week 1

Question 1

definition of economics

Answer 1

finite resources are insufficient to satisfy all humans wants and needs

Question 2

laissez faire

Answer 2

no need for gevernment intervention. Competitive markts allocate scarce resources most efficiently

Question 3

competitive markets

Answer 3

allocate scarce resources most efficiently

Question 4

market test

Answer 4

if what individuals are willing to pay exceeds the costs of production

Question 5

market failure

Answer 5

Market failure refers to the inefficient allocation of resources that occurs when individuals acting in rational self-interest produce a sub-optimal outcome

Question 6

economic policy

Answer 6

Actions that are intended to influence the way in which markets
allocate finite resources

Question 7

micro economic theory

Answer 7

relating to the branch of economics concerned with single factors and the effects of individual decisions.

Question 8

rational consumers (Homo Oeconomicus)

Answer 8

Weigh the costs and benefits of each possibility whenever they must
make a choice in pursuit of their own self-interest

Question 9

profit-maximizing firms

Answer 9

assumes that the goal of a company is to make the highest profits possible

Question 10

rational choice

Answer 10

Each person tries to choose the best alternative available to him or her (optimization principle)

Question 11

equilibrium

Answer 11

Market price adjusts until quantity demanded equals quantity supplied

Question 12

reservation price

Answer 12

person’s maximum willingness to pay for something

Question 13

demand curve

Answer 13

a graph that shows the relationship between the price of a good or service and the quantity demanded within a specified time frame

Question 14

quantity

Answer 14

the amount of something

Question 15

supply curve

Answer 15

a graph that represents the direct relationship between quantity supplied and prices

Question 16

supply shift

Answer 16

a change in the quantity supplied at every price

Question 17

demand shift

Answer 17

at any price (and at every price), the quantity demanded will be different than it was before

Question 18

monopolist

Answer 18

a person or business that has monopoly

Question 19

trade-off

Answer 19

a balance achieved between two desirable but incompatible features; a compromise.

Question 20

perfect competition

Answer 20

a theoretical market structure in which there are no monolpolies

Question 21

pareto efficienct

Answer 21

if it is impossible to change the
allocation to make one party better off without making another party
worse off

Question 22

pareto improvement

Answer 22

if we can find a way to make some people better off without making anybody else worse off

Question 23

pareto inefficient

Answer 23

there remain unrealized mutual
gains-to-trade

Question 24

competititive equilibrium

Answer 24

achieved when profit-maximizing producers and utility-maximizing consumers settle on a price that suits all parties.

Question 25

consumption choice set

Answer 25

the collection of all consumption choices available to the consumer

Question 26

budget constraint

Answer 26

p1x1 + p2x2 = m
- p1x1: amount of money spent on good 1
- p2x2: amount of money spent on good 2

Question 27

consumption bundle

Answer 27

X(x1, x2)
- X denotes the bundle composed of good 1 and good 2
- x1: how much the consumer consumes of good 1
- x2: how much the consumer consumes of good 2

Question 28

budget set

Answer 28

The set of affordable consumption bundles

Question 29

budget line

Answer 29

x2 = (m/p2) - (p1/p2)*x1

Question 30

slope of the budget line

Answer 30

-p1/p2
it measures the rate at which the market is willing to substitute good
1 for good 2

Question 31

opportunity cost

Answer 31

the potential benefits that an individual, invester of business misses out on when choosing one alternative over another

Question 32

value tax (VAT)

Answer 32

t increases all prices of a given percentage

Question 33

subsidies

Answer 33

the opposite of taxes and can also be given based on quantity
consumed or on the value

Question 34

strict preference of bundle

Answer 34

(x1, x2) ≻ (y1, y2)
⇒ Consumer wants the x-bundle rather than the y-bundle

Question 35

indifference of bundle

Answer 35

(x1, x2) ∼ (y1, y2)
⇒ Consumer would be just as satisfied consuming the bundle
(x1, x2) as they would be consuming the other bundle (y1, y2)

Question 36

weak preference of bundle

Answer 36

(x1, x2) ⪰ (y1, y2)
⇒ If the consumer prefers or is indifferent between the two bundles

Question 37

ordinal

Answer 37

they state only the order in which bundles are preferred

Question 38

axioms of consumer theory: preferences are complete

Answer 38

• it assumes that any two bundles can be compared
• Given any x-bundle and any y-bundle, we assume that
  (x1, x2) ⪰ (y1, y2) or (y1, y2) ⪰ (x1, x2), or both in which case the
  consumer is indifferent between the two bundles

Question 39

axioms of consumer theory: preferences are reflexive

Answer 39

Any bundle is always at least as preferred as itself: (x1, x2) ⪰ (x1, x2)

Question 40

axioms of consumer theory: preferences are transitive

Answer 40

Any bundle is always at least as preferred as itself: (x1, x2) ⪰ (x1, x2)

Question 41

indifference curve (IC)

Answer 41

a graphical representation of the various combinations of two goods with which a consumer is equally satisfied

Question 42

perfect substitutes in IC

Answer 42

two goods are perfect substitutes if the consumer is willing to substitute one good for the other at a constant rate. IC has constant slope

Question 43

perfect complements in IC

Answer 43

goods that are always consumed together in fixed proportions. IC is L-shaped

Question 44

monotonic

Answer 44

More of any commodity is always preferred

Question 45

convex

Answer 45

ssumes that averages are preferred to extremes

Question 46

marginal rate of substitution (MRS)

Answer 46

the slope of an indifference curve at a particular point. Slope = ∆x2/∆x1