Introduction to Economics and Business Ethics

Question 1

Definition of Economics?

Answer 1

The Science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

Question 2

What is “Scarcity”? and “Resources”?

Answer 2

Scarcity: The available resources are insufficient to satisfy all desires

Resources: Time and talent of people, buildings and equipment (capital), natural resources, knowledge

Question 3

What is Economics about?

Answer 3

Understanding how individuals make decisions.

The interaction between individuals (collective Behavior)

Question 4

Difference between micro- and macro- economics?

Answer 4

micro: How do agents make their decisions and how do agents interact. Specific markets, individual behavior.

macro: Relation between GDP, inflation, unemployment. Money supply and demand. Exchange rates.

Question 5

Difference between Positive and Normative economics?

Answer 5

Positive: purely descriptive. True or False and can be tested

Normative: Includes recommendations. Is based on value judgements, cannot be classified into true or false and cannot be tested.

Question 6

What is Consumption?

Answer 6

The use of goods or services to satisfy needs. The end to which economic activity is directed.

Question 7

What is Production?

Answer 7

The use of inputs (labor, resources, capital services) LRK, to produce outputs (Goods & services, or Investment) Y = Consumption + investments

Question 8

What is Capital Stock? (investment) and How is it calculated?

Answer 8

Capital at time t is equal to the capital at a previous time plus the investments that take effect at time t, minus the depreciation.
K_t = K_t-1 + I_t - D_t

Question 9

What are the different types of relations between economy and the environment?

Answer 9

• Natural Resource Extraction
• Waste Insertion
• Amenity Services (sunbathing, swimming, hiking)
• Basic Life Support Services (Ecosystem services such as energy production)

Question 10

How do Supply and Demand act in a Price vs. Quantity graph?

Answer 10

Supply quantity increases as Price Increases.

Demand Quantity decreases as Price increases.

Question 11

What is Willingness to Pay (WTP) used for?

Answer 11

It can be used to derive the demand curve in a Price vs. Quantity graph (Individuals demand curve)

Question 12

What is the Law of Diminishing Marginal Utility?

Answer 12

It states that as a consumer consumes more of a good or service, the additional utility gained from each additional unit consumed will eventually decline.

Question 13

What is the assumption of “Non-satiation”?

Answer 13

Also known as “More is Better”.
It is the assumption that consumers always want more of at least one good, and they are willing to give up some of another good to get it.

Question 14

What are indifference curves?

Answer 14

Curves in a Good1 vs Good2 which represent how much of a Good1 the consumer is willing to give up to gain an amount of the Good2.
It is a line which, for a specific consumer, represents a combination of 2 goods that gives the consumer the same level of satisfaction.

Assumed to be negative sloped and convex towards the origin of the graph.

Question 15

What is Marginal Rate of Substitution?

Answer 15

The slope of an indifference curve. (MRS). Rate at which a consumer is willing to trade off one good for the other while remaining indifferent.

Question 16

What is the assumption of Completeness in indifference curves?

Answer 16

The assumption that a consumer can rank every possible consumption bundle (is preferred to, is not preferred to, is indifferent between)

Question 17

What is the assumption of Transitivity in indefference curves?

Answer 17

If bundle A is preferred to B, and B is preferred to C, then A is preferred to C.

Question 18

What is the formula for the Budget Line for a Quantity 1 in a Quantity of Product 1 vs. Quantity of Product 2 graph?

Answer 18

Q₁ = Y / P₁ - (P₂ / P₁) * Q₂

Where Y is the budget constraint, P are the Product Unit Prices, and Q the quantities of each product

Question 19

What consumption bundle offers more utility?

Answer 19

The indifference curve farthest away from the origin. So when choosing between option A and B, the one that is in an indifference curve further away from the origin should be the one chosen. (The budget line is tangent to this indifference curve)

Question 20

How does a change in budget affect the Budget Line in an indifference graph?

Answer 20

It produces a parallel line to the previous budget line. (Same slope)

Question 21

What is an Opportunity Cost?

Answer 21

The benefit of the best forgone alternative

Question 22

What is Marginal Analysis?

Answer 22

An analysis that helps us identify “Efficient” consumption levels in the light of opportunity costs. It asks the question “What is the benefit of an additional unit?”

Question 23

In a graph where Marginal Benefit and Marginal Opportunity Costs are plotted, where is the most efficient distribution of the good?

Answer 23

The point at which the Marginal Benefit and Marginal Cost intersect. The marginal Cost line being the Marginal benefit of a secondary use of the good

Question 24

What is Aggregated Demand?

Answer 24

The sum of all individual demand curves. (Horizontal sum of curves).

Question 25

What is Price Elasticity of Demand? How is it calculated?

Answer 25

It expresses how demand is affected by change of a variable while all others remain constant. (How demand changes relative to price changes) η_ii = (dQ_i/Q_i) / (dP_i/P_i)

Question 26

What do different values of elasticity mean?

Answer 26

< |-1| : Inelastic = |-1|: unit elasticity > |-1| : Elastic If a product is easy to substitute elasticity is more negative.

Question 27

What are the Consumer Theory Assumptions?

Answer 27

- Each individual has own preferences - Individual receives satisfaction (utility) by consuming a good - Each individual tries to maximize utility - Non-Satiation - Completeness - Transitivity - Law of diminishing Marginal Utility

Question 28

How does an indifference curve for perfect substitute goods look? what about complimentary goods?

Answer 28

Substitutes: Straight Line with negative slope Compliments: "L" shape.

Question 29

What is Cross Price elasticity? How is it calculated?

Answer 29

It describes how the quantity of demand of a good A will change if the price of a good B changes. It is calculated using the Price Elasticity Formula: n_i,j = [dQ_i/Q_i]/[dP_j/P_j]

Question 30

What are the steps for a supply function analysis?

Answer 30

1.- Production Function 2.- Cost Functions: VC & TC 3.- Average and marginal cost functions: ATC, AVC & MC 4.- Supply Function

Question 31

What are costs associated to?

Answer 31

Production Factors = inputs. - Labour - Capital - Land & other resources like energy/water - Other factors (Information, social networks)

Question 32

What are the different costs during production?

Answer 32

- Fixed Cost (FC) : Independent from production quantity - Variable Cost (VC): Vary with production quantity - Total Cost (TC): TC = FC + VC - Average Fixed Costs (AFC): AFC = FC/Q - Average Variable Costs (AVC) : AVC = VC/Q - Average Costs (AC): AC = TC/Q = AFC + AVX - Marginal Cost (MC) : MC = ∂TC / ∂Q, Cost of an additional production unit

Question 33

What are some graphical characteristics of AC, AFC, AVC, and MC?

Answer 33

AFC: decreases with quantity AVC: May decrease first, but increases after some quantity AC: sum of AFC + AVC -> U-Shaped MC: crosses AC and AVC curves at their minimum

Question 34

What is the optimal quantity to produce in short term? what about Long Term?

Answer 34

In general the quantity must be where the Market Price is equal to the Marginal Costs (MC). Short Term: if the price is lower than the AVC then nothing should be produced. Long Term: if the price is lower than the AC then nothing should be produced.

Question 35

What is a Pareto Improvement?

Answer 35

When A can be improved without making B worse or vice-versa.

Question 36

What is the Utility Possibility Frontier?

Answer 36

A line that indicates the maximum frontier for which all possible utility combinations are achievable. (All Combinations below this line are attainable). Also called Pareto Frontier.

Question 37

What is the Pareto Principle?

Answer 37

Anything that isn't a Pareto Improvement but also isn't a Pareto "Deterioration", cannot be defined as better or worse, or are Pareto "Incomparable". What is North-East of the combination is a Pareto improvement. What is South-West is a Pareto Deterioration. What is North-West or South-East in Pareto Incomparable.

Question 38

What is Welfare Economics based on?

Answer 38

Also called Normative Economics - Welfarism (How good is it for people?) - Pareto Principle - Income Distribution or Equity (What is Fair? Rawl's, Utilitarian, Bernoulli-Nash, Weighted)

Question 39

What is the Utilitarian approach?

Answer 39

The utility of the different individuals counts the same. Social Welfare Function (SWF): W = U_A + U_B

Question 40

What are Social Indifference Curves?

Answer 40

SIC: Set of welfare allocations for which society is indifferent. Same level of Social Welfare. Normally linear with a slope of -1.

Question 41

In a Utilitarian Approach, where is the optimal combination?

Answer 41

Where the Social Indifference Curve is the farthest from the origin.

Question 42

What is Rawl's Theory of Justice?

Answer 42

Social and economics inequalities are to be arranged so that they are to be of greatest benefit to the least-advantaged members of society. The level of social welfare depends on the utility of the "poorest" person. W = min (Ua, Ub)

Question 43

What shape do Social Indifference Curves have in Rawl's Approach?

Answer 43

L- shape

Question 44

What is the Bernoulli-Nash SWF?

Answer 44

W = U_A*U_B It is a compromise between the Utilitarian and Rawl's Approach.

Question 45

What is the Weighted Social Welfare Function?

Answer 45

W = w_AU_A + w_BU_B where w_A ≠ w_B

Question 46

What are the Kaldor-Hicks efficiency criterion?

Answer 46

A way to determine societys welfare. "A change is efficient if those who gain can compensate the losers and still remain better-off" Also called Potential Pareto Criterion It compares the total benefits to the total losses, similar to the utilitarian approach

Question 47

What is Economic Rent for Consumers?

Answer 47

The difference between Willingnes to Pay and Price being paid. Also called Consumer Welfare or Consumer Surplus. The area between the Demand Line and the Expenditure Area.

Question 48

What is Economic Rent for Producers?

Answer 48

The difference between the Price and the Variable Costs. Also called Producer Surplus. The Revenue area minus the Variable Costs area.

Question 49

How is Variable Costs represented graphically? (3 different methods)

Answer 49

1st way: Area bellow the MC curve 2nd way: VC = AVC * Q, Rectangle below AVC where Q is the quantity at which MC crosses the Price. 3rd way: Rectangle with vertex at where MC crosses AVC + the area bellow MC at the Quantity.

Question 50

How is total Welfare calculated?

Answer 50

Producer Surplus + Consumer Surplus. Also the Area between Demand and Supply curves

Question 51

What is Dead Weight Loss?

Answer 51

The area between the Produced Quantity and the Optimal Quantity and between the Supply and Demand Curves. Indicates the difference between possible benefits and actual benefits

Question 52

What does a consumer tax do to the Supply Demand graph and the Consumer and Producer Surplus? What about a producer Tax?

Answer 52

- For a constant tax per unit, the Demand curve shifts down but parallel to the Original by the Tax Price. Consumer surplus is given by area between New equilibrium price + tax , the original equilibrium price and the demand curve. Producer surplus the area between the new equilibrium price, the original equilibrium price and the supply curve. - Same effect but shifting the supply curve up parallel to the original. Consumer surplus is given by area between New equilibrium price, the original equilibrium price and the demand curve. Producer surplus the area between the new equilibrium price - tax, the original equilibrium price and the supply curve.

Question 53

What does a Producer Subsidy do to the Demand and supply graph?

Answer 53

Producer Subsidy, shifts Supply curve Down Parallel to the original. Producer surplus is given by the area between the New Equilibrium Price + surplus, the original equilibrium price and the Supply curve. Consumer Surplus is given by new equilibrium price, original equilibrium price, and the demand curve.

Question 54

What is an Externality?

Answer 54

Positive or negative effect that production has on the environment.

Question 55

What is a Marginal Social Cost?

Answer 55

The cost or supply that should be produced taking into account societal factors, such as taking care of the environment, etc.

Question 56

What are public goods?

Answer 56

Goods that are available to anyone, and its consumption is not influenced by the consumption by another.

Question 57

What are the 4 different types of Goods?

Answer 57

Private Good: Exclusion + rivalry Common Good: non-exclusion + rivalry Club Good: Exclusion + non-rivalry Public Good: non-Exclusion + non-rivalry

Question 58

How is Marginal Social Benefit of a public good calculated graphically? What about a Private good?

Answer 58

Public: The vertical addition of the marginal benefit curves. Private: Horizontal addition of marginal benefit curves.

Question 59

What is Market Failure?

Answer 59

Demand Curve and Supply Curve do not intersect at all.

Question 60

What is the Prisoners Dilemma?

Answer 60

It describes how an individual's success in making a choice depends on the choices of others.

Question 61

What is the Nash-Equilibrium?

Answer 61

It represents a stable outcome where no participant can improve its payoff by changing its strategy while the other keeps theirs.

Question 62

How can the future value of a present investment cost be calculated?

Answer 62

V = (1 + i)^t P where: t = number of years i = discount rate or inflation rate P = Present Value

Question 63

How can the present value of future benefits be calculated?

Answer 63

P = V (1 + i) ^-t

Question 64

What are some of the most important dates in the 20th Century regarding world economics?

Answer 64

1914-1918: World War I 1917: Russian Revolution 1929-1939: Great Depression 1938-1945: World War II 1945-1991: Cold War 1949: Chinese communist Revolution. 1950-1970: The Golden Age of economic growth for Europe and the US 1973-1979: Oil crisis and economic stagnation 1980s: Tatcher and Reagan, deregulation of business and globalisation 1991: Fall of the Soviet Union 1995: World Trade Organization (Trips Agreement) 2001: China member of WTO 2008-2009: Financial Crisis = 12 years of 0 interest rates

Question 65

What is "Good Will"?

Answer 65

The intention of doing a good duty without taking into account the benefits to yourself or to others

Question 66

What is Utilitarianism? (Ethics)

Answer 66

"Consequentialism", A good action = the action that maximizes utility (Happiness). The consequences make the action good or bad.

Question 67

What is Deontology?

Answer 67

"Duty Ethics". Good Will + Categorical Imperative

Question 68

What is CSR? what are the two CSRs?

Answer 68

Corporate Social Responsability -Friedman: Maximizing Profit while respecting the law, social responsibility is the job of politicians, not business. 1970 -Freeman: Stakeholder Management. The interests of all stakeholders (Not just the shareholders) must be balanced.1984

Question 69

Who was John Maynard Keynes?

Answer 69

Economist. Famous for his ideas regarding the government's intervention in the economy in order to promote employment and economic stability.

Question 70

Who was George W Bush? What did he do?

Answer 70

President of the U.S. Lowered interest rates, imposed the "american dream". Anyone could take a mortgage to buy a house in 2003

Question 71

What are the 4 different responsibilities an organization has according to Archie B. Carroll?

Answer 71

Philanthropic (desired by society) Ethical (Expected by society) Legal (Required by society) Economic (Required by Society)

Question 72

What did Kofi Annan do?

Answer 72

Initiate the United Nations Global Compact.

Question 73

What are the 10 basic principles of the UN Global Compact?

Answer 73

1: Businesses should support and respect the protection of human rights 2: Businesses should make sure that they are not complicit in human rights abuses. 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4: The elimination of all forms of forced and compulsory labor; 5: The effective abolition of child labor; 6: The elimination of discrimination in respect of employment and occupation 7: Businesses should should support precautionary approach to environmental challenges; 8: Undertake initiatives to promote greater environmental responsibility; 9: Encourage the development and diffusion of environmentally friendly technologies 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Question 74

What companies must comply with non-financial reporting rules in the EU?

Answer 74

Large public-interest companies with more than 500 employees.

Question 75

What is the CSRD?

Answer 75

Corporate Sustainable Reporting Directive. Introduces detailed reporting requirements on companies impact on the environment, human rights, and social standards, in line with the EU climate goals.

Question 76

What is GRI?

Answer 76

Global Reporting Initiative. International organization that provides a framework for sustainability reporting (governance, ethics, human rights, labor practices, environment, community). Companies rate their own sustainability performance.

Question 77

What is ESG Rating?

Answer 77

Environmental, Social, Governance Rating. A third party rates the organizations sustainability performance. Some of these third party companies are: Morgan Stanley Capital International (MSCI), Institutional Shareholder Services (ISS), Standard and Poor (S&P)

Question 78

What was the ENRON scandal?

Answer 78

A financial scandal involving the American energy company Enron Corporation. It involved a range of fraudulent practices, including accounting fraud, insider trading, and bribery. Man of the executives were later convicted of these frauds. 2001

Question 79

What is the Siemens Scandal?

Answer 79

The German engineering company Siemens AG, was involved in a range of corrupt practices, including bribery, money laundering, and embezzlement, leading legal action, resulting in fines and penalties totaling more than 2 billion Euros. 2006

Question 80

What is Corporate Governance?

Answer 80

The system by which companies are directed and controlled. Provides structure through which the objectives of the company are set, and the means of attaining the objectives and monitoring performance.

Question 81

What is the Code of corporate governance?

Answer 81

Recommendations on how to govern a corporation in accordance with general standards.

Question 82

What is Compliance?

Answer 82

Acting in coherence with legislacion

Question 83

What is corporate integrity?

Answer 83

Shared corporate values as foundation for strong compliance culture

Question 84

What is Integrity/Compliance management?

Answer 84

Practical challenges of ensuring law abiding culture in corporations.

Question 85

What are the risks of bad Corporate Governance?

Answer 85

- Reduced Profitability - Reputational Risks - Heavy fines and imprisonment - Loss of Public Contracts

Question 86

What is a One tier governance system?

Answer 86

The board of directors of a company has both executive and non-executive functions. Meaning that they oversee both day-to-day operations as well as the strategic direction of the company. More efficient decision making but lack of checks and balances and increased risk of conflicts of interest.

Question 87

What is a two tier governance system?

Answer 87

The board of directors is divided into two, the boards for executive functions and the board for non-executive functions. Reduces conflicts of interest and improves accountability, but decision making is slower.

Question 88

What is power in relation to ethics?

Answer 88

Anti-utilitarian, anti-ethical, anti egalitarian. It accentuates the difference between people.

Question 89

What are the 4 principal statements that Machiavelli said?

Answer 89

1. Crush your enemies 2. Better to be feared than loved 3. Be feared but not hated 4. Be strong as a lion and cunning as a fox

Question 90

What claim is Nietzche known for?

Answer 90

"Even the appeal to objectivity is an expression of subjective will". Other claims, "God is dead", "Super is the meaning of earth".

Question 91

What are 5 of Flyvbjerg s Propositions about power?

Answer 91

1.- Power Defines Reality 2.- Rationality in Context - Dependent