Microeconomics

Question 1

Opportunity cost

Answer 1

The next best alternative lost when an economic decision is made

Question 2

Basic economic problem

Answer 2

Infinite wants and finite resources
-What to produce?
-How to produce?
-For whom to produce?

Question 3

Factors of production

Answer 3

Land
Labour
Capital
Enterprise

Question 4

PPC

Answer 4

shows the maximum combination of two types of goods that can be produced in a given time period in an economy

Question 5

Assumptions we make about PPCs (3)

Answer 5

-The economy only produces 2 goods
-Resources and state of technology are fixed
-All resources are fully employed

Question 6

Why is the PPC concave

Answer 6

Opportunity cost is not constant, since not all factors of production are equally suitable

Question 7

Assumptions of the circular flow of income model (2)

Answer 7

-Households are the owners of all factors of production
-Households buy all the nation’s output

Question 8

Leakages in the circular flow of income model (3)

Answer 8

-Taxes
-Saving
-Imports

Question 9

Injections in the circular flow of income model (3)

Answer 9

-Government spending
-Investment
-Exports

Question 10

Free market economy

Answer 10

all production is in private hands and demand and supply are left free to set prices and wages

Question 11

Planned economy

Answer 11

all production decisions are made by the government

Question 12

Market

Answer 12

where buyers and sellers come together to carry out an economic transaction

Question 13

Demand

Answer 13

the quantity of a good that consumers are willing and able to purchase at a given price at a given time

Question 14

Law of Demand

Answer 14

as price increases quantity demanded falls, and as price decreases quantity demanded increases

Question 15

Non-price determinants of demand (11)

Answer 15

Population
Advertising
Substitutes
Income
Fashion/Tastes
Interest Rates
Complements
Seasons
Expectations for price change
Demographics

Question 16

Income effect

Answer 16

when a price of a product falls, “real income” increases, so more people will buy the product

Question 17

Substitution effect

Answer 17

people recieve a certain “utility” when consuming a product, which is increased when price decreases as marginal utility increases

Question 18

Types of cognitive biases

Answer 18

Availability, Anchoring, Herb behaviour, Inertia bias, Loss aversion, Hyperbolic discounting

Question 19

Availability bias

Answer 19

The availability of recent information and examples

Question 20

Anchoring bias

Answer 20

When we are given the value of something, which is used as a reference point to influence future choices

Question 21

Framing bias

Answer 21

The way that information is presented to us

Question 22

Herd behaviour/Social conformity

Answer 22

The way that others behave can exert a powerful influence on our own choices

Question 23

Status Quo/Inertia bias

Answer 23

When consumers are faced with a “bewildering” set of choices, most would choose to do nothing

Question 24

Loss aversion bias

Answer 24

Humans feel losses are far more significant that gains

Question 25

Hyperbolic discounting

Answer 25

Humans that prefer smaller short term rewards than larger long-term rewards

Question 26

Nudge theory

Answer 26

The theory that everyone’s choices are slightly “nudged” to choose a different option

Question 27

What is PED

Answer 27

measure for how much the demand for a product changes when there in a change in price

Question 28

formula for PED

Answer 28

%ΔQd / %ΔP

Question 29

Types of elasticity

Answer 29

Elastic
Inelastic
Unitary Elastic
Perfectly Elastic
Perfectly Inelastic

Question 30

Values for PED

Answer 30

PED=0– Perfectly Inelastic
0<PED<1– Inelastic
PED=1– Unitary Elastic
1<PED<∞– Elastic
PED=∞– Perfectly Elastic

Question 31

Effect on TR from Elasticity

Answer 31

TR increases when price increases and the product is inelastic, or price decreases and the product is elastic

Question 32

different values for PED on the same line

Answer 32

the further up you go on a demand curve (linear), the higher the more elastic as proportion of income increases

Question 33

Determinants of PED (4)

Answer 33

-Number and closeness of substitutes
-Necessity of the product
-Proportion of income spent
-The time period considered