Intro econ

When PED < 1 what does this mean?
Demand is INELASTIC
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Why is elasticity needed for comparative statics?
As it has no units so can be compared easily
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When PED = 1 what does this mean?
Demand is UNIT ELASTIC
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When demand is INELASTIC, if a price cut occurs which effect dominates and what happens?
The price effect dominates, decreasing the total revenue
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Is this elastic, inelastic or unit elastic? : The price of one brand of pizza increases so you can easily switch to another
Elastic
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A 1% rise in price means a more than 1% fall in quantity, what is this?
Elastic
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A 1% rise in price means a less than 1% fall i quantity, what is this?
Inelastic
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The price of food increases, there is no alternative. Is this elastic or inelastic?
Inelastic
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Define the "Fallacy of Composition"
When demand is inelastic, suppliers are better off taken together if supply can be reduced. But if one loses out and others are unaffected, the unlucky one losses out. What is true for the individual may not be true for everyone together and v.versa
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When PED > 1 - what does this mean?
Demand is ELASTIC
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Is the PED lower of higher in the short run?
Lower
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If demand increases, what will happen to price?
Decrease
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Define 'opportunity cost'
The opportunity cost is the cost that you must sacrifice for the next best alternative
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Define 'property rights'
Producers know that goods are theirs and that they are able to sell them or not
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What is a planned or command economy?
Where all decisions are made centrally, usually by a government. Here, guidelines are set e.g how many products you can sell in a day
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What is the difference between positive and normative economics?
Positive economics is factual, analysing how the world works whereas normative economics is based solely on subjective value judgements
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What is the water-diamond paradox and what does it tell us?
Water is obviously a LOT more useful than diamonds, yet it costs a lot less due to huge supply. This proves that price is not suggested by intrinsic value, ONLY supply and demand
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Give 3 of the 5 determinants of demand
Income, Taste, Price of other goods, expectations, government regulations
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If the IED is more than one, what type of good is this?
Luxury Good
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What type of law id the law of demand?
Empirical law
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When the MRS < slope - what good does the consumer consume?
Good y
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What is the substitution effect?
As the price of a good increase, some consumers will substitute to another alternative which costs less
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What is the income effect?
As prices of goods increases (inflation) people get poorer in real terms. Real income is the amount of goods one can buy in monetary terms. When price increases, real income decreases
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What are the only two things that will force a MOVEMENT along the demand curve?
Change in price or demand
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If market conditions change, what will happen to the demand curve? (e.g increase in income)
Shift
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Define "consumer surplus"
The difference between the maximum price (reservation price) willing to pay by the consumer and the amount in which they actually pay
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Define "producer Surplus"
The amount producers benefit from selling at a market price that is higher than they would be willing to sell it for
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Give 3 of the 4 determinants of supply
Cost of production, Technology, Random Shocks, government regulations
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Define the law of diminished margin returns
When a producer inputs so much to the point further than when the benefits = costs, therefore decreasing profits
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Define the 'Marginal rate of substitution'
The MRS between two goods measures the quantity of a good the customer must sacrifice to increase the quantity of the other good by 1 unit WITHOUT CHANGING THE UTILITY
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Define diminishing marginal rate of substitution
If a consumer has a large amount on one good, they are willing to give up a relatively large amount of the good in exchange for a good where they have relatively little
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What is an "indifference curve"?
A curve representing all different combinations of consumption bundles that provide the same level of utility for a consumer
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What happens to an indifference curve as we move to the right?
It gets steadily flatter
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Define "Budget Constraint"
It describes the different bundles that the consumer can afford
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What does it mean if the MRS is constant?
The two products are perfect substitutes
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When the MRS > slope - what good does the consumer consume?
Good x
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If two goods are consumed in fixed proportions, what are they and what shape of graph does it give?
They are perfect compliments and gives an L shaped curve
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If the IED is negative, what type of good is this?
Inferior Good
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When calculating the optimal bundle, what is dy/dx (the slope) defined by?
-y/x
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Other cards in this set

Card 2

Front

Why is elasticity needed for comparative statics?

Back

As it has no units so can be compared easily

Card 3

Front

When PED = 1 what does this mean?

Back

Preview of the front of card 3

Card 4

Front

When demand is INELASTIC, if a price cut occurs which effect dominates and what happens?

Back

Preview of the front of card 4

Card 5

Front

Is this elastic, inelastic or unit elastic? : The price of one brand of pizza increases so you can easily switch to another

Back

Preview of the front of card 5
View more cards

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