Intro econ

Question 1

Define Scarcity

Answer 1

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

Links:

• opportunity costs
• Basic economic Problem
• limited resources

Question 2

Opportunity costs

Answer 2

Benefits of the next best alternative forgone

Links;

• trade offs
• choice
• scarcity

Question 2

Economics

Answer 2

Study of of how society allocate its scarce resources

• what to produce
• how to produce
• whom to produce for

links:
-scarcity

Question 3

Production Possibility Frontier

Answer 3

Curve showing all possible combination of goods that can be produced in a period of time if all resources are used efficiently.
Inside- inefficiency
Outside- impossible
Shifts are possible if production gets more/less efficient

Question 4

Opportunity costs( graph)
Comparative advantage
absolute advantage

Answer 4

Comparative advantage- when one country is producing a good at a lower opportunity cost
Absolute advantage- when one country is more efficient at producing a good
* full specialisation maximise output
Links:
-Trading
- PPF

Question 5

Types of economies

Answer 5

• Command- All economic decisions are made centrally
• Mixed- government and public sector join together to solve economic problems
• Free- all economic agents would pursue their self- interest, market led by “invisible hands”

Question 6

Positive and Normative statements

Answer 6

Positive economics studies objective or scientific (testable)
explanations of how the economy works.
Normative economics offers recommendations based on
(non-testable) value judgments.

Question 7

Determinants of Demand

Answer 7

Price
Income
Price of complements/substitutes
Expectations
Government regulations
* Law of Demand (negative relationship between Price and quantity, except griffen goods)
non luxury good that demand increases with price

Question 8

Demand functions (maths)

Answer 8

QD=D(P) (Direct)
Quantity demanded= demand relationship times price

in a linear relationship D becomes :
QD=a-bP
where a>0 and b>0 positive parameter
* non linear relationship, change the powers of P

Question 9

Why demand function is downward facing

Answer 9

Substitution Effect: When the price of a good increases, some
consumers will substitute it with alternative goods that are
relatively cheaper.
Income effect: When goods becomes more expensive, consumer’s real income decreases, so they can purchase less goods

Question 10

Shifts and movement along the demand curve

Answer 10

Movement: when price changes
Shifts: any factors other than price
QD=a-bP+cY
A=a+cY
QD=A-bP
So changes in Y affect the intercept but not the slope

Question 11

Consumer and Producer surplus

Answer 11

• think graphically
  Consumer surplus: Difference between what the consumers are willing to pay and what they actually pay
  Producer surplus: difference between what the producer were willing to supply at and what they actually supply at
  Links:
• welfare

Question 12

Determinants of supply

Answer 12

• Price
• costs of production
• technology
• random shocks and other unpredictable events
• government regulations
• supply function inverse demand funtion

Question 13

Market equilibrium ( maths)

Answer 13

QD=QS

a-bP=c+dP

Question 14

Price elasticity of demand

Answer 14

Arc elasticity - between two different points
Point elasticity- on a point
arc- % change in quantity (average) / % change in price (average)

Question 15

PED interpretations

Answer 15

When |PD | > 1 we say that the demand is elastic.
When |PD | = 1 we say that the demand is unit elastic.
When 0 < |PD | < 1 we way that the demand is inelastic.

Question 16

Elasticity in relation to total revenue

Answer 16

TR= P x Q
if price changes, quantity demanded will goes down. What effect dominates depends on elasticity
Demand is elastic: An increase in P decreases TR.
Demand is unit elastic: An increase in P does not change TR.
Demand is inelastic: An increase in P increases TR

Question 17

Cross elasticity of demand

Answer 17

Arc- %change in quantity demanded by A / % change in price of B (average)

Question 18

interpretation of cross elasticity of demand

Answer 18

If the cross price elasticity is positive, then the two goods are
substitutes. This means that an increase in the price of B will
increase the demand of A (and decrease the demand for B).

If the cross price elasticity is negative the two goods are
complements. This means that an increase in the price of B
will decrease both the demand for B and A.

Question 19

Income elasticity

Answer 19

arc- %change in quantity demanded / % change in income (average)

Question 20

interpretation of income elasticity

Answer 20

A normal good has a positive income elasticity of demand.
(e.g., dairy products)
An inferior good has a negative income elasticity of demand.
(e.g., Tesco Value products)
A luxury good has an income elasticity that is greater than 1
(e.g., champagne).
Necessities have income elasticities less than 1 (but still
positive).

Question 21

What is a specific and an ad valoran tax?

Answer 21

specific- tax dependant on quantity

ad valoran- VAT tax on percentage of price

Question 22

tax effect on market equilibrium

Answer 22

It increases the price paid by consumers.
2 It decreases the price received by suppliers.
3 It reduces the equilibrium quantity in the market.

Question 23

elasticity of supply and incidence of tax

Answer 23

The less elastic the supply curve, the greater the

producer’s burden of taxation, and vice versa

Question 24

Consumer preference is based on (axioms)

Answer 24

Completeness: A consumer can rank bundles (A preferred to B, B preferred to A, or indifferent). 2 Transitivity: A consumer’s preferences are logically consistent. 3 Monotonicity: Briefly, monotonicity implies that more is better. 4 Local Nonsatiation: A weaker form of monotonicity; roughly, it means that you can always find a bundle y that is similar to x, but preferred to it. 5 Convexity: People prefer variety.

Question 24

Consumer preference is based on

Answer 24

Completeness: A consumer can rank bundles (A preferred to B, B preferred to A, or indifferent). 2 Transitivity: A consumer’s preferences are logically consistent. 3 Monotonicity: Briefly, monotonicity implies that more is better. 4 Local Nonsatiation: A weaker form of monotonicity; roughly, it means that you can always find a bundle y that is similar to x, but preferred to it. 5 Convexity: People prefer variety.

Question 25

Indifference curve

Answer 25

Definition: An indifference curve is the combination of all bundles that a consumer views as being equally desirable. Or in other words, the combination of all bundles that give the consumer the same level of utility.

Question 26

Properties of an indifference curve

Answer 26

- Bundles on the indifference curves further from the origin are preferred to those on indifference curves close to the origin (because of monotonicity of preferences); - 2 There is an indifference curve through every possible bundle (because of completeness of preferences); - 3 Indifference curves cannot cross (because of transitivity of preferences); - 4 Indifference curves slope downward (because of strong monotonicity); - 5 Indifference curves cannot be “thick” (because of local non-satiation / monotonicity);

Question 27

what is the marginal rate of substitution (MRS)

Answer 27

: The maximum amount of one good a consumer will sacrifice to obtain one more unit of another good and to maintain the same level of utility. change in y / change in x

Question 28

If MRS is negative

Answer 28

The MRS is negative as yb − ya < 0. It reflects a trade-off | between two goods. In order to maintain one utility

Question 29

Why is the MRS decreasing? -> downward slope for indifference curve

Answer 29

The slope of the indifference curve is not constant. It is decreasing along an indifference curve (meaning that the curve becomes flatter and flatter). This property is known as: Diminishing Marginal Rate of Substitution. 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

Question 30

Marginal Utility

Answer 30

The marginal utility of a given good tells us what the gain in utility is if we increase the consumption of that good by a tiny amount.

Question 31

Income effect

Answer 31

Consumers are able to consume more with increased in income

Question 32

Substitution effect

Answer 32

as price of one good increase, consumer will substitute it for a cheaper good

Question 33

Economic growth

Answer 33

Increases in real GNP, an indication of the | expansion of the economy’s total output.

Question 34

what are the 3 measures of national output?

Answer 34

Expenditure: The sum of expenditures in the economy, Y = C + I + G + X - Z Income: The sum of incomes paid for factor services (wages, profits, etc.) Output: The sum of output (value added) produced in the economy

Question 35

What is GNP deflator and why do you use it?

Answer 35

alternative to CPI, measures the changes in all prices of goods and services, use to compare real economic activity. * GNP per capita is better used to take into population when talking about welfare

Question 36

what is potential output and actual output

Answer 36

Potential output: The output the economy would produce if all factors of production were fully employed. It is a long-run concept. Actual output: What is actually produced in a period. This may diverge from the potential level. (For now we focus on what happens in an economy if actual output is below potential output.)

Question 37

Why is savings = investments?

Answer 37

this is because investments depends on savings in a closed economy, as banks can only lends out as much as amount of savings to firms to invest

Question 38

what is fiscal policy? | and stabilisation policy?

Answer 38

government decisions about spending and taxes government policies to keep actual output close to the potential output

Question 39

What budget deficit and national debt?

Answer 39

Budget deficit: The excess of government outlays over government receipts National debt: The stock of outstanding government debt

Question 40

What are the effect of taxes on AD?

Answer 40

Direct proportional taxes: Affect the slope of the consumption function... and hence the slope of the AD schedule. Government expenditure or lump-sum taxes: Affect the position of the AD schedule

Question 41

government budget lump sum tax proportional tax How do they differ?

Answer 41

If government spending is independent of income.... but net taxes increase with income... then the budget will be in deficit at low levels of income and in surplus at high levels of income. lumpsum : rev independent of income proportional : rev increases with income

Question 42

What are discretionary fiscal policy?

Answer 42

Changes in tax rates and government spending to lower fluctuations in output.

Question 43

What are automatic stabilisers and examples?

Answer 43

Alternatively, there are automatic stabilizers. For example: High tax rates reduce the multiplier, which reduces the effects of shocks on output. High VAT rates imply that consumption reacts less to positive shocks in income. Unemployment benefits increase in recessions, which counteracts the effect of a negative shock on income.

Question 44

what are the function of money?

Answer 44

Medium of Exchange: Money eliminates the trouble of finding a double coincidence of needs. As a consequence it reduces transaction costs and promotes specialization. Unit of Account: Money is used to measure value in the economy. The value of a good or service is expressed in terms of money. Again, this reduces transaction costs. Store of Value: The third main function of money is that it is a store of value as it allows us to save purchasing power over time. This, naturally, makes money useful because you do not necessarily have to spend it all at the time you receive it. It links to money’s function as a medium of exchange: it should not deteriorate quickly.

Question 45

what are the properties of money?

Answer 45

``` It must be easily standardized. It must be widely accepted. It must be divisible (so you can have “change”). It must be easy to carry. It must not deteriorate quickly. ```

Question 46

What is the definition of the LM curve?

Answer 46

Definition of the LM curve: A schedule that gives us all the combinations of Y and r that insure the equilibrium in the money market. It can be derived from the money market equilibrium: