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1. Semester > VWL > Flashcards

VWL Flashcards

1
Q

Mankiws principles of economics

A

-> people face trade offs
-> the cost of something is what you give up to get it
-> rational people think at the margin
-> people respond to incentives
-> trade can make everybody better of

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2
Q

assumptions of competitive market model (perfect competition)

A

1) many buyers/sellers in the market
2) free market entry/exit
3) homogenous goods
4) full information on both sides
5) increasing marginal costs for the producer
6) profit maximization

-> no individual buyer/seller has the power to be able to influence the price
-> buyers and sellers act individually
-> only consider their own position in making decisions
-> clearly defined property rights

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3
Q

Advantages competitive market model

A

allocate efficiency
-> resources are allocated where they are most valued
-> goods are produced to the point where price = MC
-> ensuring the value consumers place on a good = cost of resources used to produce it

product efficiency
-> cost minimization because firms produce at the lowest point on their average cost curves (MC = AC)
-> goods produced at the minimum possible cost

absence of long term profits
-> in the long run firms earn only normal profit (economic profit = 0)
-> prevents firms from earning excessive profits at the expense of the consumer

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4
Q

disadvantages of competitive market model

A

unrealistic assumptions
-> perfect information and homogenous goods rarely exist

market failures
-> externalities: competitive markets fail to account for externalities leading to overproduction of harmful goods and underproduction of beneficial ones

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5
Q

Opportunity Cost

A

-> cost of something = what you have to give up to get it
-> money, time and other resources

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6
Q

marginal utlity

A

-> describes the change in utility (pleasure or satisfaction resulting from the consumption)
-> can be positive, negative and zero

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7
Q

Absolute utility

A

-> utility is a relative concept
-> differs from person to person
-> it is not standard and every individual will obtain a different level of satisfaction (utility) from the consumption of the same good

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8
Q

Incentives are key

A

-> government policies affect peoples life
-> lead to shifts in behaviour
-> not always reflects the original purpose of legislation (unintended consequences)

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9
Q

Benefits from trade

A

-> we can consume in a larger variety of goods which we cant produce
-> consumption at a cheaper price

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10
Q

Absolute advantage

A

when a producer can provide a good/service in greater quantity for the same cost
or
the same quantity at a lower cost than its competitors

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11
Q

Comparative advantage

A

-> the advantage over others in producing a particular good
-> can be produced at a lower relative opportunity cost
-> at a lower relative marginal cost prior to trade

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12
Q

limitations of comparative advantage

A

->ignoring transportation cost and trade barriers
-> considering only two countries and only two goods doesnt capture the complexity of global trade
-> model assumes countries are operating at full employment but unemployment/underemployment are common

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13
Q

trade off

A

loss of the benefits firm a decision to forego one option balanced against the benefits incurred from the choice made

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14
Q

efficiency

A

deals with ways society gets the most it can from its scarce resources

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15
Q

equity

A

looks at the extent to which the benefits of outcomes are distributed fairly among members of society

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16
Q

opportunity cost

A

making decisions requires comparing costs/benefits of alternative courses of action
-> measure of the options sacrificed

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17
Q

calculate opportunity cost

A

what must be given up in order to acquire something

sacrifice of a good x /gain in good y

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18
Q

marginal changes

A

incremental adjustments to an existing plan of action
-> based around the assumption that economic agents are seeking maximize/minimize the outcomes when making decisions

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19
Q

people respond to incentives

A

-> principle of rational behavior and that people make decisions by comparing costs/benefits
-> behavior may change when the costs/benefits change
-> intention of policymakers do not always lead to outcomes expected or desired

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20
Q

trade can make everyone better off

A

-> trade between economies can make all parties better off
-> trade allows specilization
-> some have skills that allow them to produce some things more efficiently
-> trade allows specializing in activities they do best
-> improves standard of living

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21
Q

assumptions of competitive market model

A

-> supply/demand refer to behavior of people as the interact in markets
-> market = group of buyers and sellers of a particular good/service
-> neither buyer/seller can influence the price
-> both are price takers

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22
Q

No influence on prices as sellers?

A

-> no control because other sellers offer identical products
-> each one only provides a very small amount in relation to total supply of the market
-> if one charges more consumers will buy elsewhere
-> goods are homogenous

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23
Q

quantity demanded

A

= amount of the good that buyers are willing and able to purchase at different prices

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24
Q

Demand curve

A

-> quantity demanded falls as prices rise and vice versa
-> quantity demanded is negatively or inversely related to the price

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25
Q

determinants of household demand

A

-> price of the good
-> disposable income
-> utility for the good
-> price of other goods
-> psychological factors/expectations

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26
Q

law of demand

A

-> the amount demanded increases with a fall in price
-> diminishes with a rise in price

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27
Q

demand curve

A

-> shows how the quantity demanded changes as the price varies
-> because a lower price increases the quantity the curve slopes downwards

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28
Q

movement along demand curve

A

change in price of a good = change in quantity demanded
-> Steigung ändert sich

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29
Q

Reasons for movement: income effect

A

-> if income remains constant a fall in price means the consumer can afford more milk with their income
-> real income has increased

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30
Q

Reasons for increase: substitution effect

A

-> with a lower price some consumers will choose to substitute the more expensive good with the now cheaper good
-> more milk than apple juice

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31
Q

Shifts in the demand curve

A

-> if any factors other than a change in price demand change
-> will cause a shift in the position of the curve = shift of demand
-> Verschiebung nach rechts oder links
-> increase in demand = shift to the right
-> decrease in demand = shift to the left

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32
Q

substitutes

A

when a fall in price reduces the demand for another good too
-> the two goods are called substitutes
-> pairs of goods that are used in place of each other

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33
Q

complements

A

-> when the fall of price in one good raises the demand for another good
-> pairs of goods that are used together
e.g. milk and cereal

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34
Q

Effect of income on demand

A

-> lower income means less spending
-> more income and its likely demand will also rise

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35
Q

normal good

A

-> if demand for a good falls/rises when income falls/rises

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36
Q

inferior good

A

if demand for a good rises when income falls
e.g. bus rides rise in demand when people are less likely to buy a car

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37
Q

quantity supplied

A

amount that sellers are willing and and able to sell goods/services at different prices

-> with high prices selling is more profitable and sellers are willing to suplly more (and vice versa)

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38
Q

supply curve

A

-> shows how the quantity supplied of the good changes as its prices varies
-> therefore supply chain slopes upward

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39
Q

law of supply

A

-> quantity supply rises with the price and falls with the price
-> quantity is positively related to the price of the good

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40
Q

movement along supply curve

A

-> if the price of a good rises there is a change in quantity supplied

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41
Q

shifts in the supply curve

A

-> shift if factors affecting producers willingness and ability to supply, other than price, change
-> at any given price sellers are now willing to produce a larger quantity
= supply chain shifts to the right

42
Q

causes of a shift in the supply curve

A

-> increase in supply = any change that raises quantity supplied at every price shifts the supply curve to the right
-> decrease in supply = any change that reduces the quantity supplied at every price shifts the supply curve to the left

43
Q

Equilibrium

A

= state of rest, point where there is no force acting for change
-> supply/demand are both market forces
-> exert force on price
-> if supply >< price -> pressure on price to change
-> market equilibrium occurs when amount consumers wish to buy at a particular price = amount sellers are willing to offer

44
Q

equilibrium price

A

-> also called market clearing price because at this price everyone in the market has been satisfied
-> if one/both curves shift at the existing equilibrium price there will be a surplus or shortage
-> market mechanism takes time to adjust

45
Q

surplus

A

-> when amount sellers wish to sell > amount consumers which to buy
-> response is cutting prices
-> some consumers will then buy more
-> movement along supply curve
-> price continue to fall until the market reaches a new equilibrium

46
Q

a shortage

A

-> occurs if the amount consumers are willing/able to purchase at a price is > amount sellers are willing/able to offer
-> with many buyer and too few goods sellers raise their prices without loosing sales

47
Q

law of sales and demand

A

-> price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance

48
Q

elasticity

A

-> measure of how much buyers and sellers respond to market conditions

49
Q

price elasticity of demand

A

-> measures how much the quantity demanded responds to a change in price

-> businesses cannot directly control demand
-> consumers can be influenced through a change in prices
-> demand for a good is elastic if the quantity demanded only slightly responds to changes in price
-> measure of how willing consumers are to move away from the good as its price rises

50
Q

availability of close substitutes

A

-> goods with close substitutes tend to have more price elastic demand
-> easier for consumers to switch from one good to another

51
Q

calcute price elasticity of demand

A

percentage change in quantity demanded / percentage change in price

-> quantity demanded is negatively related to its price

52
Q

meaning of elasticity values

A

between 0 -1 -> price inelastic
-> change in quantity demanded is less than change in price

> 1 -> price elastic
-> change in quantity is greater than change in price

change in quantity demanded = change in price -> unit elasticity

53
Q

comparative advantage

A

-> compares inputs required for production
-> describes opportunity cost of two producers
-> producer who gives up less of other goods has the smaller OC and therefore the comparative advantage

-> only possible to have the comparative advantage for one good

54
Q

absolute advantage

A

-> comparing the productivity of one person, firm, nation to another
-> producer that requires a smaller quantity of input has the absolute advantage
-> possible to have the absolute advantage for two goods

55
Q

indifference curves

A

-> consumer preferences allow them to choose between different bundles
-> represent consumer preferences in relation to the utility
-> if two bundles yield the same utility the consumer is indifferent between them
-> curve shows bundles of consumption with same utility -> equal utility curve
-> points on a higher curve a preferred

56
Q

definition indifference curves

A

=> represent all combinations of two goods that have the same utility for the consumer
-> every point on one curve represents one combination of goods
-> always have a negative slope
-> always parallel and never intersect because more is always better
-> convex shaped as they represent the desire to have a mix of both goods

57
Q

pareto-optimum

A

-> higher endowment with one good only possible at the expense of the other good
-> movement on the indifference curve by changing

58
Q

total utility

A

satisfaction consumer gains from consuming a product

59
Q

marginal utility

A

increase in utility gained from one additional unit of that good

60
Q

marginal rate of substitution

A

-> slope of the indifference curve
-> depends on the amount of each good the consumer is currently consuming
-> slope changes at every point
MRS = rate at which consumer is prepared to substitute one good for another

61
Q

budget constraint

A

-> more is preferred to less
-> spending is constrained by a budget/income
-> constraint shows the consumption bundles the consumer can afford given a specific income
-> no points outside the constraint are possible
slope of the budget constraint = relative price of the two goods

62
Q

change in income and budget constraint

A

more income = constraint shifts right
less income = constraint strains left
-> slope will remain the same because the prices dont change

63
Q

change in prices and budget constraint

A

-> slope of the constraint changes
prices fall = constraint pivots inwards
-> consumer can afford more

64
Q

externalities

A

-> when an economic agent engages in an activity that influences the well being of a third party who neither pays nor receives any compensation for that effect
-> linked to social cost and benefits that exist when making a decision

65
Q

negative externality

A

-> if the impact is adverse
e.g. pollution
-> means extra cost to society
-> social cost of the good exceeds the private cost
-> optimal quantity is smaller than the equilibrium quantity
-> could be internalized through taxes

66
Q

positive externality

A

-> if the impact is beneficial
e.g. education
-> additional gain to society from an additional unit
-> social value exceeds the private value
-> market failure can be corrected by internalization of the externality
-> therefore education is heavily subsidized by the government

67
Q

assumptions of a perfectly competitive market

A

-> many sellers and buyers
-> homogenous goods
-> full information on both sides
-> free market entry and exit
-> increasing marginal cost for the producer
-> profit maximization

68
Q

profit maximization rule

A

price = marginal cost
-> average cost sollen marginal cost entsprechen

69
Q

monopoly - imperfect competition

A

-> monopoly if its the sole seller of its product
-> product doesnt have any close substitutes
-> barriers to market entry as fundamental cause of monopoly
e.g. a key resource is owned by a single firm, cost of production make a single producer more efficient than a large number of producers

70
Q

natural monopolies

A

-> when a single firm can supply a good/service to an entire market at lower cost than more firms
-> a firms average cost curve decline as its production increases
e.g. distribution of water because a network of pipes has to be build

71
Q

monopolies - pricing decision

A

-> monopoly is sole producer in its market
-> faces downward sloping market demand
-> if the monopolist raises the price the consumers buy less
-> if he reduces the quantity of output the price increases

72
Q

welfare effect in monopoly

A

-> monopolist obtains a part of the consumer surplus
-> net welfare loss emerges
-> monopolist can call a higher price and therefore some consumers will leave the market
-> reduces the welfare of society

73
Q

functions of money

A

= set of assets in an economy people regularly use to buy goods/services from other people

  1. medium of exchange
  2. unit of account
  3. store of value
74
Q

kinds of money

A

commodity money -> takes the form of a commodity with intrinsic value (gold, silver)
gold standard -> value of the currency based on gold
fiat money -> money used by government degree (coins, currency etc.)

75
Q

liquidity

A

-> ease with which an asset can be converted into a medium of exchange
-> money is most liquid asset available
-> other assets vary in their liquidity

76
Q

central bank

A

= institution designed to oversee the banking system
-> regulate the quantity of money in the economy
-> fiat money must be regulated

77
Q

functions of a central bank

A

-> macroeconomic stability in maintaining stable growth and prices
-> avoidance of excessive and damaging swings in economic activity
-> maintenance of stability in financial system
-> monetary policy is the set of actions taken by the central bank in order to affect the money supply

78
Q

open market operations

A

increase money supply by buying bonds from the public -> currency amount is increased

reduce money supply by selling bonds -> currency amount is reduced

79
Q

lender of the last resort

A

-> liquidity is the cash needed to ensure transactions in the financial system are honored
-> to maintain financial stability central banks supply liquidity to the banking system
= lender of the last resort

80
Q

how do banks make profit?

A

-> by accepting deposits and making loans
-> spread = difference between the average interest a bank earns and the average interest paid on its liabilities
-> bank holds a fraction of the money deposited as reserves and lend the rest to make their profit

81
Q

banks balance sheet

A

-> assets include cash, securities, loans
-> liabilities are demand/saving deposits, borrowings from other banks
-> reserves must be kept
-> banks actively find ways of making new loans

new loan (asset) -> new money created -> money supply increases

82
Q

bonds - balance sheet

A

-> banks buy/sell a range of assets including bonds
-> when a bond is purchased, the funds are credited to the sellers account -> increases the money supply and vice versa

83
Q

central banks tool for monetary control

A
  1. open market operations
    -> buys/sells government bonds
  2. changing the refinancing rate
    -> increasing the rate = decreases money supply
    -> decreasing the rate = increasing money supply
  3. quantitative easing
    -> when the use of lowering interest rates is exhausted
    -> buying of assets
    -> in selling assets to the central bank it will hold more money in relation to other assets
84
Q

inflation

A

-> prices rise when the government prints too much money
-> when the price level rises, the value of money falls and people pay more for goods/services
-> value of money is determined by supply/demand for money

85
Q

measurement of GDP

A

-> measure of income/expenditure of an economy
-> total market value of all final goods/services produced within a country during a given period of time

86
Q

components of GDP

A

Y = C + I + G + NX

87
Q

Consumption C

A

-> spending by households on goods/services excluding purchases of new housing

88
Q

Investment I

A

-> spending on capital equipment, inventories, structure including new housing

89
Q

Government spending G

A

-> spending on goods/services by local and central governments
-> does not include transfer payments because they are note made in exchange for currently produced goods/services

90
Q

net exports NX

A

-> exports - imports

91
Q

GDP in a closed economy

A

Y = C + I + G

92
Q

important identities

A

S = I
S = Y - C -G
S = (Y - T - G) + (T + G)

-> national saving is the total income that remains after paying for consumption and government purchases

private saving = (Y - T - G)

public saving = (T - G)

93
Q

surplus and deficit q

A

if T > G -> budget surplus
if G > T -> budget deficit

94
Q

multiplier effect

A

-> additional shift in aggregate demand
-> result of expansionary fiscal policy which increases income and therefore consumer spending
-> slope of the expenditure function is dependent on the multiplier effect

95
Q

spending multiplier

A

M = 1/(1 - MPC)
-> marginal propensity to consume (MPC) is the fraction of extra income that a household rather consumes than saves

-> marginal propensity to save (MPS) is the fraction of extra income that a household rather saves than consumes
M = 1/MPS

96
Q

Equilibrium MRS and price ratio

A

-> optimal consumption bundle (where consumer maximizes their utility subject to their budget constraint) is found where MRS = price ratio
-> rate at which consumer is willing to trade one good for another (MRS) = rate at which the market allows the to trade the good (price ratio)
->ensures that the consumer maximizes their utility given their budget constraint

97
Q

revenue maximizing quantity

A

-> Marginal Revenue berechnen
MR = R’(x)
R(x) = demand function * x
-> maximale Menge in demand function einsetzen um maximalen Preis zu berechnen

98
Q

maximal revenue

A

R(x) = maximaler Preis * maximale Menge

99
Q

profit

A

profit = revenue - cost

100
Q

monopoly price

A

marginal revenue = marginal cost
R’(x) = C’(x)
marginal revenue = Ableitung der Revenue Function
marginal cost = Ableitung der cost function

101
Q
A

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