The Nature of Economics
What assumptions do economists make about producers and consumers?
Consumers are utility maximising
Firms are profit maximising
Give two reasons the demand curve slopes downwards.
The substitution effect
The income effect
Which elasticity is concerned with substitute and complement goods?
XED
True or false: public goods are provided by the government.
False!
Non-excludable, non-rival
Name three forms of government regulation
Bans/age limits/industry standards/direct provision
What is the economic problem?
Wants are infinite and resources are limited. Due to this scarcity, choices must be made regarding how goods are allocated.
Name three factors that could lead to an outward shift in supply.
Increased cost of production/increased productivity of workforce/increase in indirect tax/new technology/discovery of new raw materials
Name all four elasticities and their equations.
PED (% change QD/ % change P)
YED (% change QD/ % change Y)
XED (% change QD for good A/ % change P for good B)
PES (% change QS/ % change P)
What information gap might exist between a dentist and a patient?
Patient knows more about their health history, dentist knows more about dental health practice.
How would an ad valorem tax effect the supply curve?
Cause the supply curve to shift right and become steeper than the original supply curve.
Describe the four functions of money.
A medium of exchange
A store of value
A measure of value
A means of deferred payment
What is the difference between a contraction in demand and an outward shift in demand?
Contraction: caused by a decrease in price
Outward shift: a positive change in conditions of demand (price of a substitute or complement/increase real income)
Give an example of a good with a negative YED. Briefly explain why.
What is the difference between SMC and PMC?
Social marginal cost/private marginal cost. The cost to the individual VS the cost to the individual PLUS third parties (difference is the negative externality!)
What would happen if a minimum price was set below the free market price?
Nothing!
What is the difference between movement along/within a PPF and shifts in a PPF?
Movements: a change in the combination of two goods being produced/the productivity of resources.
Shifts: A change in the productive possibility of the economy.
Define the law of diminishing marginal utility.
As consumption of a produced is increase, the consumer's utility increases but at a decreased or diminishing rate.
Why is it incorrect to describe the market for apples as elastic?
It is imprecise to describe a product as being elastic or inelastic. You must describe the elasticity in terms of a relation to something else: supply, demand, income or another good.
Why does the free rider problem occur?
Once a public good is provided it is impossible to prevent people from using it, and thus impossible to charge for it.
Name three forms of government failure
Distortion of the price signal
Unintended consequences
Excessive administrative costs
Define opportunity cost, and explain an numerical example using a PPF.
The next best alternative that is forgone when a choice is made.
Define producer and consumer surplus.
Consumers: the difference between how much consumers are willing to pay and what they actually pay for a product.
Producers: the difference between the price the producers receive and the cost of supply (profit!).
What is the result of a price increase on total revenue if demand is
1. Inelastic
2. Elastic
3. Perfectly elastic.
1. Increase in revenue.
2. Decrease in revenue.
3. Elimination of revenue.
Asymmetric information - consumers don't have enough information to make rational decisions.
Positive externality - the good is under-provided and under-consumed as private benefits exceed social benefits.
An increase in the maximum price would case a reduction in the _______ of the good.
Shortage OR Quantity demanded