Economics Definitions Test Questions – Flashcards
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Equilibrium in a market economy...
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The equilibrium is where the demand and the supply curve of a product or service intersect.
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The concept of economic efficiency...
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.. using the least possible resources to produce goods and services which satisfy consumer needs & wants as fully as possible.
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The theory of consumer choice
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The utility and price ratio. The last $ spent on good A gives the same utility as the last $ spent on good B. MUa/Pa = MUb/Pb
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The law of diminishing marginal utility
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comes into play when the price of good A increases. The consumer will buy less of A and spend more on B to again reach the marginal equivalent conditions wher MUa/Pa = MUb/Pb
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Profit maximising firm
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will produce that quantity of output Q where: Marginal Revenue MR attained from each additional unit of output is = Marginal Cost MC incurred in producing it. MR = MC
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Profit maximising firm under perfect competition, which factors would all be equal?
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P = Average Revenue AR = Marginal Revenue MR = min. Average Total Cost ATC and therefore also = MC
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If we translate the consumer theory equation into the profit maximising firm under perfect competition perspective , how would it look like?
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Consumer theory: MUa/Pa = MUb/Pb. As P = MC in a profit maximising firm under perfect competition, MUa/MCa = MUb/MCb Similar as the consumer will the firm allocate resources to the product demanded.
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4+ types of Failures to the equilibrium market conditions
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1-Public goods Missing Markets (public goods with freerider problem) 2- Externalities,(affect 3rd parties) Social & private benefits/costs. Later always PrivateCs + ExternalCs = SC. Where EC then SC > PC. 3- Economies of scale - Lack of Competition in the Market (Monopoly, Oligopoly, Katells where MUm/MCm > MUn/MCn) 4- Income Distribution (taxes) 5- Unstable Prices mainly for commodities (rohstoffe) 6- Labor market failures (Ewage, unemployment, immobility & discrimination)
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Wages, how are they determined?
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The profit maximising firm following the productivity theory will hire additional unit of labor as long as the output gained = additional unit costs = MC = Value of marginal product VMP (extra revenue) => wages are determined by the demand & supply of silled/unskilled workers (scarcity)
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What happens if Labor costs go down?
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The MC curve will move to the right and the ATC down. It will cause a decrease in P =MR=AR. The supply curve will shift to the right and the quantity will increase.
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Engineering efficiency
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describes a situation in which a good of given quality is produced using fewest resources
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Economic efficiency
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subsumes engineering efficiency but requires that the good produced using the specified resources did not have a superior alternative.
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Any good or service the production of which requires scarce resources is, by definition?
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not a free good.
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Marginal analysis
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the technique for analysing incremental changes in resource allocation and evaluating the marginal benefits and marginal costs
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Marginal Product MP of an input is:
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the change in output when one additional unit of variable input is added
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Average Product AP of an Input is:
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AP = TP/Qinput. the output of each unit of input. the total product TP divided by the number of units of variable input used.
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The production frontier identifies for any given variable input level (labour in this case) the maximum possible output; the frontier traces all possible maximum outputs for all possible inputs. Maximum possible output for a given level of inputs constitutes
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technical or engineering efficiency.
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What actions would support a decrease of a deflationary gap?
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decrease taxes increase unemployment compensation increase gov expenditures - stimulate exports increase aggregate demand
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What actions would support a decrease of an inflationary gap?
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reduce Government expenditure reducing unemployment compensation increase Income T increase imports decrease aggregate demand.
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What does MEC stand for? And which Formula applies for the utility masimising households?
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Marginal Equivalency Conditions MUa/Pa = MUb/Pb
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What's the formula of Economic Efficiency in the public sector?
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MSBx/MSCx = MSBy/MSCy
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How would you calculate the materialistic well-beeing of each person in a country?
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total income / population of a country
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How would you calculate the Ntaional income of a country?
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National income of a country is the income earned by all the factor inputs which produce the total flow of goods and services usually measured over one year.
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If an economy tends to overheat. Contractionary actions on GNP (withdrawal from the circular flow of income) help prevent inflation. what actions could the Gov take?
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Monetary side: - increase interest rates (R) -> less credits - decrease supply of money (M) eg. sell Gov. bonds by Central Bank! Fiscal side: - decrease G, increase Taxes -> Budget Surplus - Wage regulations - Impots eg. trade agreements
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What are main Gov. goals?
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- Stable Economy (no inflation, deflation) - Low uneployment rate / full Employment - High, sustainable and stable growth rate of Y - Balanced Budget - Optimal mix of C, I, G, X and Z
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What are the condition defining a public good?
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1. Non-excludability (free riders) 2. Non-rivalery exists
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How do we call the variables in a macro economic model which are determined outside of the model? Make a key example to the Keynesian Economic Model
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Exogenous In the short run price is exogenous to a model attempting to explain GNP.
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How do we call the variables in a macro economic model who's behaviour are explained by the model ?
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Endogenous
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What's the formula for consumption function and what do the variables stand for?
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short run: C = a+bYd Long run: C = bY a = the amount of C independent of income b = MPC, the slop of consumption function Marginal Propensity to consume = Change in C/Change in Yd Yd = disposable real income (income - taxes + transfers)
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The 3 functions of Money
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Medium of exchange unit of account store of wealth
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What is velocity?
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The number of times money flows through the economy in a year. (umlaufgeschwindingkeit)
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What are the 3 demands for Money? and what are the influancers?
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Transactional demand (1. level of income, 2. Interest rates Precautionary (Vorsorge) (1. level of income, 2. int. rate, inverse influance) Speculative (Liquidity preference, better return opportunities) High int. rate causes low money demand & high investment demand.
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What are Anti-Inflationary policies?
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increase unemployment budget surplus change future EXPECTATIONS
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Monetarists believe in the Quantity Theory. what do they define as exogenous and what in their view is the best way to fight inflation & rescessions?
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Demand & supply of Money are exogenous money supply is the best way to fight inflation
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Keynesians, what do they define as exogenous? and what do they believe is the best tool to fight inflation & rescessions?
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They define demand &
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What are the elements of a sample budget? And which ones are controlled directly by the Gov.?
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Expenditure= (G + Transactions W + Transactions U) Income = (T-rate x Y + VAT rate x C) Controlled by G: G, T-rate & VAT rate
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What is the formula of U?
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U = f(Q-Y)
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Define Recession and the which factors changing indicating a recession
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A significant decline in economic activity lasting 6-18 month of negative growth measured by GDP. Interest rates usually fall GDP , Employment (U) and retail sales (C)
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Define Stagflation
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A condition of slow economic growth and relatively high Unemployment (stagnation) accompanied by rising prices or Inflation.
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Define the Keynesian Economics
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An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.
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How do we call goods for which the demand sinks if Income increases?
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Inferior goods
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What are the 5 factors influancing Demand?
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Tast Substitutes Expectations Income Complimentary
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What's the formula to calculate the elasticity of the demand or supply curve?
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change in Q/Q divided by change in P/P or if we only have the change in %: %ge change in quantity demand/%ge change in price
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Under which circumstances do we reach max effect of the multiplier?
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1. High MPC on domestic products 2. high U (so it can decrease) 3. Increase in MS 4. No Increase in interest rate R
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What does MEI stand for and how is the curve constructed and what does it indicate?
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Marginal efficiency of Investment. MEI is constructed by rank ordering investement opportunities from the highest rate of return to the lowest. Thus the negative slope! It indicates the rate of return of different levels of investement.
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What are the formulas for MR, AR and TR?
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Marginal Revenue = changeQ x P / changeQ Average Revenue = Q x P / Q Total Revenue = Q x P
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Not all returns to factor inputs are determined by marginal productivity theory. Can you give 3 examples?
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1. Economic Rent (the difference between the VPM of a factor of prodcutcion in its most productive use and in its next best alternative) 2. Monopsony (only one buyer, eg. only major employer of labour in town, wage < VMP) 3. Trade Unions (represents a group or all resource owners in a market.)
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Inflation may have undesirable social and economic effects. Name 5 aspects.
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1. Inflation impairs the efficiency of price mechanism 2. Penalises people on fixed income 3. favours borrowers & penalizes lenders 4. redistribution from private to public sector in unindexed tax systems. 5. If locally higher than elsewhere -> high Z, low X
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What's the demand-pull inflation explanation?
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Excess demand, higher than capacity output of the economy
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What's the cost-push inflation explanation?
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Prise rise as a consequence of bargains struck in the factor market increasing production costs which they pass on to consumers.
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What's the formula of the Quantity Theory?
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MV = PY or in the naive MV=PT Money supply x Velocity = Price x total transactions or Income Y
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Cost-push hypothesis - Expectation inflation, what are the 3 forms?
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Static - "tomorrow will be just like today" adaptive - more flexible than static rational - assumes some information for everyone - Efficient Market Hypothesis
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Lower inflation, Keynesians and Monetarists agree, can only be done by reducing demand. How they would do it differs though, what would each of them emphasize?
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The Keynesians empfhasize the importance of fiscal policy. Monetarists the need to control the Money Supply.
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A natural rate of unemployment exists when what kind of unemployment is zero? And what are the then still existing elements of unemployment ?
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Demand deficient unemployment is zero. Frictional, structural and seasonal elements still exiist.
