econ

Question 1

Define price mechanism

Answer 1

price mechanism is how price indicates a shortage or surplus in the market allowing firms to adjust accordingly.

Question 2

Allocative efficency

Answer 2

Allocative efficency is when the market is allocating resources in the most efficent manner. Or in other words MSB = MSC

Question 3

Consumer surplus

Answer 3

the price consumers are willing and able to pay but do not need to because there is market equillibrium

Question 4

Producer surplus

Answer 4

the price producers would be willing and able to sell at but dont as there is market equillibrium

Question 5

Social surplus

Answer 5

SUM of CS & PS, the total benefit gained by society when the market is at equillibrium

Question 6

Non price determinants of supply

Answer 6

CTPFNGR

Cost of production
Technological change
price of related ggoods
Future price expectations
number of firms in the market
Government intervention
regulations

Question 7

Non price determinants of Demand

Answer 7

PTFGIP

Population
Taste and preferance
future prices
government policies
income of population
price of related good

Question 8

Utility

Answer 8

happiness and individual gains from consuming a good or sevice

Question 9

marginal utility

Answer 9

additional satisfaction of consuming one more unit of output of a good or service

Question 10

total utility

Answer 10

the total satisfaction of consuming all units of output of a good or service

Question 11

util

Answer 11

the unit to measure satisfaction

Question 12

Real income effect and substitution effect

Answer 12

Real income effect is the purchising power of income, as price decreases real income increases.

Substitution effect, if two goods have the same quality good the cheaper one will have a higher QD as it has a greater satisfaction per unit of money spent compared to its substitutes.

Question 13

Methods of production

Answer 13

Capital intensive technology and Labor intensive technology

Question 14

Law of constant opportunity cost

Answer 14

reasources are easily adaptable to produce other goods

Question 15

Law of increasing opportunity cost

Answer 15

As you increase the production of one good, the opportunity cost to produce the additional good will increase

Question 16

Assumptions of PPC

Answer 16

the nations resources are fixed in quantity
maximum of two goods that can be produced
no technological advancments
the economy is closed

Question 17

What is PPC

Answer 17

PPC is a diagram that illustrants the maximum amount of two goods that can be produced by an economy by using all available resources.

Question 18

What is the rational econonic man

Answer 18

it is a thoery that all humans are purely self interested in taking actions and judgments that fulfill their own needs

Question 19

The rational consumer choices (What does the theory consist of)

Answer 19

Consumer rationality ( consumers always make the rational choice)
Utility maximization
Perfect info

Question 20

limitations of rational consumer choice

Answer 20

Biases
Rule of thumb
Anchoring( making decisions based on previous unrelated info)
Framing
availability
Bounded rationality
Bounded self control
Bounded selfishness
Imperfect info

Question 21

Choice archetecture

Answer 21

refers to the way choices are structured for consumers

Default choice

Mandated choice

Restricted choice

Question 22

what are the business objectives

Answer 22

CSR, Market share, profit satisficing, growth

Question 23

Determinants of PED

Answer 23

Number and closeness of subs
Degree of neccesity
Time period
Proportion of income taken

Question 24

Evalutaing PED

Answer 24

Limitations

PED can change overtimes as there can be new competittors
It is only ceteris parabus and many other factors can change like price
Uncertainty of consumer reaction
Calculating PED is based of past sales and history may not repeat itself
Increasing tax of a demerit good may be seen as unfair and regressive in nature

Question 25

Determinants of PES

Answer 25

Time Mobility of FOP Unused capacity ability to store rate at which costs increase

Question 26

Market failure

Answer 26

Market failure is when society fails to allocate resources in the best intrerests of societs, or in other words when society fails to produce at maximizing CS and PS

Question 27

Define externality

Answer 27

an externality is a cost or benefit a third party pays or recieves

Question 28

Solutions for Negative externality of production N.E.P

Answer 28

Pigouvian tax, A tax by the gov on the firm per unit of output Problems: it is difficult to measure the pollution or the externality and give it a value Taxes make firms pay for the pollution but does not neccesarily reduce it. legislation Problems: It may lead to unemployment as jobs would be lost if the market reduced The cost of implementing and enforcing the policy would be very costly tradable emssion permit A set level by the gov of permitted pollution per year, this permit can be traded between firms. Problems Difficult to set an acceptable level of pollution Difficult to measure a firms pollution and give them a T.E.P based of how much they deserve

Question 29

Solutions to negative externalityy of consumption

Answer 29

Legislation/ banning the good Problem: Big effect on gov revenue Leads to unemployment as the market would be reduced Negative reaction from consumers Regulations need to be enforced may impose an additional cost Tax problems Some demerit goods may be addictive therfore consumption wont decrease much Could cause black market Negative advertising Costs of advertising may be high and generate an opportunity cost Level of doubt of the effectiveness of advertising is at reducing demand especially since the demand is inelastic.

Question 30

MAX price and its problems

Answer 30

Not in the interest of landlors result to parallel market produce shortage Consequence for market stakeholders

Question 31

Min price and its problems

Answer 31

Creates surplus promotes blackmarket gov needs to dispose of the surplus might create firm inefficency generates wellfare loss

Question 32

Tax and its outcome

Answer 32

consumers pay more for less Producers TR decreases and the quantity sold of the good decreases Government gets revenues employees get less wages and potentially fired Society gets a wellfare loss and CS and PS reduces

Question 33

Subsidies and it outcome

Answer 33

financial aid paid by the government towards firms groups Consumers pay less for more Producers gets more revenue and sell more quantity and tr increases government has a burden on their budget Employees better off as there is more space for employees as budget increases and existing employees might get more wages Society is still worse off as there is now a wellfare loss