Microeconomics L8-9

Question 1

What is the problem with economics models?

Answer 1

Assumptions about the behaviour of economic agents must be made

Question 2

Which two approaches can assumptions be made with in the economy and what are they

Answer 2

Deduction - start with a hypotheses

Induction- collect evidence

Question 3

Types of schools in inductive approach

Answer 3

Behavioural school and Keynesian school

Question 4

Types of schools in deductive approach

Answer 4

Classical school and neoclassical school

Question 5

In classical and neoclassical economics what are decision makers assumed to be?

Answer 5

Rational

Question 6

What does rational mean

Answer 6

Buying products that maximise utility

Question 7

Define utility

Answer 7

The satisfaction or benefit derived from consuming a good

Question 8

What do firms do when making rational economics decisions

Answer 8

Maximise utility - maximising profit

Question 9

How do firms maximise profit

Answer 9

• Producing as efficiently as possible

- making things consumers want and can afford

Question 10

What do economic agents require to make rational decisions

Answer 10

Time, information and the ability to process information

Question 11

What is behavioural economics

Answer 11

School of economic thought based on evidence and observations to develop assumptions of economic decision making (inductive)

Question 12

What does behavioural economics assume

Answer 12

Individuals have bounded rationality

Question 13

What is bounded rationality

Answer 13

When individuals wish to maximise utility but are unable to do so due to lack of time, info and ability to process info

Question 14

What aspects of human behaviour prevent rational decision making

Answer 14

• habitual behaviour /consumer intertia
• influenced by others behaviour
• consumer weakness at computation

Question 15

What are the two types of economy consolidation and define them

Answer 15

• nationalisation- bringing economic activity under state control (private to public)
• privatisation- transferring economic activity to market (public to private)

Question 16

Define demand

Answer 16

The quantity of a good of service purchased at A given price over a given period of time

Question 17

What does the law of demand state

Answer 17

Ceteris paribus, as the price of a good increases, quantity demandes decreases and vice Versa

Question 18

What does a decrease in price lead to (demand supply graph)

Answer 18

Extension / expansion in demand

Question 19

What does an increase in price result in ( demand supply graph)

Answer 19

Contraction in demand

Question 20

On a demand curve what is the relationship between quantity demanded and price

Answer 20

Quantity demanded varies inversely with price

Question 21

What are the conditions of demand

Answer 21

• population size
• changes in price of substitute goods
• chances in price of complement goods

Question 22

Define substitute goods

Answer 22

Two alternative products that could be used for the same purpose

Question 23

Define complement goods

Answer 23

Products that are used together

Question 24

What other factors can affect demand?

Answer 24

• change in age structure of population
• change in incomes
• advertising
• change in consumer tastes

Question 25

Define raw material

Answer 25

Any material such as a oil, cotton or sugar in its natural condition before it has been processed for use

Question 26

Define revenue

Answer 26

The income that a government or company receives

Question 27

Types of revenue and define them

Answer 27

Tax revenue- income government receives | Sales revenue- income company receives

Question 28

Equation for total revenue

Answer 28

Price x quantity

Question 29

Define supply

Answer 29

Quantity of a good or service that firms are willing to sell at a given price over a given time period

Question 30

What does the law of supply state

Answer 30

Ceteris paribus, as price of a good increases, quantity supplies increases and vice Versa

Question 31

What does the supply diagram assume

Answer 31

- firms are motivated to produce profit | - cost of producing a unit increases as output increases

Question 32

What are the conditions of supply

Answer 32

- changes In production costs - improvements in tech /innovation - number of firms in market - changes in price of related goods - weather - firms expectations about future prices

Question 33

Define marginal utility

Answer 33

Change in total utility or satisfaction derived from consuming an extra unit of a good or service

Question 34

How does marginal utility affect the demand curve

Answer 34

Diminishing marginal returns = decrease in demand