Past Exams Flashcards
Own Price Elasticity
(Change in Q demanded) / (Change in Price) = -x
Price Elasticity of Demand (PED)
(Q1-Q0)/Q0 / (P1-P0)/P0 = -x
Purchasing Power Parity (PPP)
Cost of Good in Currency 1 / Cost of Good in Currency 2
Nominal Exchange Rate ($/Pound)
Cost of Good X in $ / Cost of Good X in Pound
Real Exchange Rate
Cost of Good X in $ / Cost of Good Y in $
Characteristics of Public Good
Non-excludable and non-rivalry in consumption
Closed economy multiplier
1 / 1-c
where c: marginal propensity to consume
1-c: marginal propensity to save
Consumer behavioural assumption
Rational -> will try to obtain the best they can from consumption decisions
-> pick consumption bundle that maximises individual’s satisfaction
Completeness Assumption
Consumer always ranks alternative bundles of goods according to satisfaction/utility it provides -> one bundle is better than, worse than or same
Transitivity Assumption
Ranking of possible bundles is internally consistent
If bundle a > bundle b > bundle c -> bundle a > bundle c
Non-satiation assumption
If bundle b offers more films but as many meals as bundle c -> bundle b is preferred
Indifference Curve
Shows all combinations of good x and good y that yield individual same level of utility
Giffen good effect
Income Effect > Substituion Effect
Perfect competition long-run profit maximising output and price
P = minimum AC
Price taker assumptions for PC
- Large volume of buyers and sellers
- Perfect information for both buyers and sellers
- Homogeneous product
Set P = MR
0 profit in LR for PC assumption
Free entry and exit for all firms where P(x) minimum average cost
PC output level
P = MC
Bc that’s also where MR = MC (profit maximisation condition)
P = MC
= MR
P = MC is allcoative efficiency condition
1. level of output is at demand = supply
2. total welfare of economy (CS and PS) are maximised
Cause of short-run AC movement along MC
- Fixed cost
- Tax/Subsidy
- Wages or cost of capital
Nash equilibrium
Strategy that gives highest payoff as a response to other player’s strategy
If both players have dominant strategy, confirm have nash equilibrium
Dominant Strategy
Strategy that gives higher payoff relative to other strategies REGARDLESS of what others are playing
If both players have dominant strategy, then equilibrium is where both players play their own dominant strategy
Real GDP Growth
Quantity of base year and current year at base price
= (current year GDP / base year GDP) - 1.00
Labour Force Participation
Employed + Unemployed / Relevant Population
Cause of inflation
- Decrease in SR AS (bc of wage raise)
- Increasing in AD (bc of increased consumer spending)
Marginal Rate of Substitution
MUx / MUy
Quantity of good Y consumer must sacrifice for an additional unit of good X without affecting total utility
Cournot Equilibrium
(1) P = C + Q
P = C + (q1 - q2)
P = C - q1 - q2
(2) find q1 and q2 by
finding TR using q1 or q2
finding MR
MR = MC
= reaction function of firm
(3) Substitute q1 into q2 or vice versa for firm’s quantity
(4) Industry Q = q1 + q2
(5) Industry P = C + Q
IS curve
Shows equilibrium in goods market
MP curve
Denotes equilibrium in money market
Open economy with government
Y = C + I + G + X - Z
C
A0 + c(Y-T)
where A0 > 0
and 0 < c < 1
I
I0 - b x r
where b > 0 (measures interest sensitivty of investment function)
Fischer Equation
i (nominal interest) = r (real interest) + pi (inflation rate)
r = i - pi (from Taylor’s rule)
Z
Z0 - zY
Closed economy with government
Y = C + I + G
Y = C0 + cY+ I0 - br + G
Y(1-c) = (C0 + I0 + G) - br
Y = 1/1-c [C0+I0+G] - b/1-c
Causes of IS shifting
- Autonomous consumption
- Autonomous investment
- Government spending
IS Slope
(1 - c)/b
Monetary Policy
Target inflation rate (i)
MP curve shows central bank’s desired interest rate (i) at each level of income (Y)
