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Economics > IE - 1 (1,2,3,4) > Flashcards

IE - 1 (1,2,3,4) Flashcards

1
Q

Definition of Scarcity?

A

The excess of human wants over what can actually be produced.

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2
Q

A working definition of economics?

A

The study of how a society (or an individual) manages its scarce resources (how society chooses to allocate the resources).

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3
Q

What does the PPF show?

A

A curve showing all the possible combinations of goods that can be produced within a specified time period when all resources are fully and effciently employed.

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4
Q

Define Comparative Advantage.

A

The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

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5
Q

Define Absolute Advantage.

A

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

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6
Q

What is the basis of the (David) Ricardian Model Of Trade?

A

Overall production increases and countries benefit from trade if each specialises in the production of the good they have a comparative advantage in.

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7
Q

What is the Heckscher-Ohlin Model of Trade?

A

The Heckscher-Ohlin model is a theory in economics explaining that countries export what can be most efficiently and plentifully produced. This model is used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties. Emphasis is placed on the exportation of goods requiring factors of production that a country has in abundance and the importation of goods that the country cannot produce as effectively.

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8
Q

What is the Leontief-Paradox and how did it come about??

A

Leontief’s paradox in economics is that the country with the world’s highest capital-per worker has a lower capital/labor ratio in exports than in imports. This econometric find was the result of Wassily W. Leontief’s attempt to test the Heckscher–Ohlin theory empirically.

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9
Q

What is a market economy?

A

A market economy is an economy in which decisions regarding investment, production, and distribution are based on market determined supply and demand, and prices of goods and services are determined in a free price system.

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10
Q

What is a command economy?

A

A command economy is a system where the government, rather than the free market, determines what goods should be produced, how much should be produced and the price at which the goods are offered for sale. The command economy is a key feature of any communist society.

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11
Q

What is a mixed economy?

A

An economic system combining private and state enterprise.

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12
Q

What is one of Adam Smiths key theories?

A

Individuals pursuing their self-interest would be led “as by an invisible hand” to do things that are in the interests of society as a whole.

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13
Q

Define Positive Economics.

A

Positive economics studies objective or scientific (testable) explanations of how the economy works.

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14
Q

Define Normative Economics.

A

Normative economics offers recommendations based on (non-testable) value judgments.

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15
Q

What is Microeconomics?

A

The study of the economic behaviour of single units (a consumer, a household, a firm, a particular industry,…) and of the interrelationship between those units.

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16
Q

What is Macroeconomics?

A

Emphasizes interactions in the economy as a whole. It deliberately simplifies the individual building blocks of the analysis in order to retain a manageable analysis of the complete interaction of the economy.

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17
Q

What are Models/ Theories?

A

A framework based on simplifying assumptions in order to help us in organising our economic thinking.

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18
Q

What are the Three types of data? (plus define)

A

Time Series: A simply a sequence of numbers collected at regular intervals over a period of time.
Cross Section:collected by observing many subjects (such as individuals, firms, countries, or regions) at the same point of time, or without regard to differences in time. Panel Data: Contains observations of multiple phenomena obtained over multiple time periods for the same firms or individuals.

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19
Q

What is The Law of Diminishing Marginal Returns?

A

an increasing number of new employees causes the marginal product of another employee to be smaller than the marginal product of the previous employee at some point.

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20
Q

What is the water-diamond paradox?

A

Shows the laws of supply and demand. The supply of water is far greater than the supply. This results in a lower equilibrium price. Supply for diamonds is lower. We value them more. Humans are irrational.

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21
Q

Marshallian Demand Function?

A

The amount of a good/ service that consumers are willing to buy at any given price. Only the price is relevant!! All other assumptions are taken as a given. E.g. income, personal tastes, prices of other goods etc are left out. Ceterus Paribus.

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22
Q

What is a Giffen Good?

A

Demand for a good increases with price, meaning it has an upward sloping demand curve. It does not have easily available substitutes and is typically an inferior good. The income effect dominates the substitution effect.

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23
Q

What is a Direct Demand Function?

A

It relates the quantity demanded to the price level. A simple straight line equation with a negative gradient. Q^D = a - bP, a > 0, and b > 0.

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24
Q

What is the Substitution Effect?

A

When the price of a good increases, some consumers will substitute it with alternative goods that are relatively cheaper.

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25
Q

What is the Income Effect?

A

When the price of a good increases, consumers of it will be poorer in real terms. Real income is the amount of goods you can buy with your monetary income. If the price of a good increases, with a given income you can buy less of the good, so your real income has gone down.

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26
Q

Other then price, what other factors affect supply? (4)

A
  1. Cost of Production
  2. Technology
  3. Random shocks and other unpredictable events.
  4. Government regulations.
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27
Q

Other than price, What other factors effect demand?

A
  1. Incomes
  2. Tastes
  3. Prices of other goods
  4. Expectations
  5. Government Regulation.
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28
Q

Direct Supply Function?

A

Q^s = c + dP

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29
Q

Comparative Statistics?

A

Simply comparing two separate statics. Such as comparing a change in equilibriums.

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30
Q

What are the 4 Factors of Production?

A

Land, Labour, Enterprise, Capital.

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31
Q

What is neoclassical economics?

A

An approach to economics that relates supply and demand to an individual’s rationality and his ability to maximize utility or profit.

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32
Q

Define Producer Surplus.

A

The difference between the price a producer is willing and able to sell a good for and the price they receive.

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33
Q

What does the market decide?

A

How much, for whom and what goods should be produced.

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34
Q

What does elasticity measure?

A

The sensibility of one variable when another one changes.

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35
Q

What is the arc elasticity?

A

When we measure the elasticity between two different points of a curve.

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36
Q

What is point elasticity?

A

When we measure the elasticity of a given point of a curve.

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37
Q

What is the Arc elasticity of demand formula?

A

(Change in QD/QD)/(Change in P/P)

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38
Q

Does the elasticity require any units?

A

No. It is just a number.

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39
Q

What is the Point Elasticity of Demand Formula?

A

(dQD/dP) x (P/QD)

Where (dQD/dP) is the derivative of the demand function. Or, (dQD/QD)/(dP/P)

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40
Q

When is Demand Elastic, Unit Elastic and Inelastic?

A

|Ped| > 1, demand is elastic.
|Ped| = 1, demand is unit elastic.
0 < |Ped| < 1, Demand is inelastic.

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41
Q

Why does a linear downward sloping demand curve imply a non-constant elasticity?

A

Where P is getting closer to infinity,

Q is getting closer to zero. Therefore elasticity is very high.

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42
Q

What is substitutability and is it fixed?

A

The ease at which consumers swap from one good to another, so the price elasticity of a good. Substitutability changes over time which implies that price elasticity also changes over time. Tends to be more inelastic in the short run and elastic in the long run.

43
Q

What is the Laffer curve?

A

A supposed relationship between economic activity and the rate of taxation which suggests that there is an optimum tax rate which maximizes tax revenue.

44
Q

When can we say two goods are substitutes or complements using the XED.

A

XED > 0, Goods are substitutes.

XED < 0, Goods are complements.

45
Q

What is the Cross Price Elasticity of Demand Arc Elasticity formula?

A

Ca,b = (Change in Qa/Qa)/(Change in Pb/Pb), Where Qa are the quantity demanded of A

46
Q

What is the Cross Price Elasticity of Demand Point Elasticity formula?

A

Ca,b = (dQa/dPb) x (Pb/Qa)

47
Q

What is the Income Elasticity of Demand Point Elasticity formula?

A

Yed = (dQd/dy) x (Y/Qd)

48
Q

What is the Income Elasticity of Demand Arc Elasticity formula?

A

Yed = (Change in Q/ Q)/(Change in Y/Y)

49
Q

What do the values for YED mean about the good?

A

0 < YED < 1, Normal Good.
YED < 0, Inferior Good.
1 < YED, Luxury Good.
0 < YED < 1, Necessity good. Necessities are a type of normal good but don’t increase much with income.

50
Q

What values does the price elasticity of supply have?

A

Only positive. As price increases, so to does supply.

51
Q

What determines what side takes most of the burden of a tax and what is the general rule with this?

A

The elasticity of demand and supply. The less elastic the supply curve, the greater the producers’ burden of taxation. The less elastic the demand curve, the greater the consumers’ burden of taxation.

52
Q

What is an axiom?

A

A statement that is taken to be true.

53
Q

What are the 5 axioms of consumer theory?

A

1) Completeness
2) Transitivity
3) Monotonicity
4) Local Nostalgia
5) Convexity

54
Q

Completeness?

A

A consumer can rank bundles (A preferred B, B preferred A etc.

55
Q

Transitivity?

A

A consumer’s preferences are logically consistent. If bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle A is preferred to bundle C.

56
Q

Monotonicity?

A

Implies that more is better.

57
Q

Local Nonsatiation?

A

A weaker form of monotonicity. You can find a bundle y that is similar to x, but preferred to it.

58
Q

Convexity?

A

People prefer variety.

59
Q

What is a utility function?

A

The relationship between utility measures and every possible bundle of goods.

60
Q

What is a Cardinal Measure?

A

If we have the ability to give numbers to different levels of utility and we can make absolute comparisons about those different numbers.

61
Q

What is an ordinal measure?

A

A utility is an ordinal measure if only the ranking between

dierent bundle matters. We cannot make absolute comparisons.

62
Q

What is an indifference curve?

A

An indifference curve shows all the consumption bundles yielding a particular level of utility. Or in other words, the combination of all bundles that give the consumer the same level of utility. The consumer is indifferent between consuming any of the bundles that lie on a given indifference curve.

63
Q

Why are indifference curves visually useful?

A

They are a graphical device to summarise the preference of our consumers.

64
Q

Where is it preferable to have bundles on an indifference curve?

A

Further away from the origin due to monotonicity.

65
Q

What is the Marginal Rate of Substitution? (MRS)

A

The maximum amount of one good a consumer will sacrice to obtain one more unit of another good without changing total utility.

66
Q

Why does the MRS make sense?

A

When people have a lot of one good, they are willing to give up a
relatively large amount of it to get a good of which they have relatively little.

67
Q

What is the MRS formula?

A

MRS = Change in Y / Change in X. e.g. the gradient, so differentiation can be used.

68
Q

Why would make the MRS negative?

A

As the MRS reflects the trade off between two goods, in order to maintain one utility level, if you have more of one good, you must have less of another good.

69
Q

What is the Diminishing Marginal Rate of Substitution?

A

Referes to the idea that when we have a lot of one good, we’ll be willing to give up a lot more of it to get one extra unit of another good. This causes the slope of the indifference curve to become decreasing (flatter and flatter)

70
Q

What would cause the budget constraint line to shift?

A

A change in income. An increase in income causes a rightward shift.

71
Q

What will cause the budget constraint line to ‘rotate’?

A

A change in Py or Px. It would mean you could afford less or more of a good with your income.

72
Q

What would cause the indifference curves to be straight lines?

A

If two goods are perfect substitutes.

73
Q

What are perfect compliments? (and what happens on a diagram?)

A

If two goods are always consumed together in FIXED proportions. e.g. shoes. Look like L’s on a diagram.

74
Q

What is the relationship between two products if the XED = O?

A

The two products are unrelated.

75
Q

Why is the PPF Curve Concave?

A

It means that the higher the output of one
good, the greater the opportunity cost of obtaining another unit of the good in terms
of the other good. That could be because some factors of production tend to be specialised such that they are particularly productive in their own industry. Then, the more we shift factors into one industry, the lower is their productivity in that industry relative to the other industry. Generally, this effect can observed wherever we have diminishing marginal returns in production.
We’ll come back to this later when we discuss utility functions.

76
Q

What is the fallacy of competition?

A

Means that what is true for the individual mat nor be true everyone together, and wha is true for everyone together may not hold true for the individual.

77
Q

What is the short run with regards to demand?

A

The period after prices can change but before quantity adjustments can occur.

78
Q

What is the long run with regards to demand ?

A

The period needed for complete adjustment to a price change. Its length depends on the type of adjustment consumers wish to make.

79
Q

How to work out budget share.

A

(Price x Quantity) / Total Consumer Spending or Income.

80
Q

What is tax incidence?

A

Measures who pays for the tax.

81
Q

What is a Veblen good?

A

Demand increases as price increases (upward sloping demand). Generally a high quality product that acts as a status symbol. A Veblen good reflects consumers preferences, as oppose to a Giffen good where demand is directly attributed to the price.

82
Q

What are the 4 main ingredients of consumer choice theory?

A
  1. The Consumer’s tastes and utility.
  2. The assumption that humans are rational.
  3. The consumer’s income.
  4. The prices at which goods can be purchased.
83
Q

What is the dominated region and preferred region with respect to consumption bundles?

A

With respect to a point, say A, any point north-east is preferred and any point south-west is dominated by C (which is in the preferred section). Any points outside of these two zones may or may not be preferred to A, depending on the consumer’s tastes.

84
Q

Why does an indifferent curve become flatter as we move along it?

A

Diminishing marginal rates of substitution imply that each curve becomes flatter as we move along it to the right. Meaning, as we attain more of a good, we are willing to sacrifice more of this good to attain one extra unit of another good.

85
Q

What indifference curve will be chosen by a consumer?

A

The curve that includes a point at the highest utility level. As we consumers prefer more to less, a point where consumers attain the most utility will be the point chosen.

86
Q

When do indifferent curves for the same products change?

A

For different people, the indifference curves will be different. As indifference curves involve choice and preference, someone who preferred good A will have a different indifference curve tho someone who prefers good B.

87
Q

What is budget share?

A

The amount of income taken up by a given item.

88
Q

What is a budget constraint line?

A

Describes the different bundles that the consumer can afford. It shows that maximum affordable quantity of one good given the quantity of the other good being purchased.

89
Q

What does the slope of the budget constraint line depend on and how do you work out the slope?

A

The slope of the budget constraint line depends only on the radio of the prices of the two goods. Quantity of good A is on the Y axis and quantity of good B is on the X axis. The slope of the budget line is given by the change in Y divided by the change in X. Or, [(-)price of horizontal axis % price of vertical axis. The reason its different to the formula for function is due to the relationship between quantity and price. If we can attain 5 of good A and 10 of good B, good A costs twice as much as good B.

90
Q

What will be the chosen bundle that a consumer takes?

A

The point at which the indifference curve just touches the budget line. The budget line will be tangental to the indifference curve at this point.

91
Q

Do consumers behave as utility-maximising agents?

A

According to a survey, 71% of individuals behave as utility-maximising agents. (Page 103).

92
Q

How would you work out if a good is normal using an indifference curve and a budget constraint line?

A

Work out the %change in QD and income and simply use formula.

93
Q

What is the income expansion path?

A

Shows how the chosen bundle of goods varies with consumer income levels, keeping everything else constant. Occurs when we compare different incomes. Goes through the points at which MRS = budget constraint with a curve.

94
Q

What is the Substitution/Income effect of a price change (budget constraint lines)?

A

The adjustment in demand to the relative price/real income change alone.

95
Q

What is the price consumption curve?

A

He line joining all the optimal bundles when the price of a good changes with respect to another good.

96
Q

How would decompose the effects into income and substitution effects on a budget constraint line and indifference curve?

A

Draw in the new budget constraint line. Say point A is the initial optimum utility, point B is the new utility with the new prices. Draw a line tangental to the original indifference and also parallel to the new budget constraint line (hypothetical budget constraint line). The new utility is point C. The substitution effect is the movement between A and C. The income effect is the movement between C and B.

97
Q

What is the telltale sign that a good is a given good using a budget constraint line and indifference curve and when the price of one good changes?

A

The income effect is bigger than the substitution effect.

98
Q

Why does a change in the price of a good have an effect on real income, an therefore incur the income effect?

A

If good X rises in price, the portion of income it takes up increases, decreasing the level of income available to be spent on other goods.

99
Q

What is the market demand curve?

A

The sum of the demand curves of all individuals in a particular market.

100
Q

What does the budget indifference curve look like for perfect substitutes?

A

Straight, downward sloping line. Exactly the same as the budget constraint line as utility is equal. The consumer will consumer whatever good is cheaper.

101
Q

What does the indifference curve look like for perfect compliments?

A

L shaped. (left and right shoe). There is only one point that which the budget constraint line will touch the indifference curve.

102
Q

What is a transfer payment?

A

A payment (usually by the government) for which no corresponding service is provided by the recipient. E.g. social security payments.

103
Q

What is a transfer in kind?

A

The gift of a good or service. E.g. food stamps.

Economics (6 decks)

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