Microeconomics Flashcards

1
Q

What is economics defined as?

A

Economics is defined as the allocation of scarce resources amongst competing uses.

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2
Q

What 3 things is economics concerned with?

A

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)

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3
Q

What are the different types of resources?

Hint: there’s 4

A

(1) Land
(2) Labour
(3) Capital
(4) Enterprise

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4
Q

What is the resource land limited by?

A

The size of the earth

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5
Q

What is the resource labour limited by

A

Number and skill

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6
Q

What is the resource capital limited by?

A

The inputs that are used in the production of other goods

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7
Q

What is the resource enterprise limited by?

A

The stock of available knowledge at any one time

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8
Q

What is macroeconomics?

A

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

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9
Q

What is microeconomics

A

The study of how households and firms make decisions and how they interact in markets.

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10
Q

Define scarcity

A

The excess of human wants over what can actually be produced

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11
Q

When is an economy efficient?

A

If it provides the maximum amount of goods, given the resources available to the people who demand them.

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12
Q

List three different types of efficienct.

A

(1) Productive efficiency
(2) Allocative efficiency
(3) Product mix efficiency

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13
Q

What question arises from productive efficiency?

A

Do we get the maximum output for production put in?

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14
Q

What question arises from allocative efficiency?

A

Are the people who get the best outcomes from the good actually getting it?

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15
Q

We express our wants through the market. When they work markets are a good means of allocating resources. Why?

A

(1) They are decentralised

(2) There are very small transaction costs.

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16
Q

What are the problems of a planned economy?

A

(1) Information overload
(2) Poor incentives
(3) Quality
(4) Inefficiency
(5) Insufficient competition
(6) Consumption
(7) Loss of individual liberty

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17
Q

What is a free market economy?

A

An economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods and services.

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18
Q

What is a mixed economy?

A

The Government and the private sector jointly solve economic problems.

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19
Q

How does the Government influence economic decisions?

A

(1) Regulation
(2) Taxation
(3) Subsidies
(4) the provision of certain services

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20
Q

What is the economic rationale for Government?

Hint: 4

A

(1) Regulatory role
(2) Allocative role
(3) Distributive role
(4) Stabilisation role

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21
Q

What is an economic model?

A

A highly simplified representation of a more complicated reality.

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22
Q

Name one assumption of economic models?

A

That people are rational.

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23
Q

What are economic models used for?

A

(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

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24
Q

What happens if the economic model does not work?

A

Need to ask

(1) Is something wrong with the model?
(2) Has something surprising happened?
(3) Should the model be changed?

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25
Q

What is opportunity cost?

A

The quantity of other goods sacrificed to get another unit of that good.

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26
Q

What is a positive statement?

A

(1) It attempts to describe the world as it is

(2) It can be confirmed or refuted.

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27
Q

What is a normative statement?

A

(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

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28
Q

What is the scientific method?

A

The development and testing of theories about how the world works.

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29
Q

What is the Production Possibilities Frontier? (PPF)

A

(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.

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30
Q

Draw an example of a Production Possiblilities Frontier for an economy that could produce wheat or computers and has 50,000 labour hours.

A
  • 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).
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31
Q

What does the slope of the Production Possibilities Frontier show you?

A

The opportunity cost of one good in terms of the other

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32
Q

Why could you have economic growth?

Hint: 2

A
  • Additional resources (immigration)

- New technology

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33
Q

Why would the shape of the Production Possibilities Frontier be straight?

A

When the opportunity cost remains constant.

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34
Q

Why would the shape of the Production Possibilities Frontier be bow-shaped?
(Hint: 3)

A

(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)

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35
Q

Why do economists say that two countries can gain from trade when each specialises in the good it produces at lowest cost?

A

(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

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36
Q

Who developed the theory of comparative advantage?

A

David Ricardo

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37
Q

What is absolute advantage?

A

The ability to produce a good using fewer inputs than another producer.

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38
Q

What does absolute advantage measure?

A

The cost of a good in terms of the inputs required to produce it.

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39
Q

What is comparative advantage?

A

The ability to produce a good at a lower opportunity cost than another producer.

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40
Q

What do gains in trade arise from?

A

Comparative advantage (the differences in opportunity cost).

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41
Q

What is a market

A

A group of buyers and sellers of a particular product

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42
Q

What is a competitive market?

A

A market with many buyers and sellers, each has a negligible effect on price

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43
Q

What is a perfectly competitive market?

A

The good produced is homogenous and buyers and sellers are so numerous that no one can affect market price

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44
Q

What is the role / function of a market?

A
  • A decentralised means of allocating resources through the decisions of firms and markets
  • often an excellent means of making decisions
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45
Q

What is market failure?

A

A situation in which a market left on its own fails to allocate resources efficiently.

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46
Q

What is market power?

A

The ability of a single economic actor (or small group of actors) to have substantial influence on market prices.

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47
Q

What is the quantity demanded of a good?

A

The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

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48
Q

What is the quantity supplied of a good?

A

The quantity supplied of a good is the amount that sellers are willing and able to sell.

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49
Q

What is the law of demand?

A

The law of demand is the claim that the quantity demanded of a good falls when the price of the good rises?

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50
Q

What is the law of supply?

A

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.

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51
Q

What is a demand schedule?

A

A table that shows the relationship between the price of a good and the quantity demanded.

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52
Q

What is a supply schedule?

A

A table that shows the relationship between the price of a good and the quantity supplied.

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53
Q

What is market demand?

A

The sum of the demands of all buyers.

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54
Q

What is market supply?

A

The sum of the supplies of all sellers.

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55
Q

Draw a demand schedule for icecream

A

Start with €0 - high demand

Go up to €3 - low demand

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56
Q

Draw a supply schedule for icecream market

A

Start at €0 - low supply

Go up to €3 - high supply

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57
Q

What does the demand curve show?

A

How price affects quantity demanded, all other things being equal.

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58
Q

What does the supply curve show?

A

How price affects quantity supplied, all other things being equal.

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59
Q

What causes a movement along the demand curve?

A

Price

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60
Q

What causes a movement along the supply curve?

A

Price

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61
Q

What shifts the demand curve?

Hint: 5

A
  • Number of buyers
  • Income
  • Price of related goods
  • Tastes
  • Expectations
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62
Q

What shifts the supply curve?

Hint: 4

A
  • Input prices (business costs)
  • Technology
  • Number of sellers
  • Expectations
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63
Q

What is a normal good?

A

It is positively related to income

i.e. increase in income = increase in demand

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64
Q

What is an inferior good?

A

It is negatively related to income

i.e. increase in income = decrease in demand

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65
Q

What is a substitute good?

A

Increased price in one (pizza) causes increased demand in the other (hamburger).

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66
Q

What is a complementary good?

A

Increased price in one (printer) causes decreased demand in the other (printer cartridges).

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67
Q

What is elasticity?

A

A measure of the responsiveness of quantity demand / supplied to a change in one of its determinants.

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68
Q

What is the price elasticity of demand?

A

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.

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69
Q

What is the price elasticity of supply?

A

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.

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70
Q

What does it mean when elasticity is greater than 1?

A

The good is elastic.
Quantity demanded / supplied moves proportionately more than the price.
(i.e. small change in price = bigger change in quantity)

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71
Q

What does it mean when elasticity is greater than 1?

A

Unit elasticity.

The quantity supplied is the same regardless of price.

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72
Q

What does it mean when elasticity is less than 1?

A

Inelastic.
The quantity demanded / supplied move proportionately less than the price.
(i.e. big change in price = small change in quantity)

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73
Q

List 4 factors that influence the elasticity of a demand curve?

A

(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)

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74
Q

What is the income elasticity of demand?

A

How much the quantity demanded responds to changes in consumers’ income.

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75
Q

What is the cross-price elasticity of demand?

A

How much the quantity demanded of one good responds to changes in the price of another good.

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76
Q

What is total revenue?

A

The amount paid by buyers and received by sellers.

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77
Q

How is total revenue computed?

A

The price of the goods times the quantity sold

TR = P x Q

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78
Q

What is the change in total revenue when the demand curve is elastic?

A
  • 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
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79
Q

What is the change in total revenue when the demand curve is inelastic?

A
  • 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.
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80
Q

What is market equilibrium?

A

Where price (p) has reached the level where quantity supplied equals quantity demanded.

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81
Q

What is equilibrium price?

A

The price that balances quantity supplied and quantity demanded.

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82
Q

What is equilibrium quantity?

A

The quantity supplied and the quantity demanded at the equilibrium price.

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83
Q

What is excess supply?

A

When quantity supplied is greater than quantity demanded.

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84
Q

When facing a surplus, what do sellers do?

A

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.

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85
Q

What is excess demand?

A

When quantity demanded is greater than quantity supplied.

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86
Q

When facing a shortage, what do sellers do?

A

Raise the price causing demand to fall and supply to rise. This reduces the shortage and prices continue to rise until the market reaches equilibrium.

87
Q

What are the three steps in analysing changes in equilibrium?

A

(1) Does the event shift the supply curve or the demand curve or both?
(2) What direction does the curve shift in?
(3) Use the supply-demand diagram to see hwo the shift changes the quilibrium P and Q

88
Q

What is consumer surplus?

A

The amount a buyer is willing to pay minus the amount the buyer actually pays.

89
Q

What is producer surplus?

A

The amount a seller is paid for a good minus the seller’s costs.

90
Q

What is Willingness to Pay (WTP)?

A
  • The maximum amount that a buyer will pay for a particular good.
  • The utility the buyer gets out of it
91
Q

What is Willingness to Sell (WTS)?

A

The minimum amount the seller will accept for some good?

92
Q

How is consumer surplus computed?

A

CS = WTP - P

93
Q

How is producer surplus computed?

A

PS = Price - cost

94
Q

In terms of consumer surplus, what is the amount the buyer actually pays?

A

Their opportunity cost for consuming the good.

95
Q

In terms of producer surplus, what is the cost?

A

The value of everything a seller must give up to produce a good (i.e. opportunity cost).

This includes all the resources used to produce the good, including the owner’s cost of capital and the value of the seller’s time

96
Q

How are the buyers’ gains from participating in the market computed? (in words)

A

Value to buyers
less amount paid by buyers
= buyers’ gains from participating in the market

97
Q

How are sellers’ gains from participating in the market computed? (in words)

A

Amount received by sellers
less cost to sellers
= sellers’ gains from participating in the market.

98
Q

If shown a diagram with price on the vertical axis and quantity on the horizontal axis, how would you calculate the consumer surplus?

A

(1) The area below the demand curve and above the price.

(2) Area of a triangle = (base x height) / 2

99
Q

If shown a diagram with price on the vertical axis and quantity on the horizontal axis, how would you calculate the producer surplus?

A

(1) The area above the supply curve, and below the line P to Q
(2) Area of a triangle = (base x height) / 2

100
Q

What does a higher price do to consumer surplus?

A

It reduces consumer surplus?

101
Q

What does a lower price do to producer surplus?

A

It reduces producer surplus.

102
Q

What is the total surplus?

A

The benefit of the market.

103
Q

How is the total surplus computed? (words)

A

Value to buyers
less cost to sellers
= total gains from trade in a market

104
Q

If shown a diagram with price on the vertical axis and quantity on the horizontal axis, how would you calculate the total surplus?

A

CS + PS = TS

105
Q

If shown a diagram with price on the vertical axis, quantity on the horizontal axis and the price is €30, which buyers consume the good?

A

Every buyers whose WTP is equal to or greater than €30.

i.e. the buyers who value the good most highly are the ones who consume it

106
Q

If shown a diagram with price on the vertical axis, quantity on the horizontal axis and the price is €30, which sellers produce the good?

A

Every seller whose cost is equal to or less than €30

i.e. the sellers with the lowest cost produce the good

107
Q

What maximises (aggregate) surplus?

A

Equilibrium

108
Q

What is a price ceiling?

A

A legal maximum on the price at which a good can be sold.

109
Q

What is a price floor?

A

A legal minimum on the price at which a good can be sold.

110
Q

What does a tax do?

A

It drives a wedge between the price buyers pay and the price sellers receive.

111
Q

Does it matter more if a tax is imposed on buyers or sellers?

A

Neither.

  • the effects on price are the same
  • the effects on quantity are the same
  • the tax incidence is the same
112
Q

What is the tax incidence?

A

The tax incidence / burden is who actually pays for the tax.

113
Q

What does taxing buyers do?

A

If shifts the demand curve down by the amount of the tax. To make buyers purchase the same quantity as before, the price would have to fall.

114
Q

What does taxing sellers do?

A

It shifts the supply curve up by the amount of the tax. To make sellers supply the same quantity as before, the price would have to rise.

115
Q

How does elasticity impact on the tax burden?

A

A tax burden falls more heavily on the side of the market that is elastic.

116
Q

What happens to the tax burden if demand is more elastic than supply?

A

The sellers’ share of the tax burden is greater.

117
Q

What happens to the tax burden if supply is more elastic than demand?

A

The buyers’ share of the tax burden is greater.

118
Q

What is deadweight loss?

A

The fall in total surplus that results from intervening in the market.

119
Q

How does elasticity impact on deadweight loss?

A

The more elastic the demand / supply, the greater the deadweight loss.

120
Q

What impact can tax have on trade?

A

Tax prevents some mutually beneficial trades from occurring.

121
Q

If the domestic price of a good is less than the world price, what direction is trade in?

A
  • The country has a comparative advantage in the good

- The country exports

122
Q

If the domestic price of a good is greater than the world price, what direction is trade in?

A
  • the country does not have a comparative advantage in the good
  • the country imports
123
Q

If the domestic price of a good is less than the world price, what is the impact of trade on consumer surplus?

A

it falls

124
Q

If the domestic price of a good is less than the world price, what is the impact of trade on producer surplus?

A

It rises

125
Q

If the domestic price of a good is less than the world price, what is the impact of trade on total surplus?

A

It rises

126
Q

If the domestic price of a good is greater than the world price, what is the impact of trade on consumer surplus?

A

It rises.

127
Q

If the domestic price of a good is less than the world price, what is the impact of trade on total surplus?

A

It rises

128
Q

What are the benefits of international trade to consumers?

A

increases the variety of goods

129
Q

What are the benefits of international trade to producers?

A

Lower costs (selling to larger market may achieve greater scale)

130
Q

What are the benefits of international trade to total welfare?

A

(1) Reduces market power of domestic firms

(2) Increases the flow of ideas and the spread of technology

131
Q

What are the negatives of international trade?

A

Losers are often highly concentrated among small group who feel them acutely.

132
Q

How can governments restrict trade?

A

(1) tariffs

(2) import quotas

133
Q

What is profit?

A

Total revenue
less
total cost

134
Q

What is economic profit?

A

Total revenue minus total cost, including both explicit and implicit costs

135
Q

What is accounting profit?

A

Total revenue minus explicit cost

136
Q

What is total revenue?

A

The amount a firm receives for the sale of its output

137
Q

What is total cost?

A
  • The market value of the inputs a firm uses in production.

- The sum of fixed and variable costs

138
Q

What are explicit costs

A

Input costs that require an outlay of money by the firm

An accountant cares about these

139
Q

What are implicit costs?

A

Input costs that do not require an outlay of money by the firm
(An economist cares about these)

140
Q

What is the production function?

A

The relationship between quantity of inputs used to make a good and the quantity of output of that good.

141
Q

What is marginal product?

A

The increase in output that arises from an additional unit of input (holding all other inputs constant)

142
Q
How do you represent
(A) Change in number of workers
(B) Number of workers
(C) Quantity
(D) Change in quantity
A

(A) ΔL
(B) L
(C) Q
(D) ΔQ (aka MPL)

143
Q

What is diminishing marginal product?

A

The property whereby the marginal product of an input declines as the quantity of the input increases.

144
Q

Explain diminishing marginal product.

A

The marginal product of the variable factor diminishes as more of it (e.g. labour) is added to the fixed factor (e.g. land)

145
Q

What is average total cost?

A
  • Total cost divided by the quantity of output
  • ATC = TC / Q
  • How much does it cost to make the typical cup of coffee?
146
Q

What is marginal cost?

A
  • The increase in total cost that arises from an extra unit of production.
  • MC = ΔATC / Δq
  • How much does it cost to increase coffee production by 1 cup?
147
Q

What is the relationship between marginal cost and average total cost?

A

(1) MC curve crosses the ATC curve at the minimum of the ATC curve.
(2) Whenever MC is less than ATC, ATC is falling.
(3) Whenever MC is greater than ATC, ATC is rising.

148
Q

What are fixed costs?

A

Costs that do not vary with the quantity of output produced.

149
Q

What are variable costs?

A

Costs that vary with the quantity of output produced.

150
Q

Give an example of a fixed cost

A

rent

151
Q

Give an example of a variable cost

A

coffee beans, salaries for more workers

152
Q

If drawing a diagram with cost on the vertical and quantity on the horizontal, what does total fixed cost look like?

A

A straight horizontal line.

153
Q

If drawing a diagram with cost on the vertical and quantity on the horizontal, what does total variablecost look like?

A

It increases

154
Q

What is average fixed cost?

A

Fixed cost divided by the quantity of output.

155
Q

If drawing a diagram with cost on the vertical and quantity on the horizontal, what does average fixed cost look like?

A

It decreases (and gets smaller each time)

156
Q

What are average variable costs?

A

Average cost divided by the quantity of output

157
Q

If drawing a diagram with cost on the vertical and quantity on the horizontal, what does average variable cost look like?

A

Look this up

158
Q

What are short run costs

A

Some inputs are fixed (e.g. factors, land)

159
Q

What are long run costs?

A

All inputs are variable in the long term.

160
Q

Why would a firm’s long run cost curve differ from its short run cost curves

A

Because many decisions are fixed in the short term but variable in the long reun

161
Q

What are economies of scale

A
  • Long run ATCc falls as the quantity of output increases
162
Q

What can cause economies of scale

A
  • specialisation

- more common when quantity is low

163
Q

What are constant returns to sclae

A

long-run ATC stages the same as the quantity of output charges

164
Q

What are diseconomies of scale?

A
  • Long run ATC rises as the quantity of output increases
165
Q

What can cause diseconomies of scale?

A
  • coordination problems

- more common when quantity is high

166
Q

What is the impact of different market structures?

A

The difference in market structure shapes the pricing and production decisions of the firms that operate in these markets.

167
Q

What is average revenue?

A

Total revenue divided by the quantity sold?

AR = TR / Q

168
Q

What is Average Revenue equal for all firms?

A

AR = P

average revenue equals price

169
Q

What is marginal revenue?

A

The change in total revenue from an additional unit sold?

170
Q

How is marginal revenue calculated?

A

MR = ΔTR / ΔQ

171
Q

What does marginal revenue equal for competitive firms?

A

MR = P

marginal revenue equals the price of the good

172
Q

At any quantity where marginal revenue is less than marginal cost, what raises profits?

A

Increasing quantity raises profits.

173
Q

At any quantity where marginal revenue is greater than marginal cost, what raises profts?

A

Reducing quantity raises profits.

174
Q

What happens at the profit-maximising level of output?

A

Marginal revenue and marginal cost are exactly equal.

175
Q

How is profit calculated?

A

Profit = (P - ATC) x Q

176
Q

What is normal profit?

A

The reward is just covering opportunity costs

i.e. just better than the next best alternative

177
Q

How is normal profit calculated?

A

TR = TC

178
Q

What is supernormal profit?

A

When a firm makes more than normal profit?

Total revenue is greater than total cost

179
Q

What are the characteristics of perfect competition?

Hint: 5

A

(1) Large number of small firms producing an identical (homogenous) product.
(2) Firms can freely enter or exit market.
(3) Transaction costs are zero.
(4) Market participants have perfect information.
(5) No economies of scale.

180
Q

What is a monopoly?

A

A firm that is the sole seller of a product without close substitutes

181
Q

List the 3 different types of monopoly.

A

(1) Monopoly resources.
(2) Government regulation.
(3) A natural monopoly.

182
Q

Explain monopoly resources.

A

A single firm owns a key resource.

183
Q

Explain government regulation as a type of monopoly.

A

The Government gives a single firm the exclusive right to produce some good or service.

184
Q

Explain a natural monopoly.

A

A single firm can produce the entire market at a lower cost than if there were several others.

185
Q

List three factors of a monopoly firm.

A

A monopoly firm

(1) has market power;
(2) the ability to influence the market price of the product it sells;
(3) can control the price of a good it sells but because a high price reduces the quantity that its customers buy the monopoly’s profits are not unlimited.

186
Q

A monopolist’s marginal revenue is always less than the price of the good (as monopoly faces a downward sloping demand curve). List 4 characteristics of marginal revenue.

A

(1) The demand curve and the MR curve always start on the same point on the vertical axis.
(2) The MR of the first unit sold = the price of the good.
(3) The monopolist’s MR on all units after the first is less than the price of the good.
(4) Therefore, a monopoly’s MR curve always lies below its demand curve.

187
Q

List the output effect of increase in amount sold by a monopoly firm on total revenue.
(Hint: P x Q = TR)

A
  • More output is sold
  • therefore Q is higher
  • which tends to increase total revenue
188
Q

List the price effect of increase in amount sold by a monopoly firm on total revenue.
(Hint: P x Q = TR)

A
  • The price falls
  • so P is lower
  • which tends to decrease total revenue
189
Q

Explain profit maximisation for monopoly firms.

A
  • The firm chooses the quantity of output that equates MR and MC
  • A monopoly firm uses the demand curve to find the highest price it can charge for that quantity.
190
Q

List the 2 calculations of profit for a monopoly firm.

A

(1) Profit = TR - TC

(2) Profit = (P - ATC) x Q

191
Q

List 4 public policy interventions in monopolies.

A

(1) increasing competition with antitrust laws
(2) Regulation
(3) Public ownership
(4) Doing nothing

192
Q

Explain the difference in deadweight loss between a competitive firm and a monopoly firm.

A
  • In a competitive firm (Qc), P = MC, so total surplus is maximised.
  • In a monopoly firm (Qm), P > MC, so there is deadweight loss.
193
Q

When does a firm choose to enter a market?

A

A firm enters the market if the revenue it would get from producing is more than its total costs.
(if TR > TC or also: P > ATC)

194
Q

Explain the difference between a shutdown and exiting the market (definition).

A

Shut down: a short run decision not to produce anything during a specific period of time because of current market conditions.
Exit: a long run decision to leave the market.

195
Q

Explain the difference between a shutdown and exiting the market (costs)

A

Shut down: the firm still has to pay its fixed costs

Exit: the firm does not have to pay any costs.

196
Q

Why would a firm choose to shut down?

A

A firm shuts down if the revenue that it would earn from producing is less than its variable costs of production
(i.e. if TR < VC or also: P < AVC

197
Q

Why would a firm choose to exit the market?

A

A firm exits the market if the revenue it would get from producing is less than its total costs
i.e. if TR < TC or also: P < ATC

198
Q

Name two important findings of behavioural economics

A

(1) Decisions are often inconsistent with rational choice theory
(2) Deicsions are not just motivated by self-interest

199
Q

What are system 1 and system 2 in behavioural economics?

A

System 1 represents the instinctual mental events that allow us to make quick decisions with little mental energy
System 2 is Slow, effortful, infrequent, logical, calculating, conscious

200
Q

list three heuristics

A

anchoring heuristic
availability heuristic
representative heuristic

201
Q

Name two approaches to Behavioural Economics in policy making?

A
  • make it a requirement

- support it as part of the normal process

202
Q

What is homo economicus?

A

aka economicman
the concept in many economic theories portraying humans as consistently rational and narrowly self-interested agents who usually pursue their subjectively-defined ends optimally

203
Q

What is utility?

A
  • the satisfaction we derive from consuming goods

- the basis of demand

204
Q

What does it mean to say utility is subjective

A

a good doesn’t have an inherent utility but depends on each individual consumer

205
Q

What does it mean to say utility depends on time?

A

the same good represents different intensities of utility to the same person at different points in time

206
Q

List 6 reasons why someone would purchase a good

A

(1) functional demand (warmth)
(2) exclusivity (fur coats)
(3) conspicuous consumption
(4) expectations / speculative effect
(5) bandwagon effect
(6) impulse buying

207
Q

what is total utility?

A

the sum of all the utilities we derive from the goods we consume

208
Q

what is marginal utility?

A

the addition to total utility that a person receives from consuming an additional unit of a good

209
Q

what is the law of diminishing marginal utility?

A

as a person consumes additional units of a good, his/her marginal utility will eventually decline

210
Q

what is value?

A

the value of a commodity is usually expressed in money terms and the price of a commodity is often considered its value in terms of money

211
Q

what is the paradox of value

A

Adam Smith
Early economists drew a distinction between use value and exchange value in order to explain why some trivial goods which were not necessary in order to sustain life were exchanged for large sums of money while at the same time essential goods such as water had very low prices

212
Q

what are the problems with the paradox of value?

A

It does not draw a distinction between total utility and marginal utility (which determines whether or not a consumer will buy an item)

213
Q

what is the price elasticity of demand?

A

the responsiveness of the percentage change in quantity demanded to a percentage change in price

214
Q

why is the price elasticity of demand used?

A

how do firms set prices, at what rate do governments set taxes, how do farmers react to changes in weather conditions