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ALEVELS > MICROECONOMICS > Flashcards

MICROECONOMICS Flashcards

1
Q

Why is ceteris paribus used in economics?

A
  • Economics is a social science, and data is gathered while many variables are changing.
  • Ceteris paribus tries to allow us to describe causal relationships more clearly, when in reality variables are intricately interdependent.
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2
Q

What is positive economics?

A
  • Statements or opinions based on objective facts.
  • Empirical research can disprove a positive statement.
  • “Will”, “is”, “has”, “have”.
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3
Q

What is normative economics?

A
  • Value judgments.
  • Could be based on religious, cultural, political convictions.
  • Unfalsifiable. “Ought”
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4
Q

What is scarcity?

A

A situation were people have theoretically unlimited wants and face limited resources. This causes opportunity costs.

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5
Q

What is an opportunity cost?

A

The next best alternative given up when making a choice.

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6
Q

What is marginal analysis?

A

An approach to economic decision making looking at the additional (marginal) costs and benefits of a change in behaviour.

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7
Q

What is a model?

A

A much-simplified representation of reality used to provide insight into economic decisions and events.

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8
Q

What is the difference between renewable and non-renewable resources?

A
  • Renewables are natural resources that can be replenished, such as forests that can be replanted.
  • Non renewables are finite and do not replenish.
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9
Q

What are free goods and economic goods?

A

A free good has zero opportunity cost associated with production - wind. An economic good does - public hospital.

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10
Q

What is a PPF?

A

A curve showing the various combinations of the amounts of two goods which can be produced with the factors of production.

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11
Q

P1,2

What does this PPF show?

A
  • 10000 boats or trucks could be produced per year.
  • Points A,B,C are all situations in which resources are being used most efficiently to produce boats and trucks.
  • E is not currently possible, and D represents either unemployment or inefficient use of resources.
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12
Q 
Calculate the opportunity costs for this PPF table.
Trucks     Boats.
10,000    0
9,000     4,000
7,000      7,000
4,000     9,000
0             10,000
A
  • 1,000 trucks. 0.25 trucks given up per boat.
    2,000 trucks. 0.66 trucks given up per boat.
    3,000 trucks. 1.5 trucks given up per boat.
    4,000 trucks. 4 trucks given up per boat.
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13
Q

Why might opportunity cost increase when more of a particular good is produced?

A
  • As more resources are allocated to a particular good, opportunity cost increases as resources are being used less efficiently. PPFs are curves, as resources are generally suited to producing one output more than another.
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14
Q

Show economic growth, economic decline, and technological improvements for one good on a PPF.

A

Pics

An increase in investment in capital caused out

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15
Q

What does a straight PPF represent?

A

The opportunity cost of producing one extra unit of output is constant.

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16
Q

What is specialization?

A

Where an entity focuses production on a limited scope of goods for greater efficiency.

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17
Q

What is division of labour?

A

Assigning tasks to different people in order to improve efficiency.

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18
Q

What are the drawbacks of the division of labour?

A
  • Interdependence.
  • Loss of craftsmanship, job pride.
  • Monotony.
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19
Q

Why does the division of labour increase productivity?

A
  • Working in area of expertise, labour split to suit each entity.
  • When specializing, skills and aptitude for the task increase.
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20
Q

What is money and what is barter?

A

A generally recognized medium of exchange, an economic unit used for transactions. Barter is an exchange of goods and services without money.

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21
Q

What are the functions of money?

A
  • Eliminates the double coincidence of wants: where two parties hold an item the other wants and exchange without a monetary medium. Large improbabilities for the wants and needs to occur at the same place and time.
  • Allows the value of goods and services to be expressed, so is a unit of account allowing things to be compared against one another.
  • Store of value. A monetary unit that is a bad store of value reduces incentive to save, and even earn.
  • Is a method of deferred payment: a way to value a debt, which allows goods and services to be acquired now and paid for in the future.
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22
Q

What is demand?

What leads to contractions and extension along a demand curve?

A

The quantity purchasers are willing and able to buy at a given price in a given period of time. The basic law of demand states demand varies inversely with price.
A higher price leads to a contraction in quantity demanded along the demand curve, and a lower price an extension.

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23
Q

What factors make the demand curve slope downward?

A
  • The income effect
  • The substitution effect.
  • The law of demising marginal utility.
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24
Q

What are the income and substitution effects?

A
  • As a price rises consumers can afford fewer units of the good. In effect their real income has fallen.
  • As price increases substitute products become more attractive.
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25
Q

How does diminishing marginal utility lead to a downward slowing demand curve?

A

Marginal utility is the extra satisfaction gained by consuming one extra good or service. Because each additional unit of good or service is put to less valuable ends, demand varies inversely with price.

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26
Q

What causes a shift in a demand curve?

A
  • Changes in prices of substitutes/complements.
  • Changes in the real income of consumers.
  • Changes in tastes/trends.
  • Size and demographics of the population.
  • Advertising.
  • Seasons.
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27
Q

Draw a diagram showing the effect of a decrease in almond milk prices, on the market for milk.

A

pic

28
Q

What is an inferior good?

A

A good or service that consumers demand less of with a higher real income.

29
Q

What is supply?

What leads to contractions and expansions along the supply curve?

A
  • The quantity of a good that a producer is willing and able to supply onto the market at a given price in a given period of time. The basic law of supply states that as the price of a product rises, firms will expand supply to the market.
  • Higher prices cause an extension along the supply curve, lower prices a contraction.
30
Q

Why does supply curve slope upwards?

A
  • The profit motive: it becomes more profitable for firms to increase output.
  • When output expands, firms production costs usually rise. When there is a higher price, the extra costs of production can be covered.
  • Incentive for other businesses to enter the market, increasing total supply.
31
Q

What may cause a shift in supply?

A
  • Changes in costs of production.
  • New technology.
  • Specific and ad valorem taxes.
  • Government subsidies.
  • Weather and natural disaster.
  • Joint supply, competitive supply.
32
Q

Draw a diagram showing the market for mutton, after a plague kills all cows.

A

-

33
Q

Explain the transition from disequilibrium to the new equilibrium when there is a decrease in demand for eggs.

A

Decrease in demand shifts D inward to D1. At P, the excess of supply encourages firms to decrease to P1. extension in demand along new demand curve, and contraction along the supply curve.

34
Q

Explain the transition from disequilibrium to the new equilibrium when there is an increase in supply of eggs.

A

Increase in supply shifts S outward to S1. At P, the excess of supply encourages firms to decrease to P1, to clear stocks. Contraction in supply along new supply curve, and extension along the demand curve.

35
Q

How do you find total revenue on a demand supply diagram?

A

P x Q

36
Q

What are the functions of the price mechanism?

A
  • Rationing.
  • Incentivizing.
  • Signalling.
37
Q

What is the rationing function of the price mechanism?

A

Scarcity means not everyone can buy everything they want. When demand outstrips supply, prices so demand is discouraged and contracts. Only those who can afford/ do not value the substitutes/ find the product marginally the most valuable will pay for the items.

38
Q

What is the incentive function of the price mechanism?

A

Higher prices provide producers with the possibility of increasing revenue if they increase production of the product, and vice versa.

39
Q

What is the signaling function of the price mechanism?

A

A price signal communicates information to consumers and producer whether to increase quantity supplied and quantity demanded. Price signals may be distorted in bubbles, or when central banks set extreme interest rates.

40
Q

What is price elasticity of demand?

A

A numerical measure of the responsiveness of quantity demanded to a change in price.
PED = %△Qd / %△P
Answer is a negative number.

41
Q

What is income elasticity of demand?

A

A numerical measure of the responsiveness of quantity demanded to a change in income.
PED = %△Qd / %△Y
Inferior goods have a negative YED, normal goods positive.

42
Q

What is cross elasticity of demand?

A

A numerical measure of the responsiveness of quantity demanded to a change in price of another product.
PED = %△Qdx / %△Py
Substitute goods have a positive XED, complement goods negative. Unrelated goods gave 0 XED.
The higher the absolute value of XED, the closer their relationship (complement or substitute).

43
Q

What is price elastic demand demand?

A

When a change in price will result in a proportionately greater change in quantity demanded. Quantity demanded is said to be relatively responsive to a change in price when the absolute PED > 1. Perfectly elastic PED = ∞.
Elasticity can only be measured at a unique price, as price elasticity increases lower down the demand curve - exceptionalities perfectly inelastic and elastic curves.

44
Q

What is price inelastic demand?

A

When a change in price will result in a proportionately smaller change in quantity demanded. Quantity demanded is said to be unrelatively responsive to a change in price when the absolute PED <1. Perfectly inelastic PED = 0.

45
Q

What is unitary price elasticity of demand?

A

When a change in quantity demanded is exactly proportional to the change in price. PED = -1

46
Q

What affects PED?

A
  • The availability and closeness of substitutes : consumers cannot switch from oil when price rises.
  • Brand loyalty.
  • Percentage of total expenditure.
  • Addictiveness
  • Durability : it takes time for consumers to change behavior, and so in the non durable products become more price elastic over time.
  • Necessity or luxury? People have to buy even if price goes up - linked to addictiveness.
47
Q

What would happen to a product with elastic demand when price increases or decreases?

A

Revenue would decrease when price increases, and revenue would increase as price decreases.

48
Q

What would happen to a product with inelastic demand when price increases or decreases?

A

Revenue would increase when price increases, and revenue would decrease as price decreases.

49
Q

Why is PED important to businesses and governments?

A
  • For businesses, pricing strategies to increase total revenue.
  • For governments understanding the incidence of taxes and subsidies on consumers and producers. The more price elastic the good, the greater proportion of the tax is on consumers. For subsidies, the more price inelastic, greater the price fall for consumers.
50
Q

Where are these graphs price elastic?

A

-

51
Q

What is income elastic demand?

A

When a change in income will result in a proportionately greater change in quantity demanded. Quantity demanded is said to be relatively responsive to a change in income when the absolute PED > 1. Luxury goods.

+curves

52
Q

What is income inelastic demand?

A

When a change in income will result in a proportionately smaller change in quantity demanded. Quantity demanded is said to be unrelatively unresponsive to a change in price when the absolute PED < 1. Perfectly inelastic PED = 0.

+curves
Engel Curve: Demand for toothpaste in Switzerland.

53
Q

Why is YED useful to firms?

A
  • Production planning: if economic growth is forecast, and the firm produces luxury goods it can plan to increase production.
  • Product portfolio planning: knowledge of YEDs can help a firm plan their range of product - inventing Lexus, or iPhone SE.
54
Q

Why is XED not equal to 1 for perfect substitutes?

A

A minute change in price will cause a huge change in Qd, when can consumers can switch to a perfect substitute.

55
Q

Why is knowledge of XED useful for firms?

A
  • Firms can estimate the implications of price changes from competitors, and suppliers of complements. They can plan to respond with perhaps changing their own prices, or adjusting production.
  • Firms often produce complements and substitutes to their own products. Apple Pens. Coca-cola, Sprite, Fanta.
56
Q

XED graphs.

A

-

57
Q

What is price elasticity of supply?

A

A numerical measure of the responsiveness of quantity supplied to a change in price.
PED = %△Qs / %△P
Usually, more is supplied when prices rises their is incentive for firms to produce more for higher profit and more firms are attracted to the industry.

58
Q

What determines PES?

A
  • Time: the shorter time period the harder it is for firms to increase production in response to higher prices. E.g. agriculture is inelastic in the short term.
  • Ability to build and release stocks.
  • Mobility of factors of production. Can a firm’s technology be used to produce different products.
  • Legal constraints may stop firms from expanding or other firms entering the market.
  • Spare capacity: both in the industry, and in the macroeconomy - unemployment means businesses can hire workers more easily.
59
Q

PES

A
  • dia
60
Q

What is inelastic PES?

What is perfectly inelastic PES?

A

A change in price leads to a proportionately smaller change in quantity supplied. PES < 1.
Perfectly inelastic. PES = 0

61
Q

What is unitary PES?
What is elastic PES?
What is perfectly elastic PES?

A

Unitary PES = 1. Change in supply is proportional to change in demand.
Elastic PES : A change in price leads to a proportional greater change in quantity supplied.
Perfectly elastic supply: Any change in price will lead to an infinite change in quantity supplied.

62
Q

MPC

A

Change in consumption / change in income

63
Q

MPS

A

Change in saving/ change in income

64
Q

The multiplier

A

1 / 1 - MPC

65
Q

PPP

A

Compares cost of living

Market basket of goods

66
Q

Accelerator theory

A

I = a (Real change in income)

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