Micro economics dp exam review

Question 1

What are the factors of production?

Answer 1

land, labor, capital, entrepreneurship

Question 2

Draw and explain the PPC curve .

Show increasing and constant opportunity cost

Answer 2

Good X on x axis and Good Y on y axis.

increasing opportunity cost means the curve is curved (have to sacrifice more of one good to produce another good)

Constant opportunity cost means the curve is straight (have to sacrifice the same amount of one good to produce the other)

PPC curve can also show actual growth, inefficient allocation of resources etc.
- Good x and good y on the axis
- when there is an inefficient allocation of resources, the point is under the curve. They are producing less than their potential. Having the point outside of the curve is impossible as there are not enough resources to reach that point.
- shifting curve outwards show that there is a positive supply shock (better tech, increased population, more education, new resources, etc) .
- Negative supply shock represents an inward shift of the PPC curve

Question 3

draw the Circular flow of income

Answer 3

It shows the relationship between households and firms as well as leakages and injections.

Households give FOP to firms, firms return with factors of payments (dividends).

Firms give households goods/services, households return with expenditure for goods/services.

Leakage to government through taxes and injection into the economy through government spending

Leakage to financial institutions (banks) through savings and injections through investment

Leakage to foreign countries through imports and injections through exports.

Question 4

What’s the difference with normative and positive economics?

Answer 4

Normative: opinionated statement (government should give subsidies because…)

Positive : factual statement (interest rates increased because of …)

Question 5

What is the law of demand. What causes the law of demand to work? What are the assumptions of this law?

Answer 5

This states that when prices increase, demand decreases and vice versa, ceteris paribus
- this is due to income effect (price in proportion to your income makes you either feel you have more or less purchasing power) and substitution effect (when price of main good increases, this makes substitute goods look more attractive so the demand for main good decreases).

Assumptions:
- your income doesn’t change
- price of substitute goods don’t change
- taste and preferences don’t change

• assume consumer is rational and has perfect information
• don’t take into account inferior or necessity goods

Question 6

What are the non price determinants of demand

Answer 6

these causes shifts in demand as it isn’t ceteris paribus anymore

• amount of consumers
• change in tastes and preferences
• change in income
• consumer future expectations
• price of related goods