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Economics > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

Define the term demand.

A

Demand is the amount of goods or services that consumers are willing and able to buy in a given time period at a given price, ceteris paribus.

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2
Q

Define the term supply.

A

The amount of a good a producer is willing and able to sell in a given period of time at a given price, ceteris paribus.

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3
Q

What factors affect demand?

A
  • Changes in the price or demand of related goods such as substitutes, complements, and goods in derived demand.
  • Changes in consumer’s income
  • Changes in consumer’s tastes and preferences
  • Changes in seasonal factors.
  • Aging population.
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4
Q

What factors affect supply?

A
  • Changes in the cost of production.
  • Changes in the production of related goods such as products in competitive supply and joint supply.
  • Changes in price of factor inputs
  • Changes in expectations about future prices
  • Changes in state of technology
  • Changes in the number of suppliers
  • Changes in weather conditions
  • Changes in government policies.
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5
Q

What is the production possibility frontier?

A

It is a graph that demonstrates how opportunity costs arise when individuals or the community makes choices.

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6
Q

What is the price elasticity of demand (PED)?

A

PED measures the responsiveness of the quantity demanded of a product when its price changes (ceteris paribus).

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7
Q

What factors affect PED?

A
  • The number of substitutes available within the same price range.
  • The time period in which the price changes.
  • The proportion of income the price of the good costs.
  • The degree of necessity of the good to the consumer.
  • The habit of the consumer.
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8
Q

What is the price elasticity of supply (PES)?

A

PES measures the responsiveness of quantity supplied to a change in its price, ceteris paribus.

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9
Q

What factors affect PES?

A
  • Time period
  • Mobility of factors of production.
  • Spare capacity of firms
  • Level of stocks and inventory.
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10
Q

What is the income elasticity of demand (YED)?

A

YED measures the responsiveness of the demand of a good to a change in the consumer’s income, ceteris paribus.

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11
Q

What factors affect YED?

A
  • The nature of the good.

- Levels of income.

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12
Q

What is cross elasticity of demand (XED)?

A

XED measures the responsiveness of the demand of a good to changes in price of another good.

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13
Q

What factors affect XED?

A

The relationship between the two goods.

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14
Q

What do the values of XED mean?

A 
XED = 0, not related
XED = 0-1, inelastic and less related
XED = 1 - infinity, elastic and closely related
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15
Q

What is consumer surplus?

A

The highest price (reservation price) that consumers are willing to spend on a good, minus the price that they actually paid. Essentially, the additional satisfaction of the consumer.

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16
Q

What is producer surplus?

A

The price received by firms selling goods, minus the lowest price are willing to accept for the good.

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17
Q

What is total surplus?

A

The consumer surplus + the producer surplus. Total surplus reflects society’s welfare. The goal is to maximise total surplus as this means all resources are allocated efficiently.

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18
Q

What is the difference between specific tax and ad valorem tax?

A

Specific tax is where a good or service is taxed a specific amount per unit regardless of its price. Ad valorem tax is where a good or service is taxed a percentage of its price.

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19
Q

Who carries the impact of tax?

A

The impact of tax falls on the person on whom the tax is first levied. In indirect tax, the impact always falls on the producer.

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20
Q

What is the incidence of tax and who carries it?

A

Incidence of tax refers to the eventual distribution of the tax burden; essentially whoever ends up bearing the tax. The incidence of tax falls on both consumers and producers.

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21
Q

Who bears a heavier tax - the consumer or the producer?

A

It is purely dependant on the relative price elasticities of supply and demand. Generally, the party who is less responsive to price changes (more inelastic) bears the heavier burden.

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22
Q

What are subsidies?

A

Subsidies are the payment of money to firms by the government with no exchange of goods or services in return.

23
Q

What is the purpose of subsidies?

A

To protect the incomes of farmers, and to encourage the production or consumption of merit goods.

24
Q

What is a price floor?

A

A price floor is the minimum price allowed by legislation.

25
Q

What are the purpose of price floors?

A

To either discourage consumption (e.g. cigarettes) or to protect producer’s income (e.g. farmers)

26
Q

What is a price ceiling?

A

A price ceiling is the maximum price allowed by legislation.

27
Q

What is the purpose of price ceilings?

A

To make products more affordable and encourage consumption.

28
Q

What is a black market?

A

Any market in which goods or services are sold illegally at prices above the legal price ceiling.

29
Q

Why do black markets arise?

A

Because buyers are willing and able to pay higher than the legal price ceiling at the transacted quantity. Profits can be made by those buying at the controlled price and selling at the black market price.

30
Q

What is an externality?

A

Externalities refer to the costs or benefits experienced by a third party due to the consumption and production of a good or service. This third party has no control over the production or consumption of the good or service. When these externalities exist, the market outcome will not be efficient.

31
Q

What is a negative externality?

A

Negative side effects of the consumption or production of a product. It can cause either over-production or over-consumption depending on the nature of the product.

32
Q

What is a positive externality?

A

External benefits of consumption for thurd parties. It can cause either under-consumption or under-production depending on the nature of the good.

33
Q

What is market power?

A

When a firm can affect the market by varying its output. This occurs when there are relatively few firms in the market. (e.g. a monopoly or an oligopoly)

34
Q

How do monopolies or oligopolies arise?

A

Competition is restricted through barriers to entry and anti-competitive behaviour .

35
Q

List some entry barriers.

A
  • High initial start up cost
  • Controlling a scarce resource
  • Government licenses
  • Technological advantages
  • Patents
  • Collusive behaviour
36
Q

What is anti-competitive behaviour and list some examples.

A

Agreements or arrangements between firms that seek to restrain competition and remove the automatic regulation that competitive markets achieve. e.g. collusion, collective boycott, mergers, predatory pricing, etc.

37
Q

Why are competitive markets necessary?

A

Competition provides spur for businesses to improve their performance, develop new products and respond to changing circumstances. They also offer the promise of lower prices and improved choices for consumers.

38
Q

How does market power lead to market failure?

A

Firms with market power will attempt to maximise profits. Their private interest will not necessarily coincide with society’s interests and therefore the socially optimal level of output is unlikely to be produced.

39
Q

What are some policy options to influence market power? Explain them.

A

Regulation - price controls and controlling who can enter the market.
Deregulation - the removal of price controls
Legislation - e.g. Australian consumer law, ACCC

40
Q

What is the role of the ACCC and CCA?

A

ACCC- To protect, strengthen and supplement the way competition works in Australian markets and industries.
CCA - has rules against anti-competitive behaviour, also contains consumer protection rules.

41
Q

What are private goods? Give some examples.

A

Goods that are rival (your consumption of the goods prevents another from consuming it), and excludable (there are requirements to be met before being able to access the good or service). E.g. food and clothing.

42
Q

What are club goods? Give some examples.

A

They are non-rival (your consumption will not prevent another from consuming it) and there are excludable (there are requirements to be met before being able to access the good or service). E.g. gyms, concerts.

43
Q

What are common property resources? Give some examples.

A

Rival (their consumption of the good means another party cannot consume it), and non-excludable (there are no requirements to be met before being able to access the good or service). E.g. Fish in the ocean.

44
Q

What are public goods? Give some examples.

A

Non-rival (their consumption does not prevent anyone else from consuming), and non-excludable (no requirements to be met before accessing). E.g. street lighting, public parks.

45
Q

What is the tragedy of the commons?

A

Refers to the over-consumption of common property (e.g. overfishing), as the resource is readily available and there is no restriction on consumption. This leads to the eventual depletion of the resource.

46
Q

What is the free rider effect?

A

Refers to the consumption of a resource without consideration of the upkeep of the resource. This can lead to over-consumption and rapid damage of public resources.

47
Q

What stops a market arising out of public goods?

A

Firms will not invest in public goods as they don’t return any profit, and they could wait for other firms to provide and reap the benefits for free.

48
Q

What is a solution to tragedy of commons?

A

Enforcing restrictions on consumption (E.g. fishing limits, no fish zones, fishing licenses, etc.)

49
Q

What is a solution the free rider effect?

A

Create ownership of the resource (e.g. fees for public transport, fines for damaging public property).

50
Q

What is a solution to the under provision of public goods?

A

As public goods are necessities, the government must provide them.

51
Q

What are demerit goods?

A

Goods or services that the government considers socially undesirable. They are typically bad for people and tend to be over-consumed. These give rise to negative externalities.

52
Q

What are merit goods?

A

Goods or services that the government deems are socially desirable. They are generally good for people but tend to not be adequately provided or consumed. These give rise to positive externalities.

53
Q

Define efficiency.

A

The efficient allocation of resources.

54
Q

Define equity.

A

Equitable income distribution

Economics (3 decks)

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