Microeconomics Revision Flashcards

1
Q

What is the objective of consumer choice?

A

Maximise Utility between two goods, X and Y given the budget constraint M (= Px.x + Py.y)

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2
Q

What are the assumptions of the indifference curve?

A
  1. Non-satiation: more is better than less
  2. Transitivity: ranking of goods (if x > y and y > z, then x > z)
  3. MRS between X and Y declines
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3
Q

Slope of Indifference Curve

A

MUx/MUy = dy/dx = MRS of XY

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4
Q

If indifference curve cuts another, it violates

A

Transitivity assumption

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5
Q

Budget Line formula (M)

A

M = Px . x + Py . y

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6
Q

When is utility maximisation conditon reached?

A

When indifference curve is tangent to budget line at X0 and Y0 units
Basically when MUx/Px = MUy/Py

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7
Q

What are the types of goods?

A
  1. Perfect complements (can’t consume one good without the other, they rely on each other and must be consumed in FIXED PROPORTION)
  2. Perfect substitutes (either good brings same utility)
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8
Q

Indifference curve of perfect complements

A

L-shaped IC

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9
Q

Indifference curve of perfect substitutes

A

Either steeper (consume more X), flatter (more Y), or same slope as budget line (placed precisely on budget line)

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10
Q

Nature of goods

A
  1. Normal Good
  2. Inferior Good
  3. Giffen Good
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11
Q

Difference with inferior good and giffen good

A

Yes both are inferior and yes income effect is negative (< 0), but inferior good has |SE| > |IE| and giffen good has |IE| > |SE|

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12
Q

Shape of demand curve for types of goods

A
  1. Normal good: downward sloping
  2. Inferior good: downward sloping (but steeper than normal good)
  3. Giffen good: upward sloping
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13
Q

Substitution effect

A

Measures effect of change in price on income (feel relatively richer/poorer than before) and change in quantities bought
e.g. if Px falls, feel richer bc same income can buy more X, hence will buy more X

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14
Q

Income effect

A

Measures effect when we give back additional income to consumer

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15
Q

Income effect sign in different types of goods

A
  1. Normal Good: positive (> 0)
  2. Inferior Good: negative (< 0)
  3. Giffen Good: negative (< 0)
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16
Q

Substitution effect sign in different types of goods

A
  1. Normal Good: negative (< 0)
  2. Inferior Good:
  3. Giffen Good:
17
Q

What type of good has no substitution effect?

A

Perfect complements (only has income effect)
bc must consume both goods in FIXED PROPOTION, therefore CAN’T SUBSTITUTE X for Y even if Px changes => budget line shifts PARALLEL to former budget line, which is tangent to original indifference curve, and overall BL has the SAME TANGENCY with previous IC

18
Q

Labour Supply objective

A

Maximise Utility of Consumption (amount of goods we can buy) and Leisure (24 - Hours worked) -> graphically represented by indifference curve
subject to budget constraint = w x H + V (where w: wage and V: non-labor income)

19
Q

Assumption of leisure in labour supply

A

Nature of leisure is normal good

20
Q

Labour supply slope given values of income effect and substitution effect

A

Upward sloping: when income effect > substitution effect
Backward bending: when substitution effect > income effect

21
Q

Hours worked formula

A

H = 24 - leisure time

22
Q

Why can’t two goods be inferior?

A

Violates non-satiation
Relation: if income rises and P, X and Y are unchanged -> will consume less of both goods (bc both inferior la) -> can’t really increase X and Y consumption bc nature of goods are inferior -> excess budget (contradicts with the assumption that more is always better)

23
Q

Inverse function

A

Price = function of(Quantity)
P = f(Q)

24
Q

Quantity Demanded formula

A

a - b x P

25
Q

Quantity Supplied formula

A

c + d x P

26
Q

Market equilibrium

A

QD = QS
a - bP = c + dP
a - c = (b+d)P
P* = a - c / b + d
Substitute P* into QD or QS
Q* = a - b[a-c/b+d]
Q* = (a x d + b x c) / b + d

27
Q

Who reaps the burden of tax when demand is perfectly inelastic? What shape is the demand curve?

A

Fully on consumers
Vertically shaped ( | )

28
Q

Who reaps the burden of tax when demand is perfectly elastic? What shape is the demand curve?

A

Fully on sellers
Horizontally shaped (——–)

29
Q

What are the shapes of perfectly elastic and inelastic demand curves? Why are they like that?

A
  1. Perfectly elastic: horizontal because buyers are not willing to pay for any price above P bar
  2. Perfectly inelastic: vertical because buyers are willing to pay for any price on the P-axis (Y-axis)
30
Q

Market equilibrium when tax is imposed

A

Price of supply = Price of demand - tax
QD = a - b x Pd
QS = c + d(Pd - t)
a - bPd = c + d x (Pd - t)
Equilibrium price of demand (Pd)
= (a-c/b+d) + (d x t/b+d)
= (P
+dt) / (b+d)
Equilibrium quantity of demand (Q*d)
= ((ad+bc)/(b+d)) - (b.d.t/b+d)
Price of Supply
= Pd - t
= (a-c/b+d) - (b.t/b+d)

31
Q

What market equilibriums graphically represent

A

Equilibrium price of demand: gap between supply curves shows TAX
Equilibrium quantity of demand: idk
Price of supply: burden of sellers