Microeconomics Part I Flashcards
Positive statement
Objective - can be tested against facts
Normative statement
Subjective - value judgement
What is economics?
- Study of how world’s scarce resources are allocated to competing uses to satisfy society’s wants (which are infinite)
Why is economics a social science?
Scientific methodology observes the behaviour of individuals and groups and then makes predications based on these observations
Define opportunity cost
- The costs of the next best alternative forgone - to do something you’ve govt to loose the next best thing
Define PPF
PPF - shows the maximum possible output combinations of two goods in an economy, assuming full and efficiency employment of resources
Points on the PPF are productively efficient (all FOP are fully employed)
Inside PPF = productive inefficiency
Factors causing outward PPF shift
- Technical improvement
- New resources
- Education and training
- Increasing in working population, immigration and raise retirement age
Factors causing inside PPF shift
- Natural disasters
- Wars
- Climate change
- Prolonged recession
What does the PPF show?
- Concept of opportunity cost - more capital goods produced means more consumers goods must be given up
- Can show economic growth (outward shift = increased productive capacity)
Productive efficiency
Maximum output produced when available FOP and when it is not possible to produce more of one good or service without producing less of another
Allocative efficiency
- An economy’s FOP are used to produce combination of goods and services that maximises society’s welfare
Define diminishing marginal utility
- As individuals consume more units of a good or service, the additional units give successively smaller increases in total satisfaction
Downward sloping demand curve
Define choice architecture
- Influencing consumer choices by the way choices are presented e.g. govt requiring people to opt out of organ donation (general has significantly higher % of pop. willing to donate)
Define framing
- Influencing consumer choices by the way words and numbers are used - e.g., presenting life insurance payments as less than £3 per day rather than £1000 per year
Define nudges
- Influencing consumer behaviour via the use of gentle suggestions and positive reinforcement e.g., the 5-a-day campaign to encourage greater consumption of fruit and veg can change behaviour in a sociably desirable manner
Can be more cost effective rather than laws, bans or regulation
Can compliment rational policy methods (e.g. using adverts to reinforce social norm)
Define default choice
Influencing consumer behaviour by setting socially desirable choices as default options e.g. organ donation and pension enrolment
Define mandated choice
People legally required to make a choice e.g., many countries there is a required choice to make about organ donation as part of driving license/passport application
Define restricted choice
- Giving consumers a limited number of options recognising that too much choice can sometimes paralyse individuals from making an effective choice with savings
Determinants of demand
PASIFIC
Population Advertising Substitutes Income Fashion and taste Income tax Compliments
PED equation
%change Qd/% change P
YED equation
% change Qd/% change Y
XED equation
% change in Q of good X/% change in P of good Y
Define normal good
Rise in income leads to increase in demand.
Define inferior good
Rise in income leads to fall in demand
Define substitute
Positive - rise in price of one good increases demand for another
Define Complement
Negative - rise in price of one good decrease demand for another
Total revenue equation
Price x quantity
Relationships between PED and firms’ total revenue
Price elastic D = fall in P increases TR
Price inelastic D = fall in P decreases TR
Price elastic D = rise in P decreases TR
Price inelastic D = rise in P increases TR
EOIS
Elastic - opposite - Inelastic - same
Determinants of PED
- Substitutes
- % of income
- Luxury/necessity
- Addictive/habit forming
- Time period
Determinants of supply
PINTS WC
Productivity - Indirect tax - no. of firms - technology - subsidy - weather - Costs of production
PES equation
% change Qs/% change P
Determinants of PES
PSSST
Production lag - Stocks - Spare capacity - Substitutability of FoPs - Time
Define joint demand
- Goods that tend to be demanded together, i.e., complimentary goods
Define joint supply
When the production of one good leads to the production of another good e.g., the production of beef and leather
Define composite demand
When a good is demand for more than one distinct use
Therefore - rise in D for one of the distinct uses reduces the supply available for other uses
Define derived demand
When a particular good or FoP is necessary for the provision of another good or service
E.g., a rise in demand for healthcare will likely increase the demand for doctors and nurses
Define competitive demand
Substitute goods - similar to each other + rival (in competition with each other)
Difference between normal and supernormal profit
NP - minimum level required to reward the entrepreneur for taking a risk and therefore to stay in a particular line of business
SNP - over and above NP
Role of profit in a market economy
- An important driver of business activity - creates an incentive for entrepreneurs to take a business risk
Assumptions of perfect competition
- Few, if any, barriers to entry or exit
- Consumers and firms have perfect knowledge
- Products are homogenous
- Many buyers and sellers
Price takers (firms unable to influence ruling market price and thus have to accept it)
Impact of the features of perfect competition
- Any firm that tries to sell its product at a price higher than the market equilibrium will not make any sales (since consumers will know about cheaper alternatives)
- Since all products are identical consumers have no loyalty to any particular firm
- Therefore - all firms must accept the market price if they are to remain in the market
Price determination in highly competitive markets
- If other firms become aware that existing firms in the market are earning SNP, which they can easily do due to perfect info, they will enter the market easily due to the low barriers to entry
- Increases overall supply in the market - leads to rightward shift of supply which reduces the equilibrium price
- Increase in supply and reduction in price will occur up to the point at which only NP is made (only most competitive firms survive in the market)
Perfect competition in the long run
- Firms are productively efficiency (lowest point on AC curve) and allocatively efficient (where p = mc)
- Price consumers pay for a good or service = cost of producing the last unit of output
- Optimum allocation of society’s resources
Advantages of perfect competition
- Productive efficiency - any firm that doesn’t achieve this will lose its market share to rival firms that can produce the same product more cheaply
- Allocative efficiency - lead to firms producing what consumers demand - since, if they don’t, they will lose market share to firms that are producing the most desired products
Characteristics of monopolistic competition
- Many buyers and sellers
- Similar products that are differentiated from one another (e.g. by branding or quality
- Barriers to entry and exit relatively low
- Good information
- Non-price competition
Firms are price makers
Examples of monopolistic competition
- Independent fast-food takeaways
- Plumbers
- Hairdressers
