Week 1 Flashcards
What is microeconomics?
It is the study of the actions that consumers and firms take in the presence of scarcity and how these actions interact with each other.
What are markets?
They are successful institutions through which scarce resources are allocated.
What are the traditional questions that arise in markets?
- What determines prices in an economy?
- Are allocations by markets desirable.
What does general equilibrium theory explain?
It explains how prices of all goods in an economy are determined.
What is a key assumption in general equilibrium theory?
Perfect competition so that agents behave as price takers and actions of single consumers or firms do not affect market prices.
What do economic models do?
They strip economic phenomenon to basic components to make them easier to understand. We add more assumptions to make them more realistic.
What 2 principals is standard microeconomic theory based on?
Optimisation - Individuals act rationally and know what they are doing and what they want.
Equilibrium - Markets are studied at equilibrium, where prices are not in equilibrium they are assumed to adjust freely to clear demand and supply.
What is equilibrium price?
It is when the amount of goods consumers want to buy is equal to the amount the firm wants to sell.
What is efficiency?
Lack of unnecessary welfare loss
What is Pareto efficiency and what does it not take into account.
It is where it’s not possible to improve an individual without harming others. It doesn’t take into account fairness or inequality.
What is the consumption bundle and what do each notation mean?
What is the budget set and its equation?
It is a set within the consumption set containing all the bundles the consumer can afford.
What forms the budget line and what does anything below the line represent?
When the budget constraint equals to all m it means the consumer has exhausted their income. Anything below it, costs less than the income.
Rearrange the budget constraint formula to give the horizontal and vertical intercepts.
What does the slope of the budget line tell us?
It tells us the exchange rate between the goods imposed by the market prices, also known as the opportunity cost of one good interns of another.
What will an increase in income do to the budget line?
What will changes in price do to the budget line?
If both goods price change by the same amount what happens? and show the change algebraically.
What is the numeraire price
It is a constant usually (1) pegged to one of the prices or incomes. To allow a change to the other variable to describe same budget set thus the budget line. The pegged variable is called numeraire price
What are the 3 types of subsidies and taxes that affect the budget set of a consumer. Show each of their formulas how the affect the budget constant formula.
What do rationing policies do and show graphically using a supply and demand curve.
Show what happens when taxes and rationing are used together in an example where after a certain amount of consumption, the consumer is taxed on the additional consumption. Provide both budget constraints.
Elaborate what happens when vouchers are used which are v > 0. and how this affects the consumption set. Only provide the change in budget constraint.
