Introductory Economics (ECO1014)

• Why is scarcity a problem?


  Human wants and needs are unlimited but there is only a limited number of goods and services.
• What is a PPF?


  A curve showing all the possible combinations of goods that can be produced within a specific time when all resources are fully and efficiently employed.
• What is an opportunity cost?


  The next best alternative foregone when choosing a given action
• What is a free market economy?


  A market where property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers.
• What is a command economy?


  A market where all economic decisions are made centrally by a central planner (e.g. a government).
• What is a mixed economy?


  A market where the government and private sector act in cohesion.
• What is positive economics?


  Objective or scientific (testable) explanations of how the economy works
• What is normative economics?


  Offers recommendations based on (non-testable) value judgements.
• What is a market?


  A set of arrangements by which buyers and sellers are in contact to exchange goods and services
• What is demand?


  the quantity of a good or service at which buys wish to purchase at each conceivable price.
• What is supply?


  the quantity of a good/service which sellers wish to sell at each conceivable price.
• What is the quantity demanded?


  the amount of a good or service that consumers are willing to purchase at any given price.
• What is the quantity supplied?


  the amount of a good or service that firms want to sell at a given price, holding constant other factors that influence firms' supply decisions.
• What is the Law of Demand?


  When price of good or service falls, people demand more of it.
• What type of good can be seen as an exception to the law of demand?

  Giffen good
• Why is the demand function downward sloping?

  1. Substitution effect - when the price of a good increases, some consumers may substitute it with alternative goods that are relatively cheaper.
  2. Income effect - when the price of a good increases, consumers of it will be poorer in real terms. Real income is the amount of goods you can buy with your monetary income. If the price of a good increases, with a given income you can buy less of the good, so your real income has gone down.
• What is consumer surplus?


  The difference between the maximum price (reservation price) he is willing to pay for a good and the price they pay to obtain it. It can also be considered a measure of the welfare a consumer obtains from a given economic transaction in a market.
• Why does a supply function highlight a positive relationship between the quantity supplied and the price of a given good?

  1. If a firm's COPs rise, a firm will charge a higher price to remain profitable.
  2. The higher the price of a good, the higher the profitability, therefore, more firms will want to produce that good.
  3. If the price of a good is high, new firms may enter the market and the total quantity of the price will rise.
• What is producer surplus?


  the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for.
• What are the factors that shift the supply curve?

  1. COPs
  2. Tech development
  3. Lower taxes
  4. Weather
  5. Objectives of firms
• What is market equilibrium?


  When demand = supply
• What is comparative statics?


  To compare a new equilibrium with an old one.
• What is PED?


  The measure of the sensitivity of the quantity demanded of a good to a change in the price of that good.
• What are the two ways of defining PED?

  • Arc elasticity - the elasticity between two different points of that good.
  • Point elasticity - the elasticity on a given point of a curve.
• What is the arc elasticity of demand defined as?

  The % change in quantity demanded / % change in price
• What is the point elasticity of demand defined as?


  The derivative of the demand function x (P/Qd)
• What are the three interpretations of PED?

  • | PED | > 1 - demand is elastic
  • | PED | = 1 - demand is unit elastic
  • 0 < | PED | < 1 - demand is inelastic
• What does the constant slope of a demand curve imply?


  It implies a non-constant elasticity as the demand curve becomes less elastic moving from the left to the right as while the slope is constant, the ratio P / Q changes.
• Why do firms focus on PED?


  Because the change in price impacts a firms' total revenue and this is dependent on PED.
• What is the formula for revenue?


  Total revenue = price x quantity
• What are the three rules linking price and PEDs?

  • When demand is inelastic, price increase = revenue increase as a price rise is met by a less than proportional decrease in demand.
  • When demand is elastic, price increase = revenue decrease as a price rise is met by a greater than proportional fall in demand.
  • When demand is unit elastic, price changes don't affect total revenue.
• What is cross elasticity of demand (XED)?


  The responsiveness of a change in demand of one good, X, t a change in price of another good, Y.
• What is the arc elasticity formula for XED?


  %change in quantity demanded of good X / %change in price of good Y
• What is the point elasticity formula of XED?

  dQDx/dPy * Py/QDx
• What is the demand function for each good where also the price of the other good appears?


  QDx = a - bPx + cPy
• What are the two interpretations of XED?

  • Positive XED = Subsititutes - price rise in Good X increases demand for Good Y.
  • Negative XED = Complements - price rise in Good x causes the demand to fall
• What is the income elasticity of demand (YED)?


  The responsiveness of a change in demand to a change in income.
• What is the arc elasticity formula for YED?


  % change in quantity demand / % change in income.
• What is the point elasticity formula for YED?


  dQd / dY * Y/Qd
• What are the four interpretations of YED?

  • Positive YED = Normal good (e.g. dairy product)
  • Negative YED = inferior good (e.g. Aldi baked beans instead of Heinz)
  • YED > 1 = luxury good (e.g. a Rolls Royce)
  • 0 < YED < 1 = necessity (e.g. Water)