question
Slope (L4)
answer
Ratio of absolute changes in quantity and price (Delta D/ Delta P)
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Price Elasticity (L4)
answer
The ratio of relative (or percentage) changes in price.
The price elasticity of demand is measured as the percentage change in quantity demanded, divided by the percentage change in price.
The price elasticity of demand is measured as the percentage change in quantity demanded, divided by the percentage change in price.
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Elasticity (L4)
answer
how demand for a good changes when some other variable changes
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Equilibrium
answer
Market clearing price Supply=Demand
Quantity that is demanded is supplied
Quantity that is demanded is supplied
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Basic Assumptions about a rational consumer (L4)
answer
Maximize utility
prefer more of a good to less of it
Diminishing marginal utility: As more of a good is consumed beyond a certain point the marginal utility starts to fall.
Consumers have preferences
Transitivity: If a consumer prefers A to B and B to C, we conclude they prefer A to C.
prefer more of a good to less of it
Diminishing marginal utility: As more of a good is consumed beyond a certain point the marginal utility starts to fall.
Consumers have preferences
Transitivity: If a consumer prefers A to B and B to C, we conclude they prefer A to C.
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Non Satiation (l4)
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: in most utility functions more is assumed preferred to less
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Budget Constraint (L4)
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various combinations of goods that can be afforded. Depends on a consumer's budget and the prices of goods/services.
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Marginal rate of Transformation (L4)
answer
In a PPF graph, how many quantities of good A make up the value of/ can be exchanged with one Good B. And vice versa.
- P1/P2 (minus since the slope has to descend)
- P1/P2 (minus since the slope has to descend)
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Marginal Rate of Substitution (L4)
answer
While the marginal rate of transformation (MRT) is similar to the marginal rate of substitution (MRS), these two concepts are not the same. The marginal rate of substitution focuses on demand, while MRT focuses on supply.
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indifference curve (Iso-utility) (L4)
answer
The various combinations of goods that can offer the same utility.
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Equity (L7)
answer
How goods and costs are distributed across people; fairness: very subjective/normative
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Efficiency (L7)
answer
...
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Resources (L2)
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Inputs used to produce goods and services or satisfy desires (needs and wants)
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PPF (L2)
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Combination of goods that can be produced with available inputs
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Voluntary Exchange (L2)
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Mutually beneficial to both participants
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Autarky (L2)
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self sufficiency, self production,
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Absolute Advantage (L2)
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When A is better than B at producing both things.
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Shift in Demand/Supply Curves (L3)
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change in quantities of a good or service producers are willing to sell changing due to circumstances
change in quantities of a good or service consumers are willing to buy changing due to circumstances
change in quantities of a good or service consumers are willing to buy changing due to circumstances
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Discrete Consumer Surplus (L3) slide 14
answer
Difference between what consumers are willing to pay for a good relative to what they do pay
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Continuous Consumer Surplus (L3)
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Total consumer surplus (the whole area of the triangle)
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Short side of the market (L3) Slide 16
answer
The point on the curve that is closest to the origin on a price floor price ceiling graph. (both demand and supply)
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Price Ceiling (L3)
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a legal maximum price that can be charged for a good - Results in a shortage of a
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Price Floor (L3)
answer
is a legal minimum price that can be charged for a good - Results in a surplus of a product
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Determinants of Price Elasticity (Textbook)
answer
(p. 101 of PDF, 81 of textbook)
Substitutes
Tastes (Preferences)
Product Groups
Time
Extra: the ratio of the price of the good to the consumer's income. The lower the price of the product is relative to income the more inelastic.
Substitutes
Tastes (Preferences)
Product Groups
Time
Extra: the ratio of the price of the good to the consumer's income. The lower the price of the product is relative to income the more inelastic.
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Cross-price elasticity of demand (L3)
answer
the percentage change in the quantity demanded of a product divided by the percentage change in the price of another (105PDF 85TXTBK)
Positive: Substitutes (price increase of other good causes increase in demand)
Negative: Complements (price increase of other goof causes reduction in demand)
Positive: Substitutes (price increase of other good causes increase in demand)
Negative: Complements (price increase of other goof causes reduction in demand)
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Income Elasticity of demand (L3)
answer
(105PDF 85TXTBK)
the percentage change in quantity demanded divided by a percentage change in income.
the percentage change in quantity demanded divided by a percentage change in income.
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Normal
Luxury
Necessity
Luxury
Necessity
answer
(107 PDF 87 Textbook)
Normal good: the demand for it increases in response to income increases.
A luxury good or service is one whose income elasticity equals or exceeds unity.
A necessity is one whose income elasticity is greater than zero but less than unity.
Normal good: the demand for it increases in response to income increases.
A luxury good or service is one whose income elasticity equals or exceeds unity.
A necessity is one whose income elasticity is greater than zero but less than unity.
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Inferior Goods (L3)
answer
Inferior goods are those for which there exist higher-quality, more expensive, substitutes. For example, lower-income households tend to satisfy their travel needs by using public transit. As income rises, households may reduce their reliance on public transit in favour of automobile use
Negative Income elasticity
Negative Income elasticity
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Elasticity of Supply (L3)
answer
Textbook (PDF 109, 89)
The elasticity of supply measures the responsiveness of quantity supplied to a change in the price.
Furthermore, and in contrast to the demand elasticity, the supply elasticity is generally a positive value because of the positive relationship between price and quantity supplied.
The elasticity of supply measures the responsiveness of quantity supplied to a change in the price.
Furthermore, and in contrast to the demand elasticity, the supply elasticity is generally a positive value because of the positive relationship between price and quantity supplied.
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Tax Incidence (L3)
answer
Textbook (PDF 111, 91)
Tax Incidence describes how the burden of a tax is shared between buyer and seller.
Tax Incidence describes how the burden of a tax is shared between buyer and seller.
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Statutory Incidence (Tax incidence)
answer
(PDF113)
It is not difficult to show that whether we move the supply curve upward (to reflect the responsibility of the supplier to pay the government) or move the demand curve downward, the outcome is the same - in the sense that the same price and quantity will be traded in each case. Furthermore the incidence of the tax, measured by how the price change is apportioned between the buyers and sellers is also unchanged.
It is not difficult to show that whether we move the supply curve upward (to reflect the responsibility of the supplier to pay the government) or move the demand curve downward, the outcome is the same - in the sense that the same price and quantity will be traded in each case. Furthermore the incidence of the tax, measured by how the price change is apportioned between the buyers and sellers is also unchanged.
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Welfare Economics (Chapt 5 Textbook)
answer
assesses how well the economy allocates its scarce resources in accordance with the goals of efficiency and equity.
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Own Price Elasticity of Demand (L4)
answer
•how demand for a good changes when the price (P) of that good changes
Same meaning as price elasticity
Same meaning as price elasticity
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Utility (L4)
answer
The benefit or satisfaction or happiness that a person (consumer) gets from the consumption of a good or service
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Optimal Consumption (L5)
answer
Where budget lines and an indifference curve are tangential to (touch) each other.
The word tangential only applies to a straight line touching a curved line.
The word tangential only applies to a straight line touching a curved line.
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Cardinal Utility (Chapter 6 Textbook)
answer
PDF153
Cardinal utility is a measurable concept of satisfaction.
Cardinal utility is a measurable concept of satisfaction.
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Total Utility (Chapter 6 Text)
answer
PDF153
Total utility is a measure of the total satisfaction derived from consuming a given amount of goods and services.
Total utility is a measure of the total satisfaction derived from consuming a given amount of goods and services.
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Consumer Equilibrium (Chapt 6 Text)
answer
Occurs when marginal utility per dollar spent on the last unit of each good is equal.
At this consumer equilibrium, he gets the same utility value per dollar for the last unit of each activity consumed. This is a necessary condition for him to be maximizing his utility, that is, to be in equilibrium.
At this consumer equilibrium, he gets the same utility value per dollar for the last unit of each activity consumed. This is a necessary condition for him to be maximizing his utility, that is, to be in equilibrium.
question
Law of Demand
answer
PDF 157
The law of demand states that, other things being equal, more of a good is demanded the lower is its price.
The law of demand states that, other things being equal, more of a good is demanded the lower is its price.
question
Engel Curve (L5)
answer
Results of an increase in income, i.e., a budget increase.
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Ordinal utility (Chapter 6 Textbook)
answer
PDF 159
Ordinal utility assumes that individuals can rank commodity bundles in accordance with the level of satisfaction associated with each bundle.
Ordinal utility assumes that individuals can rank commodity bundles in accordance with the level of satisfaction associated with each bundle.
question
Substitution Effect (L5)
answer
decrease in price of ONE product (P1 ) holding other price (P2 ) & income constant has two effects on individual's demand: -
Substitution Effect: Change in Qd due to consumer's behavior of substituting good 1 for good 2 (because x1 now relatively cheap), holding utility constant.
Substitution Effect: Change in Qd due to consumer's behavior of substituting good 1 for good 2 (because x1 now relatively cheap), holding utility constant.
question
Income Effect (L5)
answer
decrease in price of ONE product (P1 ) holding other price (P2 ) & income constant has two effects on individual's demand:
Income Effect: Change in Qd due to effectively-increased income (lower p1 = higher buying power), holding prices constant
Income Effect: Change in Qd due to effectively-increased income (lower p1 = higher buying power), holding prices constant
question
Social Surplus (L8)
answer
Consumer + Producer Surplus
question
Requirements of a Perfecly Competitive Market
answer
many firms; each firm is insignificant in overall output - firms' products are standardised (homogenous products) - full information about products, technology, price - many buyers in the market - free entry & exit for potential new
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Perfect Competition Market: One company's supply in LR
answer
entry of firms will cause the short-run market supply curve to shift outward - market price and profits will fall - the process will continue: until economic profits reach zero
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Continuation If economic profits
answer
If economic profits: new firms will enter the industry • Results: - market price will fall - each firm's profit shrinks - firms optimise at new price - economic profits will tend toward zero (equilibrium at ZERO PROFIT per firm
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Continuation If no economic profits
answer
...
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Factors of Production L6
answer
Inputs into the production process
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Marginal Productivity or Marginal physical output L6
answer
the additional output that can be produced by using an extra unit of that input holding other inputs constant.
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Isoquant Curve
answer
represents the combinations of k and l that can produce a given level of output
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Isocost Curve
answer
The set of combinations of inputs that cost the same amount
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Cost Minimizing L6 S16
answer
To minimize the cost of producing a given level of output, a firm should choose a point on the isoquant at which the MRTS is equal to the ratio w/r (TANGENCY)
question
Adverse Selection (L12)
answer
Behavior that takes advantage of asymmetric information before a transaction
Assymetric information in hiring- the applicant knows about how smart they are and how diligent they are. The employer doesn't and will find out once they hire the applicant. Therefore, all sorts of certificates are a signal to hire the applicant.
Assymetric information in hiring- the applicant knows about how smart they are and how diligent they are. The employer doesn't and will find out once they hire the applicant. Therefore, all sorts of certificates are a signal to hire the applicant.
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Moral hazard (L12)
answer
Behaviour that takes advtantage of asymmetric information after a transaction.
Insurance= if the insurance company will give you a brand new car if you crash it, you might take advtanahe of that insurance and crash your car. To prevent this, people who pay insurance pay a portion of that cost
Principal agent problem can be classified as a moral hazard.
New standard= Ceos can have stocks, which incentivizes them to increase the value of the stock. However, this means that CEOS want to increase stock value in the short term, which does not guarantee sustainable growth of the company.
Insurance= if the insurance company will give you a brand new car if you crash it, you might take advtanahe of that insurance and crash your car. To prevent this, people who pay insurance pay a portion of that cost
Principal agent problem can be classified as a moral hazard.
New standard= Ceos can have stocks, which incentivizes them to increase the value of the stock. However, this means that CEOS want to increase stock value in the short term, which does not guarantee sustainable growth of the company.
question
Signalling (L12)
answer
...
question
Screening (L12)
answer
...
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Theory of the Second Best NOT ON EXAM
answer
NOT ON EXAM
if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
question
Economies of Scale (L6)
answer
when a firm can increase its output more than proportionally to its total input cost (e.g., twice the input leads to greater than twice the output)
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Diseconomies of Scale (L6)
answer
: when a firm's output increases less than proportionally to its total input cost (e.g., twice the input leads to less than twice the output)
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Short Run (L6)
answer
The time frame in which the quantities of some resources are fixed"
{Usually labour can be easily changed, while land & capital not.}
- firms can neither enter nor exit an industry
- Quantity of output can be adjusted, but contracts exist firms have has fixed plant capacity size.
{Usually labour can be easily changed, while land & capital not.}
- firms can neither enter nor exit an industry
- Quantity of output can be adjusted, but contracts exist firms have has fixed plant capacity size.
question
Long run L6
answer
The time frame in which the quantities of all resources can be changed" {Everything is variable} - Firms can change the scale of operation. New firms can enter and existing firms can exit the industry
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Short run L7
answer
firms have only limited options in their production decision
question
Long ru L7
answer
Long-run: firm will vary all inputs to produce optimal output quantity
question
Reason for shift in cost curve
answer
change in technology and input prices
question
LR cost curve L7
answer
Long-Run ATC envelopes all of the short-run ATC curves
question
Equity Efficiency
answer
Equity: how goods & costs are distributed across people {can be connected to fairness} •
Efficiency: how well resources are used and allocated {optimising goals
Efficiency: how well resources are used and allocated {optimising goals
question
Social Surplus L7
answer
•Consumer Surplus + Producer Surplus= Social Surplus
An efficient market maximizes the sum of producer and consumer surpluses. (Social Surplus)
An efficient market maximizes the sum of producer and consumer surpluses. (Social Surplus)
question
Efficient market (L7)
answer
An efficient market maximizes the sum of producer and consumer surpluses.
question
Monopoly (L9)
answer
This firm can choose to produce at any point on the market demand curve... but recall the PROFIT MAXIMISI
Monopoly profits will be: (P-AC)*Q
Long-run: other firms want to enter market...but CANNOT due to the BARRIERS TO ENTRY.
Relative to perfect competition, monopoly involves a loss of consumer surplus for consumers: - some consumer surplus becomes monopoly profits, - some consumer surplus loss represents a deadweight loss Pareto inefficiency
Governments often choose to regulate natural monopolies (firms with diminishing average costs over a broad range of output levels)
Monopoly profits will be: (P-AC)*Q
Long-run: other firms want to enter market...but CANNOT due to the BARRIERS TO ENTRY.
Relative to perfect competition, monopoly involves a loss of consumer surplus for consumers: - some consumer surplus becomes monopoly profits, - some consumer surplus loss represents a deadweight loss Pareto inefficiency
Governments often choose to regulate natural monopolies (firms with diminishing average costs over a broad range of output levels)
question
Natural Monopoly/ Legal Monopoly
answer
Natural Cost advantage as a barrier to entry
Access to low-cost production technology or technique • Access to a limited resources may also be a lasting basis for maintaining a monopoly
Legal and patent rights as a barrier to entry
Access to low-cost production technology or technique • Access to a limited resources may also be a lasting basis for maintaining a monopoly
Legal and patent rights as a barrier to entry
question
Price Discrimination (L9)
answer
price discrimination! selling identical products at different prices, usually based on differing consumer's demand
question
perfect (first-degree) price discrimination (L9)
answer
a situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
If each buyer can be separately identified by the monopolist, it may be possible to charge each buyer the maximum price he would be willing to pay for the good
NO DEAD WEIGHT LOSS
NO CONSUMER SURPLUS
If each buyer can be separately identified by the monopolist, it may be possible to charge each buyer the maximum price he would be willing to pay for the good
NO DEAD WEIGHT LOSS
NO CONSUMER SURPLUS
question
Second degree price discrimination (L9)
answer
Cannot distinguish each customer's demand... • offering different package at different prices customers choose which package they prefer
question
Third Degree Price Discrimination
answer
Perfect price discrimination requires the monopolist to know the demand function for each potential buyer •
Market Separation: A less stringent requirement would be to assume that the monopoly can separate its buyers into a few identifiable market
Market Separation: A less stringent requirement would be to assume that the monopoly can separate its buyers into a few identifiable market
question
Benefits of Monopoly (L9)
answer
high profits provide funds that can be invested in research and development (R&D) - goal of attaining or keeping a monopoly position provides an incentive to work hard to stay ahead of potential competitor
question
Pareto Efficiency (L9)
answer
Pareto Efficiency is an outcome situation in which it is impossible to make any individual better off without making at least one other individual worse off.
question
Monopolistic Competition
answer
many independent sellers competing • no or low barriers to entry • differentiated product
Less interdependent than oligogpolies.
Less interdependent than oligogpolies.
question
Monopolistic Competition LR (L10)
answer
Profits attract new firms to the industry (no / low barriers to entry) - More firms & demand decreases for each existing firm This is a shift in the market supply curve. • each firm's output and price falls • total industry output rises
Continues until "zero economic profit" (P = AC) - However: P > MC
Continues until "zero economic profit" (P = AC) - However: P > MC
question
Firm's Expansion path (L6)
answer
The expansion path is all of the cost-minimizing tangency points
question
Nash Equilibrium (l10)
answer
Each player chooses its best strategy given the strategies that all the other actors will choose. • this is a "non-cooperative" equilibrium Different from the dominant strategy
question
Arbitrage (L9)
answer
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
question
Cournot Model (L11)
answer
Cournot competition is an economic model describing an industry structure in which rival companies offering an identical product compete on the amount of output they produce,
The idea that one firm reacts to what it believes a rival will produce forms part of the perfect competition theory.
The idea that one firm reacts to what it believes a rival will produce forms part of the perfect competition theory.
question
PPF
answer
BECAUSE resources are not perfect substitutes for one another (the more specialized the inputs, the more curved the PP
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