Economic Theory & Applications

Microeconomics aspect of the course covering semester 1 content

19 flashcards · Economics · by ambz1999

1. General Equilibrium Theory is general in two senses:

   (a) it is concerned with economies as inter-related systems: it is not concerned with parts of economies e.g. households, firms, the state being studied in isolation but with all these simultaneously (b) it is abstract

2. Welfare Economics

   is not the economics of the welfare state but a branch of economics concerned with evaluating whether or not a given set of economic arrangements is likely to lead to an improvement or a deterioration in the material welfare of the people affected

3. The Theory of the Invisible Hand

   The origins of GET and Welfare Economics can be traced back to the work of Adam Smith (1723-1790) This early form of economics is often referred to as the "theory of the invisible hand"

4. Commodity

   A commodity is some desirable thing or service capable of being legally bought and sold * Not all desirable things are commodities

5. Commodity examples

   Knighthood, votes, degrees, blood etc.. Note: Blood is a commodity in USA

6. Wealth

   A person's wealth is the stock of commodities owned by them at a given date. In theory, it is a list of all the commodities owned by them but in practice it is the sum of the market values of these commodities e.g. £33,760 / p.a.

7. Income

   A person's income is the maximum flow of commodities which they could consume over a given period without reducing the value of their wealth. It is almost always given as the market value of this flow of commodities e.g. £60,000/ year.

8. Wealth is a stock and income is a flow

9. What is a feasible set?

   The feasible set is the set consisting all the different collections of commodities which may be purchased by a given individual

10. To determine someone's feasible set you need to know:

    (a) the maximum the person can spend this is usually taken as income/week, month ... but: if we really mean what we say it must be entire wealth (b) the prices of everything the person might buy we usually assume there is a set price/ unit and that the person can buy as many as they like at that price *Only every assume there are two output commodities

11. Suppose you have a budget of £100 this week. There are only two commodities in your world: CDs and ‘Nights Out’. CDs cost £15 each, Nights Out cost £50 each. Is the bundle consisting of three CDs and one Night Out in your feasible set?

    Pf.Qf + Pb.Qf < B 15*3 + 50*1 < 100 Yes this is a feasible set.

12. The Budget Line

    The bundles cost exactly B (no more/less) form a subset of the feasible set which is called the budget line and are defined by the condition Pf.Qf + Pb.Qb = B

13. The budget line is also called the budget constraint

    *think about how choices are constrained by budget

14. The slope of budget line is the coefficient on qf which (ignoring the -ve sign) in pf/pb the ratio of the two prices

15. An increase in the income of the household enlarges the feasible set

16. An increase in income results in an outward parallel shift of the budget line

17. An increase in the price of a commodity restricts the feasible set

18. How many books can the person give up to gain one unit of food formula is pf/pb

19. Indifference curve

    an indifference curve through x is the set of all alt. which are as good as, but no better than x.