Microeconomics Flashcards
What is economics defined as?
Economics is defined as the allocation of scarce resources amongst competing uses.
What 3 things is economics concerned with?
o The production of goods and services
o The consumption of goods and services
o Scarcity (the world has only a limited amount of resources at any one time)
What are the different types of resources?
Hint: there’s 4
(1) Land
(2) Labour
(3) Capital
(4) Enterprise
What is the resource land limited by?
The size of the earth
What is the resource labour limited by
Number and skill
What is the resource capital limited by?
The inputs that are used in the production of other goods
What is the resource enterprise limited by?
The stock of available knowledge at any one time
What is macroeconomics?
The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
What is microeconomics
The study of how households and firms make decisions and how they interact in markets.
Define scarcity
The excess of human wants over what can actually be produced
When is an economy efficient?
If it provides the maximum amount of goods, given the resources available to the people who demand them.
List three different types of efficienct.
(1) Productive efficiency
(2) Allocative efficiency
(3) Product mix efficiency
What question arises from productive efficiency?
Do we get the maximum output for production put in?
What question arises from allocative efficiency?
Are the people who get the best outcomes from the good actually getting it?
We express our wants through the market. When they work markets are a good means of allocating resources. Why?
(1) They are decentralised
(2) There are very small transaction costs.
What are the problems of a planned economy?
(1) Information overload
(2) Poor incentives
(3) Quality
(4) Inefficiency
(5) Insufficient competition
(6) Consumption
(7) Loss of individual liberty
What is a free market economy?
An economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods and services.
What is a mixed economy?
The Government and the private sector jointly solve economic problems.
How does the Government influence economic decisions?
(1) Regulation
(2) Taxation
(3) Subsidies
(4) the provision of certain services
What is the economic rationale for Government?
Hint: 4
(1) Regulatory role
(2) Allocative role
(3) Distributive role
(4) Stabilisation role
What is an economic model?
A highly simplified representation of a more complicated reality.
Name one assumption of economic models?
That people are rational.
What are economic models used for?
(1) A formal presentation of an economic theory.
(2) To simplify, explain and predict
(3) To show a simplified relationship between the economic phenomena it is trying to explain
What happens if the economic model does not work?
Need to ask
(1) Is something wrong with the model?
(2) Has something surprising happened?
(3) Should the model be changed?
What is opportunity cost?
The quantity of other goods sacrificed to get another unit of that good.
What is a positive statement?
(1) It attempts to describe the world as it is
(2) It can be confirmed or refuted.
What is a normative statement?
(1) It is an attempt to prescribe the world as it should be.
2) It cannot be confirmed or refuted (it’s a value judgement
What is the scientific method?
The development and testing of theories about how the world works.
What is the Production Possibilities Frontier? (PPF)
(1) A model that helps us identify and think about certain aspects of the economy.
(2) A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Draw an example of a Production Possiblilities Frontier for an economy that could produce wheat or computers and has 50,000 labour hours.
- Draw wheat on one axis and computers on the other
- If 50,000 hours are allocated to computers and 0 to wheat then there are 500 computers and 0 wheat produced, etc.
- Points on the PPF (A-E) are possible and efficient (all resources are fully utilised)
- Points under the PPF (F) are possible but inefficient (only uses 40,000 labour hours so could get more of either good without sacrificing the other).
- Points above the PPF (G) are impossible (requires 65,000 labour hours so impossible given resources and technology).
What does the slope of the Production Possibilities Frontier show you?
The opportunity cost of one good in terms of the other
Why could you have economic growth?
Hint: 2
- Additional resources (immigration)
- New technology
Why would the shape of the Production Possibilities Frontier be straight?
When the opportunity cost remains constant.
Why would the shape of the Production Possibilities Frontier be bow-shaped?
(Hint: 3)
(1) When opportunity cost rises as more of a good is produced
(2) When different workers have different skills, different opportunity costs of producing one good in terms of the other
(3) When there is another resource (or mix of resources) with varying opportunity costs (different types of land suited for different uses)
Why do economists say that two countries can gain from trade when each specialises in the good it produces at lowest cost?
(A) When each country specialises in the good(s) in which it has a comparative advantage
- total production in all countries is higher
- the world’s economic pie is bigger
- all countries gain from trade
(B) Trade allows countries to move beyond the Production Possibilities Frontier
Who developed the theory of comparative advantage?
David Ricardo
What is absolute advantage?
The ability to produce a good using fewer inputs than another producer.
What does absolute advantage measure?
The cost of a good in terms of the inputs required to produce it.
What is comparative advantage?
The ability to produce a good at a lower opportunity cost than another producer.
What do gains in trade arise from?
Comparative advantage (the differences in opportunity cost).
What is a market
A group of buyers and sellers of a particular product
What is a competitive market?
A market with many buyers and sellers, each has a negligible effect on price
What is a perfectly competitive market?
The good produced is homogenous and buyers and sellers are so numerous that no one can affect market price
What is the role / function of a market?
- A decentralised means of allocating resources through the decisions of firms and markets
- often an excellent means of making decisions
What is market failure?
A situation in which a market left on its own fails to allocate resources efficiently.
What is market power?
The ability of a single economic actor (or small group of actors) to have substantial influence on market prices.
What is the quantity demanded of a good?
The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
What is the quantity supplied of a good?
The quantity supplied of a good is the amount that sellers are willing and able to sell.
What is the law of demand?
The law of demand is the claim that the quantity demanded of a good falls when the price of the good rises?
What is the law of supply?
The law of supply is the claim that the quantity supplied of a good rises when the price of the good rises, other things being equal.
What is a demand schedule?
A table that shows the relationship between the price of a good and the quantity demanded.
What is a supply schedule?
A table that shows the relationship between the price of a good and the quantity supplied.
What is market demand?
The sum of the demands of all buyers.
What is market supply?
The sum of the supplies of all sellers.
Draw a demand schedule for icecream
Start with €0 - high demand
Go up to €3 - low demand
Draw a supply schedule for icecream market
Start at €0 - low supply
Go up to €3 - high supply
What does the demand curve show?
How price affects quantity demanded, all other things being equal.
What does the supply curve show?
How price affects quantity supplied, all other things being equal.
What causes a movement along the demand curve?
Price
What causes a movement along the supply curve?
Price
What shifts the demand curve?
Hint: 5
- Number of buyers
- Income
- Price of related goods
- Tastes
- Expectations
What shifts the supply curve?
Hint: 4
- Input prices (business costs)
- Technology
- Number of sellers
- Expectations
What is a normal good?
It is positively related to income
i.e. increase in income = increase in demand
What is an inferior good?
It is negatively related to income
i.e. increase in income = decrease in demand
What is a substitute good?
Increased price in one (pizza) causes increased demand in the other (hamburger).
What is a complementary good?
Increased price in one (printer) causes decreased demand in the other (printer cartridges).
What is elasticity?
A measure of the responsiveness of quantity demand / supplied to a change in one of its determinants.
What is the price elasticity of demand?
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
What is the price elasticity of supply?
A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied by the percentage change in price.
What does it mean when elasticity is greater than 1?
The good is elastic.
Quantity demanded / supplied moves proportionately more than the price.
(i.e. small change in price = bigger change in quantity)
What does it mean when elasticity is greater than 1?
Unit elasticity.
The quantity supplied is the same regardless of price.
What does it mean when elasticity is less than 1?
Inelastic.
The quantity demanded / supplied move proportionately less than the price.
(i.e. big change in price = small change in quantity)
List 4 factors that influence the elasticity of a demand curve?
(1) Availability of close substitutes (e.g. butter and margarine)
(2) Necessities (doctor) v. luxuries (sailboats)
(3) Definition of market
(4) Time (more elastic over time)
What is the income elasticity of demand?
How much the quantity demanded responds to changes in consumers’ income.
What is the cross-price elasticity of demand?
How much the quantity demanded of one good responds to changes in the price of another good.
What is total revenue?
The amount paid by buyers and received by sellers.
How is total revenue computed?
The price of the goods times the quantity sold
TR = P x Q
What is the change in total revenue when the demand curve is elastic?
- The extra revenue from selling at a higher price is less than the lost revenue from selling fewer units.
- Price and total revenue move in opposite directsion
What is the change in total revenue when the demand curve is inelastic?
- The extra revenue from selling at a higher price is greater than the lost revenue from selling fewer units.
- Price and total revenue move in the same direction.
What is market equilibrium?
Where price (p) has reached the level where quantity supplied equals quantity demanded.
What is equilibrium price?
The price that balances quantity supplied and quantity demanded.
What is equilibrium quantity?
The quantity supplied and the quantity demanded at the equilibrium price.
What is excess supply?
When quantity supplied is greater than quantity demanded.
When facing a surplus, what do sellers do?
Try to increase sales by cutting prices, causing demand to rise and supply to fall. This reduces the surplus and the price continues to fall until the market reaches equilibrium.
What is excess demand?
When quantity demanded is greater than quantity supplied.