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Micro Economics Flashcards

Learn all definitions and diagrams. (57 cards)

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1
Q

What does MICRO ECONOMICS explain ?

A

Micro economics explains how markets work and the economic decisions made by individuals, households, business firms, industries and units of government.

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2
Q

What is Demand ?

A

Demand is the amount society is willing and able to buy at a set price at a given point in time.

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3
Q

How can the relationship between price and quantity be shown ?

A

Using a demand curve.

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4
Q

What are the determinants of demand in the market ?

A

The price of the good – movement

Consumer income – Shift the curve (parallel up or downwards)

Prices of other goods and services – Shift the curve (parallel up or downwards)

Consumer tastes and fashion – Shift the curve (parallel up or downwards)

Other factors e.g., advertising– Shift the curve (parallel up or downwards)

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5
Q

What is the equation for quantity demanded ?

A

qd = f (p,y,p of other goods/services, consumer tastes, all other factors)

where gd = quantity demanded
f = function of
p = price
y = consumer income

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6
Q

What are the two types of normal goods ?

A

Necessity goods – Foods/Drinks/Clothing
Luxury goods – Cars/Holidays

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7
Q

What is an inferior good ?

A

One where demand decreases when income increases. (Own brand, value brand)

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8
Q

What are the factors of production ?

A
  • Enterprise (money)
  • Land (Space)
  • Labour (workers)
  • Capital (machinery)
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9
Q

What is Ceteris paribus ?

A

The assumption that all factors are held constant except one.

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10
Q

What are the two reasons why more is demanded as price falls in the demand curve ?

A

The Income effect - the consumer can maintain the same consumption for less expenditure; effectively increases real income.

The substitution effect - The more substitutions there are in the market and the lower the cost/inconvenience of switching, the bigger the substitution effect is likely to be

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11
Q

What is joint demand ?

A

Joint demand is when demand for one product is positively related to demand for a related good or service.

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12
Q

What is composite demand ?

A

Composite demand exists when goods have more than one use, and so an increase in the demand for one product leads to al fall in supply of the other.

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13
Q

What is derived demand ?

A

Derived demand is the demand for a factor of production used to produce another good or service.

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14
Q

What is the Law of Demand ?

A

The principle that all other things being equal, when the price of a good or service decreases, the quantity demanded increases and vice versa.

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15
Q

What is opportunity cost ?

A

The cost of any choice measured in terms of the next best alternative foregone (sacrificed)

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16
Q

How do you calculate the price elasticity of demand ?

A

% Change in demand / % Change in price

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17
Q

What is the price elasticity of demand (PED) ?

A

Measures how quantity of demand reacts to change in price

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18
Q

What is elastic demand ? What does the graph look like ?

A

PED > 1% - If there is a large change in price there should be a large change in quantity of demand - The line is relatively flat (Demand curve).

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19
Q

What is inelastic demand ? What does the graph look like ?

A

0 < PED < 1 - When price increases demand doesn’t increase by a lot. The line is vertical and slightly angled towards the right (Demand curve)

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20
Q

What is perfectly inelastic demand ? What does the graph look like ?

A

PED = 0 - When price changes there will be no change in demand (its unresponsive) - The line is completely straight vertical (Demand curve)

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21
Q

What is perfectly elastic demand ? What does the graph look like ?

A

PED = INFINITE - a fall in price leads to an infinite level of demand (If price changes then demand will drop to 0) - The graph is a straight vertical line from p1.

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22
Q

What is unit elastic demand ?

A

Percentage change in price leads to equal percentage change in demand.

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23
Q

What factors affect price responsiveness ?

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A
  • Availability of substitutes
  • Income spent on goods. (If the price of cheap goods increases, demand would not change as much)
  • Time period
24
Q

What is revenue ?

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A

Money obtained from selling a good without factoring in price to make it.

25
How does PED relate to revenue ?
Elastic - as price falls and demand increases a lot, revenue increases Inelastic - as price falls demand increases marginally, revenue increases Elastic - As price for a good increases and demand falls, revenue decreases Inelastic - As price for a good falls demand increases marginally, revenue decreases
26
What does PPF stand for ? What does it represent ?
A Production Possibility Frontier (PPF) is a graphical representation that illustrates the maximum output of two goods or service that an economy can produce given its available resources assuming full utilization of resources.
27
How does a PPF demonstrate the concept of scarcity ?
it refers to the limited availability of resources in relation to unlimited wants and need of society.
28
How does a PPF demonstrate the concept of trade offs ?
It reflects the idea that an economy must make trade-offs when allocating it's resources, producing more of one good necessitates making less of another.
29
How does a PPF represent opportunity cost ?
The slope of the PPF represents the opportunity cost of switching from producing one good to producing the other.​
30
How does a PPF represent efficiency
Points along the PPF represent an efficient use of resources, where the economy is fully utilizing all available resources to produce goods and services. Points inside the PPF are inefficient, indicating that resources are not fully employed.​
31
What are the features of a PPF ?
Growth - A PPF can shift outwards or inwards based on the availability of resources Assumptions - The PPF diagram makes several assumptions, such as fixed resources, a given level of technology, and full resource utilization. These assumptions may not always hold.​
32
How do you calculate opportunity cost from a PPF ?
Lost output of Y / Gained output of X
33
What shape is a PPF graph ?
A curve from y outwards and down to x
34
When will a PPF shift outwards ?
When there is economic growth. - Increase in natural resources - Technological advancements - Human capital development - Investment in capital
35
How does a PPF show - Productive, Allocative and dynamic efficiency
productive efficiency is achieved when the economy is operating on the PPF curve. allocative efficiency is achieved when the economy is producing at a point on the PPF that matches society's preferences.​ An outward shift of the PPF indicates that the economy has achieved dynamic efficiency, allowing it to produce more goods and services than before with the same resources.​
36
What does it show when the points are below the PPF curve ?
It shows that all resources are not being fully utilized.
37
What does it show when the points are on the PPF curve ?
They are all efficient output combinations
38
What does it show when the points are above the PPF curve ?
This output is not yet obtainable
39
Define scarcity
Scarcity is an economic concept where individuals must allocate limited resources to satisfy their unlimited wants and needs.
40
What are the factors of production and describe them
Land: Definition: This refers to all natural resources that are used in the production process. It includes not just physical land itself, but also resources like minerals, forests, water, and agricultural products. Example: A farm, forests, or the oil extracted from the ground. Labour: Definition: This is the human effort used in the production of goods and services. It encompasses the physical and mental work done by workers, ranging from unskilled labor to highly skilled professionals. Example: Factory workers, teachers, or engineers. Capital: Definition: Capital refers to man-made resources used in the production of goods and services. This includes machinery, buildings, tools, equipment, and technology that aid in the production process. Example: A factory building, computers, or machinery used in manufacturing. Entrepreneurship: Definition: Entrepreneurship is the initiative and risk-taking ability of individuals who organize the other factors of production (land, labor, and capital) to produce goods and services. Entrepreneurs combine the factors of production in innovative ways to create value. Example: A business owner who starts a company or a tech innovator who develops a new product.
41
What is a trade off ?
A trade-off in economics refers to the concept of having to make a choice between two or more alternatives when resources are limited. Choosing one option typically means giving up another, due to scarcity.
42
What is cross elasticity of demand (XED) ?
Measures the responsiveness of demand for one good to a change in the price for another good
43
How do you calculate XED ?
% Change in quantity demanded of good X / % Change in price of good Y
44
What does it mean when XED > 1 ?
The demand between the two goods is relatively cross elastic, demand does not respond to changes in price of other goods by a greater proportion than changing the price.
45
What does it mean when XED is positive (+) ?
it shows us that the goods are substitute goods, the higher the XED the closer the substitutes are.
46
What does it mean when XED is between 0 and 1 ?
Demand between the two goods is relatively cross inelastic – Demand for cars is relatively unresponsive to changes in the price of petrol.
47
How does a decrease in interest rates affect consumptions and savings ?
As interest rates decrease, savings with decrease and consumption will increase.
48
What is income elasticity of demand (YED) ?
YED – Measures the responsiveness of demand to a change in income
49
What is the equation for YED ?
YED = % change in quantity demanded / % change in income
50
How does income elasticity change with normal and inferior goods ?
Normal good – the quantity demanded rises with income Inferior good – the quantity demanded falls as income rises
51
How can we tell whether its a normal or inferior good from its YED ?
If we are looking at an inferior good, the YED will be negative If we are looking at a normal good, the YED will be positive
52
What are the two categories that normal goods are divided into and what are their YEDs ?
Basic goods (YED between 0 and 1 i.e., income inelastic) (quantity demanded rises less than proportionately to a change in income) Luxury goods (YED will be greater than 1 i.e., income elastic) (quantity demanded will rise more than proportionately to a change in income)
53
What is PES ?
measures the responsiveness of quantity supplied due to a change in price.
54
How do you calculate PES ?
PES = Percentage change in Quantity supplied / Percentage change in price
55
Why is demand always negative and why is supply always positive (in terms of graph correlation)
Demand is always negative because it has an inverse relationship with price, supply has a positive relationship with price, so the value is positive.
56
If Pes is... < 1 > 1 = 1 = 0 = infinite = 2 What does that mean
<1- inelastic >1 - elastic =1 - unitary =0 - perfectly inelastic = infinite - perfectly elastic PES = 2 – for every 1% change in price there would be a 2% change in the quantity supplied.
57
What are some factors that affect PES ?
Length of the production period Ease of switching between alternative methods of production Time period (Short term vs Long term) Existence/availability of spare capacity Ability to hold stocks The number of firms in the market and the ease of entering the market

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