Microeconomics
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How individual markets work: supply and demand, elasticity, consumer choice, cost curves, competition and monopoly, game theory, externalities and public goods, labour markets and welfare analysis.
- What is the economic problem?
- Wants exceed the resources available to satisfy them, so every society must decide what to produce, how to produce it, and who gets it.
- What is opportunity cost?
- The value of the best alternative given up when a choice is made.
- What does a production possibilities frontier show?
- The maximum combinations of two goods an economy can produce when all resources are fully and efficiently used.
- Why is a production possibilities frontier usually bowed outward?
- Because resources are not equally suited to both goods, so shifting production toward one good means giving up ever larger amounts of the other.
- What is marginal analysis?
- Comparing the additional benefit of one more unit with the additional cost of that unit, and acting when the benefit is at least as large.
- What is the difference between positive and normative economics?
- Positive statements describe what is and can in principle be tested against evidence; normative statements say what ought to be and rest on values.
- What does ceteris paribus mean and why do economists use it?
- Other things held equal. It isolates the effect of one variable by holding the others fixed.
- Should a sunk cost affect a decision?
- No. A cost already incurred and unrecoverable is the same whatever you now choose, so it cannot change which option is best going forward.
- What is comparative advantage?
- The ability to produce a good at a lower opportunity cost than another producer.
- How does absolute advantage differ from comparative advantage?
- Absolute advantage means using fewer inputs per unit of output; comparative advantage means having a lower opportunity cost.
- What is the law of demand?
- Holding other things constant, a higher price reduces the quantity of a good buyers wish to purchase.
- What is the difference between a change in demand and a change in quantity demanded?
- A change in quantity demanded is a movement along the curve caused by the good's own price; a change in demand is a shift of the whole curve caused by anything else.
- What shifts a demand curve?
- Income, the prices of substitutes and complements, tastes, expectations about future prices, and the number of buyers.
- What is the law of supply?
- Holding other things constant, a higher price increases the quantity producers wish to sell.
- What shifts a supply curve?
- Input prices, technology, taxes and subsidies, expectations, the number of sellers, and for farms and fisheries the weather.
- What is market equilibrium?
- The price at which quantity demanded equals quantity supplied, so there is no pressure on price to change.
- What happens when price is held above the equilibrium price?
- Quantity supplied exceeds quantity demanded, creating a surplus, and sellers face unsold stock.
- What happens when price is held below the equilibrium price?
- Quantity demanded exceeds quantity supplied, creating a shortage, and the good is rationed by queues, waiting lists or informal payments.
- What is the difference between a normal good and an inferior good?
- Demand for a normal good rises with income; demand for an inferior good falls with income.
- What is the difference between substitutes and complements?
- Substitutes serve a similar purpose, so a rise in one price raises demand for the other. Complements are used together, so a rise in one price reduces demand for the other.
- What is a price ceiling and when does it bind?
- A legal maximum price. It has an effect only when it is set below the equilibrium price, where it creates a shortage.
- What is a price floor and when does it bind?
- A legal minimum price. It has an effect only when set above the equilibrium price, where it creates a surplus.
- Who bears the burden of a per-unit tax?
- Both sides, in proportions set by relative elasticity. The more inelastic side bears more of the burden regardless of who legally pays.
- What does a subsidy do to a market?
- It lowers the price buyers pay and raises the price sellers receive, increases quantity traded, and costs the government the subsidy times that quantity.
- How does a market coordinate production without anyone directing it?
- Prices carry information about relative scarcity and give people the incentive to act on it, so decentralised decisions add up to a broadly consistent plan.
- What is price elasticity of demand?
- The responsiveness of quantity demanded to price, measured as the percentage change in quantity divided by the percentage change in price.
- What is the midpoint formula for elasticity and why use it?
- It divides changes by the average of the start and end values, so the elasticity between two points is the same in both directions.
- When is demand elastic, unit elastic or inelastic?
- Elastic when the absolute value of elasticity exceeds 1, unit elastic at exactly 1, inelastic below 1.
- What determines whether demand for a good is elastic?
- The availability of close substitutes above all, plus the share of income spent on it, whether it is a necessity or a luxury, how narrowly the market is defined, and the time allowed to adjust.
- What is the total revenue test?
- If demand is elastic, a price rise lowers total revenue; if inelastic, a price rise raises it; at unit elasticity revenue is unchanged.