Microeconomics Flashcards
What is a reservation price?
The price at which a person would be indifferent between doing x and not doing x
What is the opportunity cost?
If doing x means you can’t do y, then the value of you doing y is the opportunity cost of doing x
What is a sunk cost?
Costs that once spent are lost and so shouldn’t be considered
What is the marginal cost of an activity?
The cost of an additional unit of such activity
Draw a supply-demand graph
What is Pareto efficiency?
The idea that an outcome can’t benefit someone without making someone poorer in the process
What is a price ceiling and price floor
A price ceiling is a maximum a good can be sold for. A price floor is a minimum a good can be sold for.
What is the impact on equilibrium price and quantity by an increase in demand?
Price; increases
Demand; Increases
What is the impact on equilibrium price and quantity by a decrease in supply?
Price; increases
Quantity; decreases
What is the impact on equilibrium price and quantity by a decrease in demand?
Price; falls
Quantity; falls
What is the impact on equilibrium price and quantity by a decrease in supply?
Price; rises
Quantity; falls
What is a dominant strategy?
The strategy that you should adopt in a game irrespective of what your opponent chooses
When is an outcome in a Nash Equilibrium
When neither player has incentive to deviate from their current strategy
What is a sequential game?
A game where one player makes their decision after someone else has made theirs
What is a bundle?
A particular combination of two or more goods
What is a budget constraint?
The set of all bundles that exactly exhaust the consumers income at given prices
What is a composite good?
In a choice between a good X and numerous other goods, the amount of money the consumer spends on those other goods
What is the relationship between bundles on an indifference curve
The consumer would be completely indifferent between any bundles on that curve
What is the marginal rate of substitution
At any point on an indifference curve the rate at which a consumer will exchange the goods on the vertical axis for the good on the horizontal axis; absolute value of the slope
Where does the best affordable bundle occur
When MRS=P(x)/P(y)
Draw an indifference curve for perfect complements
Algebraically, with a utility function U, and goods X,Y, what equation must be satisfied to maximise Utility
(dU/dx)/Px = (dU/dy)/Py
What is a normal good?
One whose quantity demanded rises as income rises
What is an inferior good?
One whose quantity demanded falls as income rises
Draw the effect of an increase in the price of a normal good X
What is a giffen good?
A good for which the quantity demanded rises as its price rises
ie (income effect) > (substitution effect)
What is the substitution effect for perfect complements?
Zero
In a market with n customers, with every customer having the consumer demand curve P=a-bQ(i), what is the market demand curve?
nQ(i)=an/b - nP/b
What is the price elasticity of demand?
The percentage change in the quantity of good demanded resulting from a 1% change in the price
When is a good elastic, unit elastic and inelastic?
Inlastic e>-1
Unit elastic e=-1
Elastic e<-1
What is the point-slope method for calculating elasticity?
P/Q * 1/slope
Draw the graph for a perfectly inelastic demand
When will a price reduction increase total revenue?
When the good is elastic
When will a price rise increase total revenue?
When the good is inelastic
When is total expenditure at a max with respect to elasticity?
When the good is unit elastic
What is income elasticity of demand?
The percentage change in the quantity of a good demanded that results from a 1 per cent change in income
When is a good a
i) necessity
ii) luxury
iii) inferior
Let n be income elasticity of demand
i) 0 < n < 1
ii) n > 1
iii) n < 0
What is the cross price elasticity of demand?
The percentage change in the quantity of a good demanded that results from a 1% change in the price of another good
What is the interpretation of e(XZ) and give the formula
e(XZ) is the change in the demand of X when the price of Z changes
((Change in Quantity of X)/Quantity of X)/((Change in Price of Y)/Price of Y)
What is the cross price elasticity of two complement goods
Less than zero
What are the two factors of production?
Capital K and Labour L
What is the long run?
The least amount of time required to alter the amounts of input in a production process
What is the short run?
The longest period of time where one of the inputs in the production system is fixed
What does the law of diminishing returns state?
if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline
What is the marginal product?
Change in output due to a unit change in the variable input
What is happening to the average product curve when the marginal product curve lies about it?
It is increasing
Where is the average product curve maximal?
At the intersection with the marginal product curve
How should you go about solving a distribution problem
Allocate resources to the highest marginal product
What are isoquants
The set of all input combinations that yield a given level of output
What is the marginal rate of technical substitution
the rate at which one input can be exchanged for another without altering the total level of output. Equal to the absolute value of the slope of the isoquant
What is the relationship between marginal products and MRTS
MPL/MPK = MRTS
When does a production function have increasing returns to scale
F(zK,zL) > zF(K,L)
When two processes are producing total output, how is the cheapest solution found?
MC(A) = MC(B)
What is an isocost line?
The set of input bundles where each costs the same
When does the minimum cost of a bundle on an isocost line occur?
MPL/w = MPK/r
w is wage
r is rent of capital
What is economic profit?
The difference between total revenue and total cost, including explicit and implicit costs
What are the four conditions for perfect competition?
i) Firms sell a standardized product
ii) Firms are price takers
iii) Free entry and exit
iv) Firms and Consumers have perfect information
When is a firm a price taker?
When it takes the market price of a product as given
What is the short run condition for profit maximisation in perfect competition?
When the difference between total cost and total revenue is maximum
What is Marginal Revenue?
The change in total revenue that occurs as a result as a 1-unit change in sales
What is the short-run shutdown condition for a firm in perfect competition?
When price falls below the minimum of average variable cost
Show on a graph where the aggregate consumer and producer surplus’ occur
What is the short run equilibrium price in perfect competition?
Price = marginal cost
What is the price elasticity of supply
The percentage change in the quantity supplied b a firm as a result of a 1% change in product price
What is the equation for elasticity of supply
P/Q * 1/slope
What is a monopoly
A market structure where a single seller of a product with no close substitutes serves the entire market
Are monopolies price makers or price takers
Price makers, set to maximum total revenue. Price elasticity is unit
What is the optimal price condition for a monopolist?
Marginal revenue = marginal cost
What is the relationship between marginal revenue and price elasticity?
MR= P(1 - 1/e)
When the demand curve is P = a-bQ, what is the corresponding marginal revenue curve?
MR = a - 2bQ
What is the shutdown condition for a monopolist?
Whenever average revenue is less than average variable cost at every level of output.
What is third-degree price discrimination?
Different prices are charged in different markets or to different categories of consumer
What is first-degree price discrimination?
Consumers are charged individual prices which are the highest they will pay
What is a Cournot model?
Each firm assumes that rivals will continue producing at their current output levels
How do you solve for quantity and price in a Cournot model?
Set Marginal Revenue = Marginal Cost
What is a Bertrand model?
Each firm assumes that rivals will continue charging their current prices
What is the equilibrium price in a Bertrand model?
Price = marginal cost
