VWL

Question 1

Mankiws principles of economics

Answer 1

-> 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

Question 2

assumptions of competitive market model (perfect competition)

Answer 2

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

Question 3

Advantages competitive market model

Answer 3

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

Question 4

disadvantages of competitive market model

Answer 4

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

Question 5

Opportunity Cost

Answer 5

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

Question 6

marginal utlity

Answer 6

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

Question 7

Absolute utility

Answer 7

-> 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

Question 8

Incentives are key

Answer 8

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

Question 9

Benefits from trade

Answer 9

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

Question 10

Absolute advantage

Answer 10

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

Question 11

Comparative advantage

Answer 11

-> 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

Question 12

limitations of comparative advantage

Answer 12

->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

Question 13

trade off

Answer 13

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

Question 14

efficiency

Answer 14

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

Question 15

equity

Answer 15

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

Question 16

opportunity cost

Answer 16

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

Question 17

calculate opportunity cost

Answer 17

what must be given up in order to acquire something

sacrifice of a good x /gain in good y

Question 18

marginal changes

Answer 18

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

Question 19

people respond to incentives

Answer 19

-> 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

Question 20

trade can make everyone better off

Answer 20

-> 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

Question 21

assumptions of competitive market model

Answer 21

-> 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

Question 22

No influence on prices as sellers?

Answer 22

-> 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

Question 23

quantity demanded

Answer 23

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

Question 24

Demand curve

Answer 24

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

Question 25

determinants of household demand

Answer 25

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

Question 26

law of demand

Answer 26

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

Question 27

demand curve

Answer 27

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

Question 28

movement along demand curve

Answer 28

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

Question 29

Reasons for movement: income effect

Answer 29

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

Question 30

Reasons for increase: substitution effect

Answer 30

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

Question 31

Shifts in the demand curve

Answer 31

-> 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

Question 32

substitutes

Answer 32

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

Question 33

complements

Answer 33

-> 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

Question 34

Effect of income on demand

Answer 34

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

Question 35

normal good

Answer 35

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

Question 36

inferior good

Answer 36

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

Question 37

quantity supplied

Answer 37

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)

Question 38

supply curve

Answer 38

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

Question 39

law of supply

Answer 39

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

Question 40

movement along supply curve

Answer 40

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

Question 41

shifts in the supply curve

Answer 41

-> 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

Question 42

causes of a shift in the supply curve

Answer 42

-> 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

Question 43

Equilibrium

Answer 43

= 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

Question 44

equilibrium price

Answer 44

-> 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

Question 45

surplus

Answer 45

-> 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

Question 46

a shortage

Answer 46

-> 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

Question 47

law of sales and demand

Answer 47

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

Question 48

elasticity

Answer 48

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

Question 49

price elasticity of demand

Answer 49

-> 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

Question 50

availability of close substitutes

Answer 50

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

Question 51

calcute price elasticity of demand

Answer 51

percentage change in quantity demanded / percentage change in price -> quantity demanded is negatively related to its price

Question 52

meaning of elasticity values

Answer 52

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

Question 53

comparative advantage

Answer 53

-> 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

Question 54

absolute advantage

Answer 54

-> 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

Question 55

indifference curves

Answer 55

-> 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

Question 56

definition indifference curves

Answer 56

=> 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

Question 57

pareto-optimum

Answer 57

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

Question 58

total utility

Answer 58

satisfaction consumer gains from consuming a product

Question 59

marginal utility

Answer 59

increase in utility gained from one additional unit of that good

Question 60

marginal rate of substitution

Answer 60

-> 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

Question 61

budget constraint

Answer 61

-> 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

Question 62

change in income and budget constraint

Answer 62

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

Question 63

change in prices and budget constraint

Answer 63

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

Question 64

externalities

Answer 64

-> 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

Question 65

negative externality

Answer 65

-> 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

Question 66

positive externality

Answer 66

-> 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

Question 67

assumptions of a perfectly competitive market

Answer 67

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

Question 68

profit maximization rule

Answer 68

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

Question 69

monopoly - imperfect competition

Answer 69

-> 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

Question 70

natural monopolies

Answer 70

-> 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

Question 71

monopolies - pricing decision

Answer 71

-> 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

Question 72

welfare effect in monopoly

Answer 72

-> 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

Question 73

functions of money

Answer 73

= 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

Question 74

kinds of money

Answer 74

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.)

Question 75

liquidity

Answer 75

-> 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

Question 76

central bank

Answer 76

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

Question 77

functions of a central bank

Answer 77

-> 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

Question 78

open market operations

Answer 78

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

Question 79

lender of the last resort

Answer 79

-> 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

Question 80

how do banks make profit?

Answer 80

-> 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

Question 81

banks balance sheet

Answer 81

-> 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

Question 82

bonds - balance sheet

Answer 82

-> 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

Question 83

central banks tool for monetary control

Answer 83

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

Question 84

inflation

Answer 84

-> 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

Question 85

measurement of GDP

Answer 85

-> 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

Question 86

components of GDP

Answer 86

Y = C + I + G + NX

Question 87

Consumption C

Answer 87

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

Question 88

Investment I

Answer 88

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

Question 89

Government spending G

Answer 89

-> 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

Question 90

net exports NX

Answer 90

-> exports - imports

Question 91

GDP in a closed economy

Answer 91

Y = C + I + G

Question 92

important identities

Answer 92

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)

Question 93

surplus and deficit q

Answer 93

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

Question 94

multiplier effect

Answer 94

-> 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

Question 95

spending multiplier

Answer 95

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

Question 96

Equilibrium MRS and price ratio

Answer 96

-> 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

Question 97

revenue maximizing quantity

Answer 97

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

Question 98

maximal revenue

Answer 98

R(x) = maximaler Preis * maximale Menge

Question 99

profit

Answer 99

profit = revenue - cost

Question 100

monopoly price

Answer 100

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