i detest econs (pt 1)

Question 1

free market system

Answer 1

resources are allocated according to the price mechanism and market forces of demand and supply

Question 2

what four characteristics are necessary for a free market system to allocate resources efficiently

Answer 2

1. perfect competition
2. rational behaviour and pursuit of self interest (huge assumption)
3. freedom of choice and enterprise
4. private ownership of property

Question 3

perfect competition

Answer 3

each of the many buyers and sellers have an insignificant share of the market

Question 4

rational behavior and pursuit of self-interest

Answer 4

driven by self-interest; prod max. profit, cons. max. utility

Question 5

freedom of choice and enterprise

Answer 5

consumers are free to decide what to buy with their incomes (consumer sovereignty) firms can choose what to sell and how to produce

Question 6

private ownership of property

Answer 6

indivs have rights to own control and dispose of land, capital and natural resources. owners of fop have rights to the income earned from using fop

Question 7

price mechanism

Answer 7

changes in price cause resources to move in or out of industries (invisible hand that allocs resources)

Question 8

market equilibrium

Answer 8

a position from which there is no inherent tendency for change; achieved when quantity demand= quantity supplied

Question 9

equilibrium price

Answer 9

price at which the quantity demanded is equal to the quantity supplied (market clearing price)

Question 10

disequilibrium

Answer 10

(refers to market) shortages or surpluses of goods that trigger the market adjustment process

Question 11

market adjustment (price > equilibrium price)

Answer 11

1. surplus in market
2. downward pressure on price
3. producers lower prices
4. demand increases due to low prices + quantity decreases (profitability falls)
5. fall in prices continues
6. equilibrium price reached

Question 12

market adjustment (price < equilibrium price)

Answer 12

1. shortage in market
2. upward pressure on price (consumers try to outbid one another)
3. producers produce more (as profitability increased)
4. quantity demand decreases (as price increased)
5. increase in price continues
6. equilibrium price reached

Question 13

demand

Answer 13

amt consumers are willing and able to purchase at a given price over a given period of time

Question 14

law of demand

Answer 14

quantity dd for a good or service is inversely related to its price ceteris paribus –> substitution effect and income effect

Question 15

marginalist principle for dd

Answer 15

experiences diminishing marginal utility in consuming additional units of a good –> max. utility with given budget –> rational consumer increase qty dd as price decreases –> downward sloping dd curve

Question 16

non price determinants of dd

Answer 16

taste and pref, expectations of future prices, income, price of related goods (substitutes and complements), derived demand, govt policies (direct tax/subsidies), population, interest rates, exchange rates

Question 17

supply

Answer 17

qty of a good or service that producers are willing and able to offer for sale at each given price over a given period of time

Question 18

law of supply

Answer 18

qty supplied is directly related to price of product

Question 19

marginalist principle for ss

Answer 19

ldmr states that beyond a certain point of production, adding an additional fop results in smaller increases in output to max profits, the rational producer will increase outputs as prices increases and vice versa

Question 20

non price determinants for ss

Answer 20

cost of production, innovation/ state of technology, natural factors (agriculture), no of firms, government policies (indirect taxes/subsidies), prices of related goods (joint supply, competitive supply), expectations of future prices

Question 21

society’s welfare

Answer 21

sum of consumer and producer surplus

Question 22

consumer surplus

Answer 22

difference between max amt the consumer is willing to pay and what he actually pays

Question 23

producer surplus

Answer 23

difference between what producers are willing and able to receive and what they actually receive

Question 24

price elasticity of demand

Answer 24

measure of degree of responsiveness of the qty dd of a good to change in its price, ceteris paribus

Question 25

sign of ped

Answer 25

negative to reflect law of demand

Question 26

magnitude

Answer 26

more than one --> price elastic, more than proportionate rise/fall in qd less than one but more than zero, price inelastic, less than proportionate rise/fall in qd

Question 27

applications of ped

Answer 27

1. effect of price change on qty dd 2. effect of total revenue of firm (draw diagram) 3. decisions the firms can make to raise total revenue

Question 28

determinants of ped

Answer 28

shit --> substitutes, habituality of consumption, (proportion of) income spent, time horizon

Question 29

pes

Answer 29

measure of degree of responsiveness of the qty supplied of a good to change in its price, ceteris paribus

Question 30

sign

Answer 30

pawsitive (law of supply)

Question 31

magnitude

Answer 31

01, elastic

Question 32

applications pes

Answer 32

price change, qty change differently due to pes total revenue

Question 33

determinants pes

Answer 33

level of stock, avail of spare capacity, mobility of fop (btwn industries), time horizon (momentary perfectly price inelastic, short run restricted by at least one fop relatively price inelastic, long run all fop variable), length of production

Question 34

ced

Answer 34

measure of degree of responsiveness of the qty dd of a good to a change in the price of another good, ceteris paribus

Question 35

sign

Answer 35

ced>0, substitutes ced<0, complements ced=0, unrelated

Question 36

magnitude of pes

Answer 36

closer relationship = larger magnitude

Question 37

applications pes

Answer 37

fall in price of substitute: price comp and decrease price, make good less substitutable like advertising fall in price of complement: output planning increase prod, collab

Question 38

yed

Answer 38

degree of responsiveness of the qty demanded of a good to a change in income, ceteris paribus

Question 39

sign yed

Answer 39

positive for normal goods (necessities --> inelastic demand and not very sensitive, luxuries --> elastic and very sensitive), negative for inferior goods

Question 40

magnitude yed

Answer 40

the more responsive the qd is to changes in income, the larger the magnitude

Question 41

determinants of yed

Answer 41

degree of necessity --> necessity vs luxury (depends on level of income of consumers, and stage of development of their economy)

Question 42

applications of yed

Answer 42

firms will: (economic growth) channel resources to sales of luxury goods, market luxury goods recession channel resources from sales of luxury goods to normal goods, promote inferior goods segment consumer base

Question 43

limitations of elasticity principles

Answer 43

ceteris paribus assumption: changes in qd can be attributed to various factors and diff to keep all other factors constant cost concerns: if increasing tr will also increase costs, profit will not rise prediction issues: calculations done from past data may not be accurate in the future computation issues: involves collecting price and qty data, inaccurate data = inaccurate analysis

Question 44

direct subsidy

Answer 44

granted directly to buyers increases buyers' disposable income

Question 45

indirect subsidy

Answer 45

granted indirectly through sellers, lowers sellers' cop

Question 46

direct tax

Answer 46

granted directly to buyers decreases buyers' disposable income and purchasing power

Question 47

indirect tax

Answer 47

raises cop, paid indirectly by consumers thru sellers (ad valorem tax has pivotal shift)

Question 48

price ceiling good and bad

Answer 48

good: ensure affordability bad: inefficiencies chronic shortage black market deadweight loss

Question 49

price ceiling

Answer 49

maximum price set below market equilibrium price legally established

Question 50

price floor good and bad

Answer 50

good: protect income minimum wage bad: involves g spending of buying surplus surplus loss deadweight loss

Question 51

price floor

Answer 51

minimum price legally established set above market price

Question 52

quota

Answer 52

limit on quantity produced, less than equilibrium qty legally established affects ss, at quota ss is fixed (perfectly price inelastic) (theres also deadweight loss)

Question 53

labour market

Answer 53

buyers of labour= firms, sellers of labour= households

Question 54

labour demand

Answer 54

depends on how much revenue each unit of labour can bring to the firm 1. dd for final good (derived dd) 2. productivity of labour 3. supply of alt and complementary fop

Question 55

labour supply

Answer 55

1. immigration 2. educational attainment 3. non-wage benefits of job 4. alt employment opportunities

Question 56

minimum wage good and bad

Answer 56

good: increases income and standard of living and inclusive growth bad: 1. higher unemployment 2. illegal employment below minimum wage 3. encourages substitution with other fop

Question 57

wage differentials

Answer 57

1. imperfect market (trade union/ monopsony) 2. discrimination 3. ped/pes 4. minimum wage