Microeconomics LS7-LS12 Flashcards
What is deduction?
Starting with a hypothesis.
What is induction?
Collecting evidence
What are decision makers assumed to be in classical and neoclassical economics?
Rational.
What is utility for consumers?
The satisfaction derived from consuming a good.
What is utility for producers?
Maximising profit. Achieving through producing as efficiently as possible and what consumers want.
What is required to make rational decisions?
Time
Information
Ability to process information
What approach does behavioural economics use?
The inductive approach
What does behavioural economics assume?
Individuals have bounded rationality (want to maximise utility but can’t due to lack of time, information and ability to process information)
What are the aspects of human behaviour that prevent rational decision making?
Consumer inertia
People are influenced by the behaviour of others
Consumers weakness at computation
What is demand?
Is the quantity of goods and services purchased at a given price over a given time period.
What is the difference between substitute and complement goods?
Substitute goods- two alternative products that can be used for the same purpose
Compliment goods- products that are used together
What are factors that affect demand (cause a shift in demand) :
1- change in age structure
2- income
3- advertising
4- changes in consumer tastes
What is supply?
Is the quantity of good and services that firms are willing to sell at a given price over a given time period.
What is equilibrium price?
Only prince where demand of buys equals supply of sellers in market
What is a direct tax?
Tax levied directly on individual or organisation.
What is indirect tax?
Tax levied on a good or service.
What is specific tax?
Same fixed amount for all prices.
What is ad valorem tax?
Increases as amount sold increases.
Why does the government impose taxes?
- To raise government revenue
- To discourage certain economic activities
Why does the government give out subsidies?
In order to encourage firms production
What is price elasticity of demand?
Measures the repsonsoiveneness of demand given a change in price.
What is price elastic and price inelastic?
Price elastic- change in price causes proportionately larger change in demand/ supply
Price inelastic- change in price causes proportionately smaller change in demand/ supply
What are the determinants of PEoD?
1- Number of substitutes 2- Necessity/ luxury 3- Addictiveness 4- Time 5- Proportion of income spent on product
What is the PEoD/ PEoS equation?
Price elasticity of demand/ supply= percentage change in quantity demanded/ supplied/ percentage change in price
What are the determinants of PEoS?
1- Time required to produce product 2- Level of spare capacity 3- Number of finished goods/ stocks 4- Time 5- Perishability of the product
