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Year 1 > Microeconomics > Flashcards

Microeconomics Flashcards

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1
Q

What is a reservation price?

A

The price at which a person would be indifferent between doing x and not doing x

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2
Q

What is the opportunity cost?

A

If doing x means you can’t do y, then the value of you doing y is the opportunity cost of doing x

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3
Q

What is a sunk cost?

A

Costs that once spent are lost and so shouldn’t be considered

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4
Q

What is the marginal cost of an activity?

A

The cost of an additional unit of such activity

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5
Q

Draw a supply-demand graph

A
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6
Q

What is Pareto efficiency?

A

The idea that an outcome can’t benefit someone without making someone poorer in the process

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7
Q

What is a price ceiling and price floor

A

A price ceiling is a maximum a good can be sold for. A price floor is a minimum a good can be sold for.

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8
Q

What is the impact on equilibrium price and quantity by an increase in demand?

A

Price; increases

Demand; Increases

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9
Q

What is the impact on equilibrium price and quantity by a decrease in supply?

A

Price; increases

Quantity; decreases

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10
Q

What is the impact on equilibrium price and quantity by a decrease in demand?

A

Price; falls

Quantity; falls

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11
Q

What is the impact on equilibrium price and quantity by a decrease in supply?

A

Price; rises

Quantity; falls

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12
Q

What is a dominant strategy?

A

The strategy that you should adopt in a game irrespective of what your opponent chooses

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13
Q

When is an outcome in a Nash Equilibrium

A

When neither player has incentive to deviate from their current strategy

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14
Q

What is a sequential game?

A

A game where one player makes their decision after someone else has made theirs

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15
Q

What is a bundle?

A

A particular combination of two or more goods

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16
Q

What is a budget constraint?

A

The set of all bundles that exactly exhaust the consumers income at given prices

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17
Q

What is a composite good?

A

In a choice between a good X and numerous other goods, the amount of money the consumer spends on those other goods

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18
Q

What is the relationship between bundles on an indifference curve

A

The consumer would be completely indifferent between any bundles on that curve

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19
Q

What is the marginal rate of substitution

A

At any point on an indifference curve the rate at which a consumer will exchange the goods on the vertical axis for the good on the horizontal axis; absolute value of the slope

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20
Q

Where does the best affordable bundle occur

A

When MRS=P(x)/P(y)

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21
Q

Draw an indifference curve for perfect complements

A
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22
Q

Algebraically, with a utility function U, and goods X,Y, what equation must be satisfied to maximise Utility

A

(dU/dx)/Px = (dU/dy)/Py

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23
Q

What is a normal good?

A

One whose quantity demanded rises as income rises

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24
Q

What is an inferior good?

A

One whose quantity demanded falls as income rises

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25
Draw the effect of an increase in the price of a normal good X
26
What is a giffen good?
A good for which the quantity demanded rises as its price rises ie (income effect) \> (substitution effect)
27
What is the substitution effect for perfect complements?
Zero
28
In a market with n customers, with every customer having the consumer demand curve P=a-bQ(i), what is the market demand curve?
nQ(i)=an/b - nP/b
29
What is the price elasticity of demand?
The percentage change in the quantity of good demanded resulting from a 1% change in the price
30
When is a good elastic, unit elastic and inelastic?
Inlastic e\>-1 Unit elastic e=-1 Elastic e\<-1
31
What is the point-slope method for calculating elasticity?
P/Q \* 1/slope
32
Draw the graph for a perfectly inelastic demand
33
When will a price reduction increase total revenue?
When the good is elastic
34
When will a price rise increase total revenue?
When the good is inelastic
35
When is total expenditure at a max with respect to elasticity?
When the good is unit elastic
36
What is income elasticity of demand?
The percentage change in the quantity of a good demanded that results from a 1 per cent change in income
37
When is a good a i) necessity ii) luxury iii) inferior
Let n be income elasticity of demand i) 0 \< n \< 1 ii) n \> 1 iii) n \< 0
38
What is the cross price elasticity of demand?
The percentage change in the quantity of a good demanded that results from a 1% change in the price of another good
39
What is the interpretation of e(XZ) and give the formula
e(XZ) is the change in the demand of X when the price of Z changes ((Change in Quantity of X)/Quantity of X)/((Change in Price of Y)/Price of Y)
40
What is the cross price elasticity of two complement goods
Less than zero
41
What are the two factors of production?
Capital K and Labour L
42
What is the long run?
The least amount of time required to alter the amounts of input in a production process
43
What is the short run?
The longest period of time where one of the inputs in the production system is fixed
44
What does the law of diminishing returns state?
if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline
45
What is the marginal product?
Change in output due to a unit change in the variable input
46
What is happening to the average product curve when the marginal product curve lies about it?
It is increasing
47
Where is the average product curve maximal?
At the intersection with the marginal product curve
48
How should you go about solving a distribution problem
Allocate resources to the highest marginal product
49
What are isoquants
The set of all input combinations that yield a given level of output
50
What is the marginal rate of technical substitution
the rate at which one input can be exchanged for another without altering the total level of output. Equal to the absolute value of the slope of the isoquant
51
What is the relationship between marginal products and MRTS
MPL/MPK = MRTS
52
When does a production function have increasing returns to scale
F(zK,zL) \> zF(K,L)
53
When two processes are producing total output, how is the cheapest solution found?
MC(A) = MC(B)
54
What is an isocost line?
The set of input bundles where each costs the same
55
When does the minimum cost of a bundle on an isocost line occur?
MPL/w = MPK/r w is wage r is rent of capital
56
What is economic profit?
The difference between total revenue and total cost, including explicit and implicit costs
57
What are the four conditions for perfect competition?
i) Firms sell a standardized product ii) Firms are price takers iii) Free entry and exit iv) Firms and Consumers have perfect information
58
When is a firm a price taker?
When it takes the market price of a product as given
59
What is the short run condition for profit maximisation in perfect competition?
When the difference between total cost and total revenue is maximum
60
What is Marginal Revenue?
The change in total revenue that occurs as a result as a 1-unit change in sales
61
What is the short-run shutdown condition for a firm in perfect competition?
When price falls below the minimum of average variable cost
62
Show on a graph where the aggregate consumer and producer surplus' occur
63
What is the short run equilibrium price in perfect competition?
Price = marginal cost
64
What is the price elasticity of supply
The percentage change in the quantity supplied b a firm as a result of a 1% change in product price
65
What is the equation for elasticity of supply
P/Q \* 1/slope
66
What is a monopoly
A market structure where a single seller of a product with no close substitutes serves the entire market
67
Are monopolies price makers or price takers
Price makers, set to maximum total revenue. Price elasticity is unit
68
What is the optimal price condition for a monopolist?
Marginal revenue = marginal cost
69
What is the relationship between marginal revenue and price elasticity?
MR= P(1 - 1/e)
70
When the demand curve is P = a-bQ, what is the corresponding marginal revenue curve?
MR = a - 2bQ
71
What is the shutdown condition for a monopolist?
Whenever average revenue is less than average variable cost at every level of output.
72
What is third-degree price discrimination?
Different prices are charged in different markets or to different categories of consumer
73
What is first-degree price discrimination?
Consumers are charged individual prices which are the highest they will pay
74
75
What is a Cournot model?
Each firm assumes that rivals will continue producing at their current output levels
76
How do you solve for quantity and price in a Cournot model?
Set Marginal Revenue = Marginal Cost
77
What is a Bertrand model?
Each firm assumes that rivals will continue charging their current prices
78
What is the equilibrium price in a Bertrand model?
Price = marginal cost
79

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