Questions

Question 1

Why does the demand curve slope downwards?

Answer 1

• Theory of decreasing marginal utility
• Substitution effect
• Income effects
  (Page 4)

Question 2

Determinants of Demand (6)

Answer 2

• Price of a good
• Income (normal, inferior good)
• Price of related goods (substitutes, complements)
• Taste, preference
• Demographic changes (population, n of consumers)
• Future price expectations

Question 3

Why does the supply curve shift upwards?

Answer 3

• Law of diminishing marginal returns
• Profit
  (Page 5)

Question 4

Determinants of Supply (7)

Answer 4

• Price (movements)
• Change in price of FOPS
• Price of related goods (competitive supply, joint supply)
• Future price expectations
• Indirect tax/subsidies
• Changes in tech
• N of firms

Question 5

What are the types of economic systems?

Answer 5

• Free market
• Planned/controlled economy
• Mixed economy

Question 6

Basic economic problem

Answer 6

• What to make
• How to make
• For whom to make

Question 7

3 functions of price

Answer 7

• Rationing
• Signaling
• Incentive

Question 8

Problems of planned economy

Answer 8

1. Untrue output targets
   Gvt sets output targets w/o considering actual demand, overproduction -> surplus -> waste
2. Lack of incentives
   Wage isn’t based on quantity/quality-> low labor productivity
3. Right to employment
   Too many workers
4. No profits leads to resource waste
   Quotas, no fear of bankruptcy or competitiveness, no incentive to minimise COPs
5. Low prices
   Excess demand

Question 9

Problems of transitional economy

Answer 9

ALL SUDDEN
1. GDP decrease
Firms not prepared to transition -> low productivity
2. Inflation increase
Sudden foreign investment influx and increased competitiveness of new industries leads to rise in prices
3. Increase in U/E
State owned enterprises close, workers can’t find work in private sectors
4. Exchange rate depreciates
Influx of foreign investment pressures currency, ER falls
5. Falling income / more poverty

Question 10

What is Rational consumer choice composed of

Answer 10

• Consumer rationality
• Perfect information
• Utility maximisation

Question 11

What is consumer rationality composed of

Answer 11

• Completeness assumption
• Transitivity assumption
• Non satiation assumption

Question 12

Limitations of rational consumer behaviour

Answer 12

Bias
1. Rule of thumb
2. Framing
3. Anchoring
4. Availability

Question 13

Alternatives to rational consumer behaviour

Answer 13

• Bounded rationality
• Bounded self control
• Bounded selflessness
• Imperfect information

Question 14

Types of choice architecture choices

Answer 14

• Default choice
• Restricted choice
• Mandated choice

Question 15

Goals of firms

Answer 15

1. Sales revenue optimisation
   MR=0
2. Satisficing
   - Strategy of firms to achieve satisfactory outcome, not best
   - Focusing on research/development to maximise profit rather than hiring more workers to perfect customer service
3. Corporate social responsibility
   - Firms engaging in socially beneficial activities
   - Environmentally sound activities, human rights advocation
4. Market share
   - % of total sales in a market earned by a firm
5. Growth maximisation
   - Become an Economy of Scale (cost/unit of output decreases when production levels increase)
   - Gain market power
   - Influence price
   - Diversify production

Question 16

Determinants of PED

Answer 16

1. Availability and closeness of substitutes
2. Necessity vs luxury
3. Proportion of income spent on a good
4. Time
   - Over time, consumers may adjust consumption patterns in response to price changes; change habits, adapt to substitutes

Question 17

PED cases

Answer 17

Elastic PED>1
Inelastic PED<1
Perfectly elastic PED= Infinity (horizontal)
Perfectly inelastic PED = 0 (vertical)
Unit elastic PED=1

Question 18

What does it mean when YED is positive/negative

Answer 18

+ Luxury or necessity
- Inferior good

Question 19

Applications of YED

Answer 19

1. When under recession, businesses should increase production of inferior goods, viceversa for necessities and luxury goods
2. If total income grows by 3% and YED is elastic, demand for goods will rise more than 3%, opposite for normal goods
3. Primary sector (agriculture, fishing, forestry, extractions) +YED<1
   Manufacturing/service sector +YED>1
   As an economy grows primary sector output will shrink, M and S sector output will grow

Question 20

Cases of YED

Answer 20

Elastic YED>1
Inelastic YED<1
Unit elastic YED=1
Inferior good YED<0

Question 21

PES determinants

Answer 21

1. Time
   In SR, PES is lower because resources are fixed in SR
2. Mobility of FOPs
   Being able to easily move FOPS between different uses
3. Spare capacity of firms
   Release good into market when prices rise
4. Rate at which costs increase
   If firms can produce more w/o significant additional costs they are PES elastic
5. Storability

Question 22

Applications of PES

Answer 22

Primary commodities are more inelastic than manufactured goods because they are more time-staking to produce and harder to store (tomatoes), Hence, they have a price volatility meaning larger revenue fluctuations and unstable revenue for producers as they struggle to align demand and supply due to these variables

Question 23

Types of government intervention

Answer 23

Max price (ceiling)
Min price (floor)
Taxation
Subsidy

Question 24

Why does the Gvt intervene?

Answer 24

1. Earn revenue for gvt
2. Provide support for firms
3. Support low income HH
4. Influence levels of firm production
5. Influence level of consumption (more merit goods, less demerit)
6. Correct market failure
7. Promote equity

Question 25

What are the problems of a max price

Answer 25

1. Creates a shortage 2. Prices will fall -> people buy more than they need and resale on black market 3. Price falls signaling to firms to decrease production, worsening shortage 4. Firms gain less revenue 5. Non price rationing may occur Waiting in line, coupon distribution, favouritism

Question 26

How to fix a maximum price led surplus

Answer 26

1. Subsidizing fims lowering COPs which increase supply at the opportunity cost of taking gvt budget away from other sectors 2. Offering some alternatives (substitutes) Demand may redivert to substitutes lowering Qd, but finding substitutes is costly and takes time, GS opportunity cost again

Question 27

Advantages and disadvantages of a price floor

Answer 27

+ Can protect low income workers + Higher prices means higher revenue - Surplus caused by price floor can bring price down again - Price increases and some low income consumers may not be able to buy the good longer - Allocation inefficiency

Question 28

How do you clear a price floor led surplus?

Answer 28

Buying off the excess goods + Minimum price remains in place and loss of excess supply is reduced - Money used to buy surplus decreases other GS and may lead to taxation

Question 29

Consequences of buying out a surplus

Answer 29

1. Gvt spending opportunity costs and possible taxes 2. Consumers pay more, so consumer surplus decreases 3. Produces sell at a higher price and quantity and are protected by low cost competition 4. More employment, higher incomes 5. Foreign consumers who buy off surplus are better of as they buy goods for cheaper than home country 6. Global misallocation of resources as high cost firms produce more whilst low cost firms produce less

Question 30

Implications of minimum wage imposition

Answer 30

1. Structural unemployment and labor market rigidities 2. Illegal workers working below minimum wage 3. Labour resources are misallocated because wages usually act as a signalling price for labor, but with a min price this signalling function is distorted leading to a decrease in hiring

Question 31

Do excise taxes decrease allocative efficiency

Answer 31

Depends If without the excise tax, the market is already at equilibrium then yes it will

Question 32

Consequences of indirect tax with no externalities

Answer 32

1. Consumers pay a higher price, Qd falls 2. Produces receive lower price, Qs falls and revenue falls 3. Gvt receives tax revenue 3. Workers produce lower output, more unemployment 5. Underallocation of resources leads to society being worse off

Question 33

Why grant a subsidy?

Answer 33

1. Encourage more production 2. Encourage more consumption through lower prices 3. Can make merit goods and necessities affordable to low income consumers 4. Can increase revenue/income 5. Can support growth of particular industries 6. Can encourage exports 7. Improves resource allocation by correcting positive externalities