topic 2

Question 1

Definition: Consumption/Savings Function

Answer 1

is a mathematical function used to express dynamic consumer spending/saving.
it is used to calculate the economies total amount of consumption/savings

Question 2

Definition: Autonomous Consumption (Co)

Answer 2

represent consumption when Income (Y) = 0 and there is the survival cost. this cost eats into savings and contributes to dissaving.

Question 3

Definition: Induced Consumption (Ci)

Answer 3

spending increased by an increase in income (Y)

Question 4

Consumption Formula (C)

Answer 4

C = Co + Y(mpc)

Question 5

When drawing a Consumption Function _____

Answer 5

the scales on the X (income) and Y (consumption) axis must be the same

Question 6

The point C=Y on a Consumption Function is the ____

Answer 6

break even point where savings = 0 and everything is consumed

Question 7

Definition: Average Propensity to Consume/Save

Answer 7

broad measure of the economy’s consumption/saving behaviour in a single point in time

Question 8

APC and APS Formula

Answer 8

APC = C/Y
APS = S/Y
APS + APC = 1

Question 9

Savings Function Formula (S)

Answer 9

S = -Co + Y(mps)
negative Co because the autonomous consumption is dissaving

Question 10

What influences what we WANT to buy?

Answer 10

• tastes/preferences
• trends
• advertising

Question 11

what influences what we CAN buy?

Answer 11

• income
• price (of G&S itself, substitutes and compliments)

Question 12

Definition: Utility

Answer 12

the satisfaction one gets from consuming a G&S

Question 13

Goods trends

Answer 13

1. normal good (demand increases as income increases)
2. inferior good (demand decreases as income increases)
3. giffen good (demand increases as price increases) (good such as rice for people in absolute poverty)

Question 14

Market Equilibrium is set when ____

Answer 14

supply levels intersect with possible demand levels

Question 15

Definition: Income

Answer 15

a flow concept. the flow of funds or money from nonmarket sources

Question 16

Definition: Wealth

Answer 16

a stock concept. the total value of real and financial assets of an individual at a particular point in time.

Question 17

How does the Government redistribute income?

Answer 17

• Tax brackets
• provide welfare payments
• provide social wages (a safety net for education, health, etc.)

Question 18

Definition: Firm

Answer 18

business organisation using factors of production to produce G&S to satisfy consumer needs and wants in return for PROFIT

Question 19

What are the goals of a firm?

Answer 19

• maximising profit
• maximising sales
• maximising growth
• maximising market share
• maximising shareholder value
• for managers own satisfaction (small companies)

Question 20

What are the different parts of a Unit sale price?

Answer 20

1. Fixed cost (e.g rented room to produce the G&S) –> can not change
2. Variable cost (e.g materials, labour, etc) –> variable cost can be cut down
3. Profit –> positive difference between the total cost of producing and the selling cost

Question 21

Profit Maximisation Formula

Answer 21

profit (per unit) = revenue - cost (fixed and variable)
- firms raise prices
- firms increase number of units sold
- firms cut costs of each unit produced

Question 22

Definition: Economies of Scale

Answer 22

refers to the reduction of costs per unit of output as output increases (technical efficiency). this is measured on the LRAC curve.
INTERNAL: the cost savings that the firm acquire because it becomes more efficient in allocating internal resources. (point moves along the left side of the curve)
EXTERNAL: the reduction in average cost at every output level due to outside factors (whole curve shifts up)

Question 23

Definition: Technical Optimum

Answer 23

the lowest point on the LRAC. Also known as the point of technical efficiency. as a firm moves past this point it experiences diseconomies of scale.

Question 24

Definition: Long run average cost curve

Answer 24

a concaved up curve that plots the average cost of producing a certain output of a certain G&S.

Question 25

Definition: Diseconomies of scale

Answer 25

when a company or business grows so large that the costs per unit increases
INTERNAL: increase in production costs per unit as output increases beyond the technical optimum (movement along the right side of the curve)
EXTERNAL: increases in average cost at every level of output due to outside factors (shift of the whole curve down)

Question 26

Reasons for EOS

Answer 26

INTERNAL:
- increase in specialisation (capital and labour)
- input costs reduced (wastage reduced)
- research and development
EXTERNAL:
- new resources found, resource costs/ interest rates decrease
- improvement of infrastructure

Question 27

reasons for DEOS

Answer 27

INTERNAL:
- skill shortages (hiring structurally unemployed)
- congestion
- useless management roles
EXTERNAL:
- increase of resource costs/interest rates/labour rates

Question 28

Definition: Returns to Scale

Answer 28

relationship between inputs and outputs
- increase in ROS –> FOP increases and output increases
- decrease in ROS –> FOP decreases and output decreases
- ROS –> output increases the same amount input increases