Week 1 Flashcards
What’s rational behaviour?
It refers to how economic agents seek to optimise when making decisions. Firms want to maximise profits and consumers want to maximise utility.
What are the features of a capitalist economic system?
Private ownership of FOP’s, goods and services exchanged through a price mechanism; firms are predominantly driven by the desire to make profit.
What does microeconomics mean?
The study of the behaviour of individuals and firms at a disaggregate level.
What does macroeconomics mean?
Studies the aggregate behaviour of the economy.
What are positive approaches to economics?
A positive approach attempts to describe how the world actually is.
What are normative approaches to economics?
A normative approach attempts to prescribe how the world ought to be.
What was Alfred Marshall responsible for?
Alfred Marshall was responsible for the change from “political economy” to “economics”.
How did Alfred Marshall define economics?
“… the study of mankind in the ordinary business of life”.
How did Lionel Robbins define economics?
“… a relationship between ends and scarce means which have alternative uses”.
What was Ragnar Frisch responsible for?
Ragnar Frisch invented the terms “micro” and “macroeconomics” (as well as “econometrics”).
What are the two types of economic functions?
- General functions describe, generally, what affects what – the general relationship but not the exact detail of it. [e.g, A = F(B,C)]
- Specific functions describe the exact relationship between variables in a model. [A = 20B + 30C]
What’s the law of demand?
There’s an inverse relationship with the price and quantity demanded of a good/service.
What’s the law of supply?
There’s a direct relationship with the price and quantity supplied of a good/service.
What’s partial equilibrium analysis?
The analysis of an individual product.
What are the assumptions of the basic demand and supply model?
There are many buyers and sellers.
Each buyer/seller has complete (or at least equal) information.
Firms produce and sell homogenous goods.
Those homogenous goods sell at a uniform price.
What are the factors that affect demand?
The number of consumers.
Consumers’ income levels.
Tastes/preferences.
Price of substitutes/complements.
What are the factors that affect supply?
The number of sellers
Production costs
Level of technology
Regulations
The extent of sellers outside options.
What’s market equilibrium?
Where the amount that consumers are willing to buy coincides with the amount suppliers are willing to sell.
What’s the impact on equilibrium if demand and supply were to change simultaneously?
Its determined by:
The relative size and direction of the changes.
The shape of the demand and supply curves (slopes and elasticity).
What’s price elasticity of demand (PED)?
The responsiveness of quantity demanded to a change in price.
(Always Negative)
What’s price elasticity of supply (PES)?
The responsiveness of quantity supplied to a change in price.
(Always positive)
What are the units of elasticity?
“Elastic” is where the absolute value >1
“Inelastic” is where the absolute value <1
“Unit elastic” is exactly equal to 1
What’s income elasticity of demand (YED)?
The responsiveness of quantity demanded to a change in income.
If YED is positive, it’s a normal good.
If YED is negative, it’s an inferior good.
What’s cross price elasticity of demand (XED)?
The responsiveness of quantity demanded for good X to a change in price of good Y.
If XED is positive, goods X and Y are substitutes.
If XED is negative, goods X and Y are complements.
