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Economics > Microeconomics Theory > Flashcards

Microeconomics Theory Flashcards

1
Q

What does traditional econ. theory assume about consumers?

✅ Consumers are ___ + wish to ___ their ___ from consumption by correctly choosing how to spend their ___ income.

A

✅ Consumers are rational + wish to maximise their utility from consumption by correctly choosing how to spend their limited income.

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2
Q

What does traditional econ. theory assume about firms?

✅ Firms wish to maximise ___, by producing at lowest ___ the g/s that are desired by ___

A

✅ Firms wish to maximise profits, by producing at lowest cost the g/s that are desired by consumers.

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3
Q

What does traditional econ. theory assume about the government?

✅ Gov wishes to ___ the economic and social ___ of the citizens.

A

✅ Gov wishes to improve the economic and social welfare of the citizens.

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4
Q

What does the modern field of behavioural economics recognise about consumers and their decisions?

✅ Rarely behave in a __ __ and __ __ way.
✅ Often decisions are based on __ __ which causes a loss of __ not only for people themselves but also others and society as a whole.

A

✅ Rarely behave in a well-informed and fully rational way.
✅ Often decisions are based on incomplete information which causes a loss of welfare not only for people themselves but also others and society as a whole.

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5
Q

Define Marginal Utility.

A

✅ The additional satisfaction an individual gains from consuming one extra unit of a g/s

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6
Q

Define the hypothesis of diminishing marginal utility?

A

✅ For a single consumer the marginal utility gained from a g/s diminishes for each additional unit

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7
Q

6 demand curve ‘shift’ factors

IPTER

A

I - Income (distribution and magnitude)
P - Population (size and age distribution)
T - Trends
E - Expectations
R - Related goods (substitue/complementary)

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8
Q

Explain how changes in income shift D curve.

A

✅Normal goods: ⬆️ Income => ⬆️ D

✅Inferior goods: ⬆️ Income => ⬇️ D

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9
Q

Equation for PED.

A

✅ %△Qd / %△$

Always -ve

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10
Q

6 factors that affect PED?

- NASBIT

A 
N - Necessity or Luxury
A - Addiction and Habit
S - Substitutes (closeness and number) 
B - Branding 
I - Income (magnitude + proportion)
T - Time
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11
Q

Difference in YED for normal / inferior goods?

A

✅ Normal good: +ve YED

✅ Inferior good: -ve YED

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12
Q

Difference in XED for complementary / substitute goods?

A

✅ Complementary: -ve XED

✅ Substitute: +ve XED

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13
Q

2 factors that explain the Law of Supply

A

✅ Profit: ⬆️$ => ⬆️ incentive to produce bc ⬆️ revenue from selling so ⬆️ profit
✅ Costs: ⬆️$ => ⬆️ producers able to produce (even with ⬆️ $ of prod.) => ⬆️ Quantity supplied

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14
Q

6 supply curve ‘shift’ factors

SPITEG

A 
S - Size of market 
P - Productivity of labour 
I - Input costs
T - Technology Improvements 
E - Expectations 
G - Government actions (eg. subsidies)
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15
Q

4 factors that affect PES?

PEST

A

P - Production period
E - Ease of Switching e.g. factory changes from printing story books to textbooks easily during exam period
S - Spare Capacity
T - Time

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16
Q

Define consumer surplus.

What does it look like on a D/S diagram?

A

✅ Difference between what consumers are willing to pay and what they actually pay

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17
Q

Define producer surplus

What does it look like on a D/S diagram?

A

✅ Difference between what producers are willing to pay and what they actually pay.

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18
Q

What is the price mechanism?

A

✅ The operation of the market forces of D + S

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19
Q

What is it called when MSC>MSB?

A

✅ Deadweight loss

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20
Q

cons of setting price ceiling

QBS

A

Q - Quality/Quantity: in the long run, quality of products suffer as firms try to use cheaper inputs and if other-non-price-controlled products can be produced with the same inputs, eg. textbooks and storybooks, then firms will shift to production of those products, exacerbating shortages
B - Black markets may emerge for those willing to pay a much higher price
S - Shortage of supply as price ceiling set below equilibrium price => price mechanism fails to perform its rationing function so an alternative rationing mechanism is required, eg. ballot or coupon

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21
Q

cons of setting price floor

BRT

A

B - buyers worse off as they have to pay higher prices for the same product.
R - resource misallocation because of surplus of goods produced at higher price
T - taxpayers suffer as gov forced to buy surplus of goods at higher price.

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22
Q

Formula for tax incidence/tax burden

A

% of tax incidence on consumers / % of tax incidence on producers

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23
Q

2 effects that explain the law of demand

A
  • substitution effect: $ good X rises => all other goods automatically become relatively cheaper => people substitute other goods for X.
  • income effect: $ good X rises, consumers’ real income falls => buy less
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24
Q

Graph of percentage/ad valorem tax

A
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25
Q

define subsidy

A
  • per unit payment to firms from gov to lower theri costs and thus the market price and increasing production consumption and firm revenus.
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26
Q

define short-run

A

period where at least one factor of production is fixed

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27
Q

Equation for average product / productivity of labour

A

total output / number of workers.

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28
Q

Equation for marginal product

A

change in production output / change in input labour

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29
Q

What do the MP and AP curves look like in a graph?

A
  • MP crosses AP at AP’s maximum
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30
Q

graph of MC, AVC, ATC

A
  • distance between ATC and AVC (AFC) decreases as quantity increases
  • MC cuts ATC and AVC at their minima
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31
Q

what is the long run

A

when all factors of production are variable

32
Q

define economies of scale

A

cost savings due to increased scale of production

33
Q

define diseconomies of scale

A

increases in average costs due ot increased scale of production

34
Q

reasons for diseconomies of scale

A
  • management problems due to communication issues associated with huge size
  • industry grows => factor prices (raw materials) may also start increasing due to higher factor demand
35
Q

Goals firms could have

A
  • maximising profits
  • maximising sales
  • increased market share
  • social/enivronmental concerns
36
Q

Why must firms produce at output where MR=MC to maximise profit?

A

A quantity larger than where MR=MC means MR total revenues decrease => profit decreases

37
Q

characteristics of perfect competition

A
  • many small firms
  • product is identical
  • no entry barriers
  • perfect information
38
Q

why perfect competition is not realistic

A
  • economies of scale, especially in manufacturing sector, are very common
  • firms have an incentive to differentiate their product to get some degree of monopoly power
  • firms try to create entry barriers so they can maintain any supernormal profits in the long run
  • perfect mobility of factors is unrealistic, eg. labour suffers from geographical immobility
39
Q

Graph of MC, AC, MR and AR curves for a typical firm in a market with perfect competition in the short run

A

P=MR=AR

40
Q

What happens in the long run in the market if a firm is making supernormal profits?

A
  • induces entry of new firms into the industry => supply shifts rightwards => market price decreases
41
Q

define supernormal profits

A

when total revenues exceed total economic costs.

Firm making more than required to remain in business (more than normal profits:0)

42
Q

Evaluation of perfectly competitive firms

A
  • no incentive to innovate because may not be able to afford research to innovate, but they know innovation will be copied by other firms, so the investment would be a waste of money.
  • identical products is a disadvantage to the consumer
43
Q

characteristics of a monopoly

A
  • one firm producing a good without close substitutes. The industry is the firm
  • unique product (as there is by definition only one firm in the market)
  • barriers to entry
44
Q

What can a monopolist do with the price?

A

Set the price

45
Q

How does the PED change along teh demand curve?

A
46
Q

What does the graph of a monopoly in the short run look like? With D (or AR), AC, MC and MR curves.

A

MR and AR both straight and have saem y-intercept, but MR is twice as steep.

47
Q

If a monopolist aims to maximise revenue where will it choose its level of output?

A

where MR=0

48
Q

What is allocative efficiency?

A

when ‘just the right amount’ of a good is produced FROM SOCIETYS POINT OF VIEW.
Price equals the marginal cost of production.
Demand fully met by supply, no excess.

49
Q

What is technical efficiency?

A

when production has minimal resource waste, ie. with minimum average costs.

50
Q

Why is allocative efficiency not achieved under monopoly?

A
  • Monopoly is able to set a price of Pm. This is allocatively inefficient because at this output of Qm, price is greater than MC curve. Every unit after Qm on the demand curve could have been provided without the business losing revenues.
  • Allocative efficiency occurs where MC meets demand so Price = Pc.
  • The area of deadweight welfare loss shows amount of allocative inefficiency
51
Q

Pros of monopoly

E I

A
  • Economies of scale (benefit consumer)
  • Innovation: assuming no state-created barriers to entry such as licenses, then to maintain its position, forced to innovate as other firms will be innovating as well to displace the monopolist.
52
Q

3 types of barriers to entry

NSF

A

natural
state-created
firm-created

53
Q

what is a natural barrier to entry

A
  • production technology means that very significant economies of scale are present, so only very few firms can profitably coexist.
54
Q

examples of state-created barriers to entry

A
  • patents
  • licenses
  • tariffs (limit competition from foreign firms, creating monopoly power)
55
Q

examples of firm-created barriers to entry

APE

A

A - advertising and brand name
P - product differentiation
E - Excess productive capacity: firms maintain this so potential entrants know the firm can easily increase output, decreasing the price to unprofitable levels.

56
Q

characteristics of monopolistic competition

A
  • many small firms
  • differentiated product so a small degree of monopoly power
  • no barriers
57
Q

what does demand curve for monopolistic competition look like and why?

A

Negatively sloped demand.
Because product is not identical in monopolistic competition
If it increases price it will not lose all customers.

58
Q

characteristics of an oligopoly

A
  • few interdependent firms
  • can be almost any product, homogeneous (eg. oil, steel)or differentiated
  • significant entry barriers
59
Q

What does it mean when firms are interdependent (defining characteristic of an oligopoly)

A
  • the outcome of an action of one firm depends. on the reaction of the rival firms.
    eg. the success of an advertising campaign of firm A depends on whether rival firm B decreases its price at the same time or not.
60
Q

To compete or to collude? Why would oligopolistic firms do either of those

A
  • through competition, might increase own market share and profits at the expense of rivals
  • through collusion, decreases uncertainty and firms may maximise joint profits as if they were a monopoly.
61
Q

define collusive oligopoly

A
  • when firms agree to fix prices, formally or informally.
62
Q

Why are collusvie oligopolies unstable?

A
  • inherent incentive to cheat: each member would prefer others to abide by the output restricting agreement while it doesn’t and exceeds it.
63
Q

price discrimination

A
  • firm sells same product at multiple prices in multiple markets, with price difference not reflecting cost differences.
  • eg. airline tickets
  • increases profits further
64
Q

define market failure and 3 types:

A
  • when the outcome of the free market mechanism doesn’t benefit society and causes an inefficient distribution of g/s
  • monopoly power
  • externalities
  • public goods.
65
Q

how is monopoly power a source of market failure

A
  • firms with monopoly power can restrict output below the competitive ideal and charge a higehr price, leading to a welfare loss.
66
Q

3 solutions for market failure from monopoly power and evaluation of those solutions

A
  • liberalising international trade => increases competition => increased inefficiency and lower prices
  • gov monitor firm practices that seem anti-competitive, fine guilty firms and break those firms into smaller independent pieces.
  • gov ensure competitive conditions in markets: no M&A that excessively increase monopoly power of firm
  • but large monopoly firms may lead to faster innovation and greater economies of scale.
  • regulator make sure that scale economies or rate of innovation not compromised.
67
Q

externality

A

when an economic activity (production or consumption) imposes benefits or costs on third parties which do not pay for or get compensated for

68
Q

what does a negative externality in production look like

A

MPB = MSB=D, which are downward sloping

MSC and MPC=S are upward sloping

69
Q

What does a graph showing a negative externality in consumption look like?

A

MPC=MSC=S which are upwards sloping

MPB=D and MSB are downwards sloping

70
Q

Solutions to externalities

CAM

A

C - Command-and-control solutions: direct regulation from gov
A - advertising (or banning of) and education: gov tries to change preferences and increase awareness
M - market-based solutions: eg. property rights - then prices can be set and benefits and costs of an activity can be estimated.
taxes - equal to any costs of production or any external cost of consumption
subsidies when the full benefits of activity not captured by the indivdiual or firm creating them. Price is lowered so consumption increases to socailly desirable level.
tradeable pollution permits - but initial allocation of permits is difficult to determine, and monitoring compliacne is expensive

71
Q

define public good, give examples

A

good that is non-excludable and non-rival
non-excludable: once available to one consumer, available to all, no one can be excluded from consuming it.
non-rival: consumption of good by one does not decrease amount available for everyone else, ie. marginal cost of an extra user is zero.

eg. national defence, traffic lights.

72
Q

why is public good a market failure?

A

public good is non-excludable
=> individuals have incentive to conceal their true preferences and behave as ‘free riders’ because they know that they can enjoy the good without having to pay for it once it becomes available for others =>private profit-oriented firms will not have the incentive to produce and offer such g/s in the market
=> market fails.

73
Q

define common access/pool resource

A
  • rival but non-excludable

- everyone can use it, but one person’s use of it takes away the amount available for everybody else

74
Q

Marshall-Lerner condition

A
  • depreciation will only lead to an improvement in the current account if the sum of the elasticities of a country’s exports and imports is greater than 1.
75
Q

define fixed costs

A

costs that don’t vary when level of production varies, eg. rent, interest on loans

76
Q

define variable costs

A

costs that vary when level of production varies, eg. raw materials, labour

77
Q

how to calculate average total costs

A

ATC=AFC + AVC
AFC=FC/Q
AVC=VC/Q

Economics (3 decks)

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