Principles of Economics 11 - Tips

Question 1

What would a change in the level of income cause in the budget contraint line?

Answer 1

A parallel shift

Question 2

What is being looked for when it comes to utility maximization when looking at a budget constraint line and indifference curve?

Answer 2

A point of tangency between the budget constraint line and the outermost indifference curve

Question 3

In a graph of a budget contraint line and indifference curve, what is significant about the outermost indifference curve?

Answer 3

This signifies utility maximization - how happy a firm can make consumers given its budget

Question 4

Briefly explain what a firm’s decision to shut-down is dependant on, both in the SR and LR

Answer 4

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

Question 5

How are isoquants & isocosts and ICs & budget constraint lines similar?

Answer 5

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

Question 6

How are utility functions and ICs related?

Answer 6

Utility functions are the mathematical representation of ICs

Question 7

What are the characteristics of ICs?

Answer 7

• 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

Question 8

What effect does a change in price have on a budget constraint line?

Answer 8

A pivot

Question 9

What does it mean when a budget constraint line pivots?

Answer 9

There’s a change in price

Question 10

What does it mean when a budget constraint line shifts in a parallel direction?

Answer 10

There’s a change in the level of income

Question 11

When does MC intersect ATC?

Answer 11

At MC’s lowest point

Question 12

When do firms maximise profit in terms of marginal profits & costs?

Answer 12

When MC = MP

Question 13

What does it mean when a ‘Pareto optimal outcome’ is reached?

Answer 13

We cannot make any one person better off, without making someone else worse off

Question 14

What is it called when a point is reached where we cannot make any one person better off, without making someone else worse off?

Answer 14

A pareto optimal outcome

Question 15

When are Paretian principles used

Answer 15

When arguing that a particular outcome is as good as it can be

Question 16

What are often used when arguing that a particular outcome is as good as it can be?

Answer 16

Paretian Principles

Question 17

What are the 2 extremes of the market structure spectrum?

Answer 17

Perfectly competitive markets and monopolies

Question 18

What is ‘strategic interdependance’?

Answer 18

Where firms need to consider each others’ actions when making their own decisions

Question 19

What’s the name for ‘where firms need to consider each others’ actions when making their own decisions’?

Answer 19

Strategic Interdependance

Question 20

Which market structures depend on strategic interdependance most?

Answer 20

Imperfect Structures

Question 21

What’s a private good?

Answer 21

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

Question 22

What’s a public good?

Answer 22

Public goods are those that are non-rivalrous and non-excludable

Question 23

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’?

Answer 23

Private good

Question 24

What’s the name for goods ‘that are non-rivalrous and non-excludable’?

Answer 24

Public goods

Question 25

Explain what the ‘argument for public provision’ is

Answer 25

Public goods should be provided by the government as well as some other goods that aren’t public like healthcare or education

Question 26

State the various forms of market interventions

Include a brief description about what each of them are

Answer 26

• Price ceilings (maximum prices)
• Price floors (minimum prices)
• Quotas (maximum quantities)
• Taxes
• Subsidies (giving money to parties to encourage a party)

Question 27

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’?

Answer 27

Argument for public provision

Question 28

Which economic school of thought has a vertical AS? Why?

Answer 28

Classical because they believe in Sey’s Law (supply drives demand)

Question 29

What’s Sey’s Law?

Answer 29

Supply drives demand - if you make it, somebody will buy it

Question 30

Which law states that ‘supply drives demand’?

Answer 30

Sey’s Law

Question 31

Briefly describe the Loanable Funds Market Model

Answer 31

Real Interest Rate (r) on the vertical axis, Savings/Investment on the horizontal axis

Question 32

What does the Loanable Funds Market model do?

Answer 32

Shows how real interest rates are determined in a closed economy with classical assumptions

Question 33

How does SRAS differ in classical vs keynesian economics?

Answer 33

It’s horizontal in the keynesian model and vertical in the classical model

Question 34

What was the traditional goal of the Bank of England vs the Fed?

Answer 34

Inflation targeting for B of E while the Fed has dual goals of inflation targeting and growth targeting

Question 35

What’s the key equation for the quantity theory of money?

Answer 35

MV = PY where M is the money supply, V is the velocity of money, P is the overall price level and Y is output