 in 80 and the alternative, far more likely outcome is getting nothing (the expected value is then $1.25); according to expected value theory people should choose the $100-or-nothing gamble, but as stressed by expected utility theory, some people are risk averse enough to prefer the sure thing, even though it has a lower expected value, while other less risk averse people would still choose the riskier, higher-mean gamble.
Constant return to scale
Long-Run Average Total Cost Curve does not change with the quantity.
Pareto Improvement
When an action makes somebody better off without harming anybody else
Social Welfare Function
The collective utility of society which is reflected by all the individual consumer and producer surpluses.
Ad Valorem Tax
Levied as a % of the price of the good
Tax Specific tax
Fixed rate of tax on a good
Average tax rate equation
Tax you are liable to pay/Taxable income
Marginal Tax Rate
Change in tax liability / change in taxable income
Lump-sum tax
tax which is the same amount for every person
Benefits principle
Idea that a person who benefits more from a service should pay more for it.
Ability-to-pay principle
Idea that taxes should be levied on a person according to how well that person can shoulder the burden.
Vertical equity
Tax payers with greater ability to pay taxes should pay larger amounts
Horizontal equity
Taxpayers with similar abilities should pay similar amounts
Proportional tax
Same fraction of income
Regressive tax
Higher earners pay smaller fraction
Progressive tax
Higher earners pay bigger fraction
Permanent Income
person’s normal income
Absolute advantage
the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
Comparative advantage
the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
GDP deflator equation
Nominal GDP / Real GDP x 100
Future value equation
(1 + r)n (power) x100
