Economics questions and answers

Q1. What is opportunity costs The cost of anything is what you have to give up to get it. Economists call this 'opportunity cost'. It is the value of the next best alternative that must be forgone in order to engage in the action. We say that the cost of any action is measured in terms of forgone opportunities. When economists are considering costs, they are referring to opportunity costs and not simply money or explicit costs. These costs arise because choices are made, in the face of scarcity. Q 2. What is microeconomics Microeconomics is an examination of individual agents, buyers and sellers real or corporate engaging in the buying and selling of factors of production, goods services and or experiences in a market which in certain conditions and subject to different constraints and systems may produce the most efficient and satisfactory use of all the Globe's resources for mankind. Q 3. Explain the law of demand Law of demand states that the quantity of goods that a person demands will increase if the price of those goods decreases; and decrease if the price of the goods increases all other variables remaining constant. Exceptions: Snob, Speculative and Giffen goods. Demand= F (P, Pog, Y, Taste) Q4. Define the income elasticity of demand Income elasticity of demand measures the responsiveness (in terms of percentages) of quantity demanded to changes in income. ΔQ ×100 ῃ=% Change in Quantity Demanded= Q______ % Change in Income ΔY × 100 Y Q5. Define the Law of Equi Marginal Principle Law of Egui Marginal returns state that utility is maximised when the utility of the last Euro spent on each good is the same. MUx=MUy Px Py Q6. What is the long run The long-run is a period of time when all the factors of production can be varied in quantity. The long-run production function shows combinations of inputs and the quantities of output produced. There are three possible relationships between inputs and outputs. The long-run production function may exhibit all three relationships over the range of production. Q7. What are externalities The efficiency of the market is based on certain assumptions. Behavioural, ethical and environmental and that market equilibrium represents the maximum utility and profit but also the optimum social outcome for all participants. An Externality is the failure of the market transaction to take all costs or benefits of the transaction into account. (Spillover effects) Q8. What are economies of scale Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept . Marketing economies of scale: A large firm can spread its advertising and marketing budget over a large output and it can purchase its factor inputs in bulk at negotiated discounted prices . Financial economies of scale: Larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing. Managerial economies of scale: This is a form of division of labour. Large-scale manufacturers employ specialists to supervise production systems. Better management; investment in human resources. Q9. What are the assumptions of perfect competition Perfect competition is a model which describes idealised economic conditions that are rarely met in practice. It insists of a large number of small firms with no single firm large enough to influence price. Each firm is price taker. There is freedom of entry and exit and no entry barriers. A standartised product is sold. All informed about prices, profits and quality. As a result, perfectly competitive firms cannot make supernormal profit in the long run. MR=MC Profit maximisation Q10. What is price discrimination Price discrimination occurs when a firm changes different prices to different customers for the same product for reasons other than differences in costs. There are two conditions necessary for price discrimination: 1. The producer must be able to classify consumer into separate groups. 2. The markets must be separated so that the products cannot be resold (i.e. arbitrage). _____________________________________________________________________________________________________________________________________________ What is the short run The short run is a period of time where there is at least one factor of production that cannot change. The quantity of a 'fixed'factor does not vary as the level of output varies. The fixed factor is generally land or machinery, with the latter falling into the general classification of capital. 1.The principle of scarcity There are scarce resources in society. Wants or needs exceed means or the limited resources that are available. Since resources are scarce, it follows that the goods and services produced must also be limited. In these situations of scarcity, choices must be made. In turn, these choices involve costs-there is no 'free lunch'. 2.The principle of a co-ordination mechanism As long as there is scarcity, there is a need for a co-ordination mechanism to allocate these limited resources and for rationing device to decide who gets what of the available resources. The two co-ordination mechanisms are: decentralised markets and centralised plans. The three fundamental questions in any economy: What to produce? How to produce? For whom to produce? 3.The principle of rational self-interested behavior Rational self-interested behaviour is based on the assumption that decisions are made that best serve the objective of the decision-maker. Rational economic agent will pursue actions that enable them to achieve their greatest satisfaction 4.The principle of incentives Economic agents respond to incentives. The behaviour of households, firms, governments and other organisations changes in response to incentives that they face. These incentives can be material, moral or a mix of both. 5.The principle of marginal analysis (cost-benefit principle) Economic decision-making is made at the margin. Economic actors make decisions by comparing marginal benefits with marginal costs. An action is taken only if the additional or extra benefits are at least as great as the additional or extra costs. 6.The principle of trade and exchange Trade, where exchange between both parties is voluntary, is mutually beneficial. Trade between individuals, firms or countries benefits both parties and increases national output. Trade and exchange increase society's well-beeing. 7.The principle of specialisation and the division of labour Specialisation allows each person to do what he or she can do relatively well while leaving everything else to be done by others. Division of labour, on the basis of different talents, skills, knowledge and intelligence, results in greater output produced. 8.The principle of comparative advantage Nations can engage in mutually beneficial trade by specialising in what they do relatively best. Countries concentrate on activities for which the opportunity cost is lowest. According to this principle, countries engage in international trade in order to take advantage of their differences. This is an application of the opportunity cost principle to international trade. 9.The principle of trade-offs Decision makers face trade-offs or conflicts. A trade-off is simply an exchange-giving up one thing in favour of another. Trade-offs exist because of scarcity. Of the most common, important and controversial trade-offs in pursuit of economic goals include efficiency vs. equity, unemployment vs. inflation (in the short run) and taxation vs. public spending. Demand is a specific term used by economists to explain consumers wants supported by the ability and desire to pay for a product. The demand curve illustrates the negative relationship between price and quantity demanded. Supply is specific term used by economists to explain the amount of a product supplied to the market. Price elasticity of demand measures the responsiveness (in term of percentages) of quantity demanded to changes in the price of the same product. Categories: Perfectly elastic e=-infinity Elastic e-1 Perfectly inelastic e=0 ΔQ ×100 ῃ=% Change in Quantity Demanded= Q______ % Change in Price ΔP × 100 P Price elasticity of supply measures the responsiveness (in terms of percentages) of quantity supplied to changes in price. The elasticity coefficient is usually positive. Its magnitude depends on the availability of inputs. Marginal cost is the additional cost incurred if output is altered by one unit. Marginal revenue is the change in total revenue arising from a one unit change in output. In the short run, a profit maximasing firm produces where marginal revenue equals marginal cost so long as it has covered all of its variable costs. Economics is a science which studies human behaviour in distributing scarce recourses, which have alternative uses, in such a manner as to attempt to satisfy the infinite wants of mankind. Resources: land, labour, capital, enterprise. What is market A market is a place, situation and or occasion where consumers and producers buy and sell goods and service value. This value may be a price in the case of money other goods and services in the case of barter. Market exists everywhere. Explain the law of supply Law of supply states that the quantity of goods a producer will supply will increase if the price of those goods increase and decrease if the price of those goods decreases. Supply= function (P, C,G,Tec,) Exceptions: Capacity, Fixed supply and below cost supply. What is a Price control In a market economy, price is determinate by demand and supply. In planned economy, it is government, through a particular department or pricing authority decides not only which products to produce, but what price to charge. Price controls are particularly common during periods of crisis like wars or natural disasters. Price controls are government regulations which limit the ability of the market to determinate price. Two types of price controls: Maximum price: A Price ceiling is a maximum price on a product legislated by the government. It usually imposed in times of scarcity. Without the imposition of price ceiling, scarce supply would usually result in a high equilibrium price. The government want to make products such food or fuel more affordable and sets a price below high equilibrium price. Any price level below the equilibrium results in excess demand. Protects consumer in times of crises, creates excess demand, black economy and rationing. Minimum price: A Price floor is a minimum price legislated by government on a product. When implemented, the seller is not legally permitted to sell the product below this price. The basic purpose of a price floor is to help producers. Any price level above the market price results in excess supply. Protects producer in time of low prices, creates excess (nadwyzka, nadmiar) supply, intervention, dumping, quotas. Market structure Market structure is an attempt to identify (to proba identyfikacji) different types of companies that can evolve depending on the level of competition in the market place. Main classification: PERFECT, MONOPOLISTIC, OLIGOPOLY, MONOPOLY. PERFECT- million buyers, sellers MONOPOLISTIC- combination of perfect and monopoly market OLIGOPOLY- only few players in the market MONOPOLY- only one firm Define the Monopoly market structure Only one firm with unique product, barriers to entry, control the supply or making the prices, getting super normal profits, price discriminator. MR=MC Profit maximisation A monopolist is the sole producer in the market. It is a price maker. There are barriers to entry. A unique product is sold with no close substitutes available. As a result, the monopolist can make supernormal profit even in the long run. A monopolist can also increase its profits by engaging in price discrimination. Define Imperfect competition – Monopolistic Large number of firms, differentiated (zróżnicowane) products, no barriers to entry (everybody can entry), lack of information, advertising/ non price competition ( bez konkurencji cenowej). MR=MC Profit maximisation Monopolistic competition is similar to perfect competition, with one important exception : products are differentiated. Products are close rather than perfect substitutes for each other. The short run equilibrium is similar to the monopoly equilibrium and the firms can earn supernormal profits in the short run, but freedom of entry ensures that only normal profits are earned in the long run. A firm in this market does not produce at the lowest possible cost per unit. Define Oligopoly classification of market structure Few firms- just few players, collusion (zmowa)/ Cartel, kinked demand curve ( załamana krzywa popytu), lack of information, different market segments and elasticities, Luxury, middle and economy MR=MC Oligopoly is another example of imperfect competition. In oligopoly, the actions of firms are interdependent. Each firm tries to anticipate the action and reactions of its competitors when formulating and implementing its own strategy. Oligopoly models divided into two: 1.those that assume collusion 2. Those that assume competition. Marginal revenue is the change in total revenue resulting from a one unit change in output. MR=ΔTR ΔQ Neoclasscal. Economics defined: study of how individuals choose to allocate scare resources among alternative uses. Focus of analysis: consumer and firm. Behaviours analysed: choices made by consumers and producers. Relationship between actors: harmonious; based on implicit or explicit contracts. Technology: assumes harmonious implementation of new technology as it is developed. Political system: libertarian democracy. Institutional. Economics defined: study of how institutions regulate the production of goods and services. Focus of analysis: institutions Behaviours analysed: regulation of the boundaries of individual choice. Relationship between actors: based on exiting or new institutional relationships. Technelogy: institutional arrangements facilitate the development and adoption of new technologies. Political system: interventionist democracy. Marxian. Economics defined: study of the social relations that people enter into in the course of production and how these relationships change over time. Focus of analysis: classes or groups who share common interests, particularly the ownership of the factors of production. Behaviours analysed: straggle between the classes in the pursuit of economic interests. Relationship between actors: conflictual;disagreements about the distribution of resources among classes. Technology: implementation of technology may lead to class struggles. Political system: communist/ socialist.

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