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Year 1 > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

What is a reservation price?

A

The price at which a person would be indifferent between doing x and not doing x

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2
Q

What is the opportunity cost?

A

If doing x means you can’t do y, then the value of you doing y is the opportunity cost of doing x

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3
Q

What is a sunk cost?

A

Costs that once spent are lost and so shouldn’t be considered

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4
Q

What is the marginal cost of an activity?

A

The cost of an additional unit of such activity

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5
Q

Draw a supply-demand graph

A
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6
Q

What is Pareto efficiency?

A

The idea that an outcome can’t benefit someone without making someone poorer in the process

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7
Q

What is a price ceiling and price floor

A

A price ceiling is a maximum a good can be sold for. A price floor is a minimum a good can be sold for.

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8
Q

What is the impact on equilibrium price and quantity by an increase in demand?

A

Price; increases

Demand; Increases

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9
Q

What is the impact on equilibrium price and quantity by a decrease in supply?

A

Price; increases

Quantity; decreases

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10
Q

What is the impact on equilibrium price and quantity by a decrease in demand?

A

Price; falls

Quantity; falls

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11
Q

What is the impact on equilibrium price and quantity by a decrease in supply?

A

Price; rises

Quantity; falls

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12
Q

What is a dominant strategy?

A

The strategy that you should adopt in a game irrespective of what your opponent chooses

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13
Q

When is an outcome in a Nash Equilibrium

A

When neither player has incentive to deviate from their current strategy

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14
Q

What is a sequential game?

A

A game where one player makes their decision after someone else has made theirs

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15
Q

What is a bundle?

A

A particular combination of two or more goods

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16
Q

What is a budget constraint?

A

The set of all bundles that exactly exhaust the consumers income at given prices

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17
Q

What is a composite good?

A

In a choice between a good X and numerous other goods, the amount of money the consumer spends on those other goods

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18
Q

What is the relationship between bundles on an indifference curve

A

The consumer would be completely indifferent between any bundles on that curve

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19
Q

What is the marginal rate of substitution

A

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

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20
Q

Where does the best affordable bundle occur

A

When MRS=P(x)/P(y)

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21
Q

Draw an indifference curve for perfect complements

A
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22
Q

Algebraically, with a utility function U, and goods X,Y, what equation must be satisfied to maximise Utility

A

(dU/dx)/Px = (dU/dy)/Py

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23
Q

What is a normal good?

A

One whose quantity demanded rises as income rises

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24
Q

What is an inferior good?

A

One whose quantity demanded falls as income rises

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25
Q

Draw the effect of an increase in the price of a normal good X

A
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26
Q

What is a giffen good?

A

A good for which the quantity demanded rises as its price rises

ie (income effect) > (substitution effect)

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27
Q

What is the substitution effect for perfect complements?

A

Zero

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28
Q

In a market with n customers, with every customer having the consumer demand curve P=a-bQ(i), what is the market demand curve?

A

nQ(i)=an/b - nP/b

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29
Q

What is the price elasticity of demand?

A

The percentage change in the quantity of good demanded resulting from a 1% change in the price

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30
Q

When is a good elastic, unit elastic and inelastic?

A

Inlastic e>-1

Unit elastic e=-1

Elastic e<-1

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31
Q

What is the point-slope method for calculating elasticity?

A

P/Q * 1/slope

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32
Q

Draw the graph for a perfectly inelastic demand

A
33
Q

When will a price reduction increase total revenue?

A

When the good is elastic

34
Q

When will a price rise increase total revenue?

A

When the good is inelastic

35
Q

When is total expenditure at a max with respect to elasticity?

A

When the good is unit elastic

36
Q

What is income elasticity of demand?

A

The percentage change in the quantity of a good demanded that results from a 1 per cent change in income

37
Q

When is a good a

i) necessity
ii) luxury
iii) inferior

A

Let n be income elasticity of demand

i) 0 < n < 1
ii) n > 1
iii) n < 0

38
Q

What is the cross price elasticity of demand?

A

The percentage change in the quantity of a good demanded that results from a 1% change in the price of another good

39
Q

What is the interpretation of e(XZ) and give the formula

A

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)

40
Q

What is the cross price elasticity of two complement goods

A

Less than zero

41
Q

What are the two factors of production?

A

Capital K and Labour L

42
Q

What is the long run?

A

The least amount of time required to alter the amounts of input in a production process

43
Q

What is the short run?

A

The longest period of time where one of the inputs in the production system is fixed

44
Q

What does the law of diminishing returns state?

A

if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline

45
Q

What is the marginal product?

A

Change in output due to a unit change in the variable input

46
Q

What is happening to the average product curve when the marginal product curve lies about it?

A

It is increasing

47
Q

Where is the average product curve maximal?

A

At the intersection with the marginal product curve

48
Q

How should you go about solving a distribution problem

A

Allocate resources to the highest marginal product

49
Q

What are isoquants

A

The set of all input combinations that yield a given level of output

50
Q

What is the marginal rate of technical substitution

A

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

51
Q

What is the relationship between marginal products and MRTS

A

MPL/MPK = MRTS

52
Q

When does a production function have increasing returns to scale

A

F(zK,zL) > zF(K,L)

53
Q

When two processes are producing total output, how is the cheapest solution found?

A

MC(A) = MC(B)

54
Q

What is an isocost line?

A

The set of input bundles where each costs the same

55
Q

When does the minimum cost of a bundle on an isocost line occur?

A

MPL/w = MPK/r

w is wage

r is rent of capital

56
Q

What is economic profit?

A

The difference between total revenue and total cost, including explicit and implicit costs

57
Q

What are the four conditions for perfect competition?

A

i) Firms sell a standardized product
ii) Firms are price takers
iii) Free entry and exit
iv) Firms and Consumers have perfect information

58
Q

When is a firm a price taker?

A

When it takes the market price of a product as given

59
Q

What is the short run condition for profit maximisation in perfect competition?

A

When the difference between total cost and total revenue is maximum

60
Q

What is Marginal Revenue?

A

The change in total revenue that occurs as a result as a 1-unit change in sales

61
Q

What is the short-run shutdown condition for a firm in perfect competition?

A

When price falls below the minimum of average variable cost

62
Q

Show on a graph where the aggregate consumer and producer surplus’ occur

A
63
Q

What is the short run equilibrium price in perfect competition?

A

Price = marginal cost

64
Q

What is the price elasticity of supply

A

The percentage change in the quantity supplied b a firm as a result of a 1% change in product price

65
Q

What is the equation for elasticity of supply

A

P/Q * 1/slope

66
Q

What is a monopoly

A

A market structure where a single seller of a product with no close substitutes serves the entire market

67
Q

Are monopolies price makers or price takers

A

Price makers, set to maximum total revenue. Price elasticity is unit

68
Q

What is the optimal price condition for a monopolist?

A

Marginal revenue = marginal cost

69
Q

What is the relationship between marginal revenue and price elasticity?

A

MR= P(1 - 1/e)

70
Q

When the demand curve is P = a-bQ, what is the corresponding marginal revenue curve?

A

MR = a - 2bQ

71
Q

What is the shutdown condition for a monopolist?

A

Whenever average revenue is less than average variable cost at every level of output.

72
Q

What is third-degree price discrimination?

A

Different prices are charged in different markets or to different categories of consumer

73
Q

What is first-degree price discrimination?

A

Consumers are charged individual prices which are the highest they will pay

74
Q
A
75
Q

What is a Cournot model?

A

Each firm assumes that rivals will continue producing at their current output levels

76
Q

How do you solve for quantity and price in a Cournot model?

A

Set Marginal Revenue = Marginal Cost

77
Q

What is a Bertrand model?

A

Each firm assumes that rivals will continue charging their current prices

78
Q

What is the equilibrium price in a Bertrand model?

A

Price = marginal cost

79
Q
A

Year 1 (11 decks)

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