Principles of Economics 11 - Tips Flashcards
What would a change in the level of income cause in the budget contraint line?
A parallel shift
What is being looked for when it comes to utility maximization when looking at a budget constraint line and indifference curve?
A point of tangency between the budget constraint line and the outermost indifference curve
In a graph of a budget contraint line and indifference curve, what is significant about the outermost indifference curve?
This signifies utility maximization - how happy a firm can make consumers given its budget
Briefly explain what a firm’s decision to shut-down is dependant on, both in the SR and LR
In the short-run, the decision to shut down is based on a firm’s variable costs, in the long-run the total costs become more relevant because fixed costs become more variable
How are isoquants & isocosts and ICs & budget constraint lines similar?
Isoquants and isocosts are very similar to indifference curves and budget constraint lines respectively except the former are about producing a certain quantity of a good using labour & capital while MINIMIZING costs and the latter are about MAXIMISING utility subject to a budget constraint. In both cases, you are looking for a point of tangency between a convex curve & a straight line - they’re both an optimization problem
How are utility functions and ICs related?
Utility functions are the mathematical representation of ICs
What are the characteristics of ICs?
- They can be drawn
- ICs further from the origin give higher utility
- They don’t intersect
- They’re broadly convex
- The shape of ICs (they can be straighter or more convex) informs about the relationship between the 2 goods in question
What effect does a change in price have on a budget constraint line?
A pivot
What does it mean when a budget constraint line pivots?
There’s a change in price
What does it mean when a budget constraint line shifts in a parallel direction?
There’s a change in the level of income
When does MC intersect ATC?
At MC’s lowest point
When do firms maximise profit in terms of marginal profits & costs?
When MC = MP
What does it mean when a ‘Pareto optimal outcome’ is reached?
We cannot make any one person better off, without making someone else worse off
What is it called when a point is reached where we cannot make any one person better off, without making someone else worse off?
A pareto optimal outcome
When are Paretian principles used
When arguing that a particular outcome is as good as it can be
What are often used when arguing that a particular outcome is as good as it can be?
Paretian Principles
What are the 2 extremes of the market structure spectrum?
Perfectly competitive markets and monopolies
What is ‘strategic interdependance’?
Where firms need to consider each others’ actions when making their own decisions
What’s the name for ‘where firms need to consider each others’ actions when making their own decisions’?
Strategic Interdependance
Which market structures depend on strategic interdependance most?
Imperfect Structures
What’s a private good?
A private good is one where you can exclude people from consuming it by charging a price and one person consuming it prevents someone else from consuming it
What’s a public good?
Public goods are those that are non-rivalrous and non-excludable
What’s the name for a good ‘where you can exclude people from consuming it by charging a price and one person consuming it prevents someone else from consuming it’?
Private good
What’s the name for goods ‘that are non-rivalrous and non-excludable’?
Public goods
Explain what the ‘argument for public provision’ is
Public goods should be provided by the government as well as some other goods that aren’t public like healthcare or education
State the various forms of market interventions
Include a brief description about what each of them are
- Price ceilings (maximum prices)
- Price floors (minimum prices)
- Quotas (maximum quantities)
- Taxes
- Subsidies (giving money to parties to encourage a party)
What’s the name for the advocacy that ‘public goods should be provided by the government as well as some other goods that aren’t public’?
Argument for public provision
Which economic school of thought has a vertical AS? Why?
Classical because they believe in Sey’s Law (supply drives demand)
What’s Sey’s Law?
Supply drives demand - if you make it, somebody will buy it
Which law states that ‘supply drives demand’?
Sey’s Law
Briefly describe the Loanable Funds Market Model
Real Interest Rate (r) on the vertical axis, Savings/Investment on the horizontal axis
What does the Loanable Funds Market model do?
Shows how real interest rates are determined in a closed economy with classical assumptions
How does SRAS differ in classical vs keynesian economics?
It’s horizontal in the keynesian model and vertical in the classical model
What was the traditional goal of the Bank of England vs the Fed?
Inflation targeting for B of E while the Fed has dual goals of inflation targeting and growth targeting
What’s the key equation for the quantity theory of money?
MV = PY where M is the money supply, V is the velocity of money, P is the overall price level and Y is output
