Microeconomics for CFA L1

question

GDP Deflator

answer

% Chg in QD of Good A/% Change in Price for Good B
20%/-10% = -2 -> The good is a compliment, because we demand more of Good A, when we can afford more it's a complement
-20%/-10% = 2 -> The goods are substitutes because we demand less of good A when the price of good B goes down. We demand less of Good A and opt for Good B.
-20%/10% = -2 -> The good is a substitute, We demand less of Good A

question

real GDP per capita

answer

1415

question

formula for cross-price elasticity of demand

answer

The net effect is the sum of the substitution effect and income effect.

question

# of concepts for the CFA

answer

Describes how consumption varies with prices and utility h(p1...pn, u)

question

Net Effect (Substitution and Income)

answer

shift the curve, only changing the y-intercept, slope does not change

question

Hicksian demmand

answer

move us along the supply/demand curve but don't shift it

question

For the demand curve, changes in income and wages

answer

To the right, people will buy more at every price

question

Changes in price and quantity

answer

Q = -64 + 37Px - 7.5w (where P is price and w is wages)

question

An increase in income shifts the demand curve

answer

Qdx = 2 - .4Px + .05I + .15Py (Where Px is the price of the first good and Py is the price of a second good and I is income) A positive sign in front of Py means we have a substitute product.

question

Equation of Supply Curve

answer

Solve for Px, ie. Px = 15.9 - 2.5Qx

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Demand Function

answer

Solve for Px

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Inverse Demand Function

answer

Shifts inward/left, willing to supply less at every price

question

Inverse Supply Function

answer

1. Start with the demand function 2. Multiply each term by the number of buyers 2. to find the new demand curve solve for Px.

question

If wages increase, the supply curve

answer

i.e. 6360 - 400Px = -1116 + 300Px
Px = 10.68

question

Aggregate demand curves

answer

The coeff of the slope of the supply curve is positive, the coeff of the slope of the demand curve is negative

question

Equating the supply and demand function will give us equilibrium price (partial equilibrium) full equilibrium includes wages and income.

answer

Buyers keep buying based on an idea that the value will go up

question

When there is stable equilibrium, the coefficients of the supply and demand curve

answer

Qdx = 6360 -400(12) = 1560
Qsx = -1116 + 300(12) = 2484
Excess supply = 2484-1560 = 924
Subtract Qd from Qs

question

When there are bubbles

answer

Subtract Qsx from Qdx
3160-1284 = 1,876

question

Find the excess supply when Px = 12

answer

Competitive and non-competitive bids are entered at different price levels. The price is dropped until all inventory is accounted for. All bids are filled at the last price level. https://image.slidesharecdn.com/wasim-120331103946-phpapp01/95/dutch-auction-20-728.jpg?cb=1333192825

question

Find excess demand when Px = 8
Qdx = 6360 -400(8) = 3160
Qsx = -1116 + 300(8) = 1284

answer

57:52 Surplus

question

Modified Dutch Auction

answer

total expenditure = P * Q

question

Left off at Video one

answer

Use 1/2bh to figure out consumer surplus, height = intercept - price

question

total expenditure

answer

downward, buyers want to buy less at every price

question

consumer surplus on a graph

answer

Change in Q/Change in P will give you the price coeff/slope

question

price ceiling

answer

Qdx = 11,200 - 400(3) = 10,,000
Edpx = -400(3/10,000) = -.12
If the price elasticity of demand is < 1, then the demand is inelastic

question

price floor

answer

the more elastic demand gets, people will buy less at higher prices

question

An increase in taxes shifts the demand curve

answer

demand is not very sensitive

question

Own price elasticity of demand

answer

demand is very sensitive

question

Calculate price elasticity of demand at a price P=3
Qdx = 11,200-400Px

answer

Edpx = 1

question

As price moves up the downward sloping demand curve,

answer

Edx = 0

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Inelastic

answer

Edx = infinity

question

Elastic

answer

More elastic, people will cut back if price increases

question

unit elastic

answer

Inelastic/less elastic, people will cut back very little if price increases

question

perfectly inelastic

answer

If it's a small part of budget, it's more inelastic, we'll be insensitive to price changes

question

Perfectly elastic

answer

results in greater quantity demanded and an increase in total expenditure

question

If availability of substitutes is high

answer

results in greater quantity demanded and a DROP in total expenditure

question

If availability of substitutes is high

answer

Quantity demand at each price increase by .8% for each 1% increase in income
If EdI > 0 normal good
If EdI < 0 inferior good

question

Elasticity in regards to % of budget a good represents

answer

1. Completeness - consumers know their preferences, they can be ranked
2. Transitivity - Preferences are transitive A>B, B>C, A>C
3. Non-satiation - consumers prefer more

question

When demand is elastic, a fall in Px

answer

MRS = Y/X - the slope of the line, as Towards the right of the indifference curve we are willing to give up very little of the y-axis item to receive a little bit of good x, smaller slope

question

When demand is inelastic, a fall in Px

answer

The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater

question

if Income Elasticity of demand = .8

answer

On an indifference curve, if income goes up, the indifference curve will shift out to the right

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Utility Theory

answer

We are willing to buy more

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Graph of Perfect Substitutes

answer

We will consume less of that good

question

Graph of perfect compliment

answer

decreases, demand becomes more elastic, we can buy more for less

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Marginal Rate of Substitution (MRS)

answer

there will be a substitution effect, more substitutions and income effect, real income increases

Substitution is a movement along the initial indifference curve, income accounts for the rest of the change in quantity

question

The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater

answer

There will be more substitutions, we move to the right along the indifference curve, the income effect decreases the quantity we purchase

question

On an indifference curve, if income goes up, the indifference curve will shift out to the right

answer

an inferior good, for which the income effect overpowers the substitution effect where S-I is not greater than 0

A company sells a Pom Pilot, as the price drops for the product people find it less and less attractive to buy

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If income increase for a normal good

answer

Higher prices indicate to consumers that the good is more valuable, status products

question

If income increases for an inferior good

answer

This is a normal return

question

As price for a normal good decreases, the slope of the line tangent to the distance curve

answer

This is an abnormal return

question

For a normal good, if price drops

answer

Price X Quantity

question

For an inferior good, if price drops

answer

Horizontal, no matter how much it makes it can't effect the price

question

What is a Giffen Good

answer

Total Revenue/ Quantity = Price

question

What is a Veblen good?

answer

When all companies sell identical products, market share does not influence price

question

If accounting profit - opportunity costs = 0 (Opportunity cost is Required Rate of Return)

answer

AFC + AVC (Avg fixed cost + avg variable cost)
The min of the ATC shows the min/cost per unit

question

If accounting profit - opportunity costs > 0

answer

The marginal cost is the change in the total cost that arises when the quantity produced is incremented

question

Total Revenue =

answer

At point a, the firm profit < 0 because price is lower than cost. This is a shutdown point.

question

An individual firm's demand curve is...

answer

At point B, the economic breakeven has been reach, TR=TC, ROE=RRR, above B Accty profit > 0

question

Average revenue =

answer

Short-run | Long-run
Below A - shutdown | Leave
A-T - produce | leave
Above B - produce | stay

question

Perfect competition

answer

MR=MC Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.

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Production Function

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Output or Q

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Total fixed cost

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Quantity/Quantity of Labor

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Average Total Cost (ATC)

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chg in Q/ chg in labor

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marginal cost curve

answer

The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output. After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns.

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Shutdown point

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Marginal product of labor is a measurement of a change in output when additional labor is added. However, all other factors remain constant. To calculate marginal product of labor you simply divide the change in total product by the change in labor.

question

Breakeven

answer

Gives us the additional output (units) of product we get for an additional $1 of labor

question

Summary of cost curve analysis

answer

Gives us the additional output in unit we can get by adding $1 of capital

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Profit maximization

answer

Increase output by adding labor until the two are equal

question

What happens to prices in an increasing cost industry, decreasing cost industry and constant cost industry?

answer

What combination of two inputs will allow us to produce something for the least amount of cost.?
We have optimized production when the Marginal Product (MP) of adding one more unit of labor = the marginal product of adding one more unit of capital.
i.e. MP/Price of one unit of labor = Additional Productivity added per unit of labor
$100 of perfume/$20 of labor of one human, I get 5 times as much in productivity value

question

total product =

answer

Profit is maximized when MRP/Pl = l
If MRP/l > 1 then add labour

question

avg product =

answer

Look at the sign in front of the price of good B. Qdx = 8.45 - 6.39Px + .25I - 2Py (Py represents price of good B)
Negative = complement
positive = substitute

question

marginal product =

answer

The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously.

question

factors of production

answer

The concept that determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy. Start by determining the firm with the dominant strategy. The scenario in which one firm will always choose a certain strategy. Then, look at what the other firm would do when the dominant firm chooses that strategy. This will show us the Nash equilibrium.

question

diminishing marginal returns

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In the dominant firm model where there is a price leader, all competitive firms follow the price of the leader. The slope of the follower demand curve is steeper than the leader firms demand curve.

question

Marginal product of labor

answer

Sum of the squares of the top 50 firms' market shares
- Higher is closer to monopoly
- Max is 10 000

question

MPl/Pl (Marginal product of labor/price of labor)

answer

Sum of the market share of the n largest firms. Aproblem with this approach is it does not take into account elasticity of demand. When e of demand is high, there is near perfect competition.

question

MPk/Pk (Marginal product of capital/Price of capital)

answer

MC = P(1-1/price elasticy of demand)
40 = P(1-1/1.5)
P = 120

question

If marginal product of labor > marginal product of capital

answer

HHI is an index in which the market shares of n companies are squared and then added. A score of 2500 or higher indicates a high concentration.

question

rule of least cost

answer

old value - new value/ old value

question

Profit maximization of an input
profit is maximized at MR = MC or M/Mc =
MR = MP * P = MRP
MC = P input

answer

negative

question

How do we determine if a good is a compliment or a substitute using the demand function?

answer

positive

question

Courtnot Oligopoly

answer

We demand a lot more of a good when the price of it's compliment or substitute changes a little

We drive 2 more mile for every 1% decrease in the gas price
2:1 = 2

question

Nash Equilibrium

answer

A 2% increase in demand for Crest for every 3% price decrease in the price of toothbrushes
2/-3 = -2/3 which means the good is a compliment

question

Dominant firm model

answer

The price coeff of A * (Price of B/QD of A substituting the price of B)

question

Herfindahl Index

answer

associated with deflation, no matter how much money is pumped into the system, interest rates do not fall and people continue to hoard their money

question

concentration ratio

answer

undefined

question

Calculate the price a company will be most likely to set it's price at given price elasticity of demand 1.5, and marginal cost 40.

answer

undefined

question

HHI Index

answer

undefined

question

Percent Change Formula

answer

undefined

question

A complement will have a blank cross price elasticity of demand

answer

undefined

question

A substitute will have a blank cross price elasticity of demand

answer

undefined

question

When cross price-elasticity of demand is greater than 1

answer

undefined

question

when cross price elasticity of demand is greater than 0

answer

undefined

question

Calculating cross-price elasticity of demand of A

answer

undefined

question

A liquidity trap is

answer

undefined

1 of 95

question

GDP Deflator

answer

question

real GDP per capita

answer

1415

question

formula for cross-price elasticity of demand

answer

The net effect is the sum of the substitution effect and income effect.

question

# of concepts for the CFA

answer

Describes how consumption varies with prices and utility h(p1...pn, u)

question

Net Effect (Substitution and Income)

answer

shift the curve, only changing the y-intercept, slope does not change

question

Hicksian demmand

answer

move us along the supply/demand curve but don't shift it

question

For the demand curve, changes in income and wages

answer

To the right, people will buy more at every price

question

Changes in price and quantity

answer

Q = -64 + 37Px - 7.5w (where P is price and w is wages)

question

An increase in income shifts the demand curve

answer

Qdx = 2 - .4Px + .05I + .15Py (Where Px is the price of the first good and Py is the price of a second good and I is income) A positive sign in front of Py means we have a substitute product.

question

Equation of Supply Curve

answer

Solve for Px, ie. Px = 15.9 - 2.5Qx

question

Demand Function

answer

Solve for Px

question

Inverse Demand Function

answer

Shifts inward/left, willing to supply less at every price

question

Inverse Supply Function

answer

1. Start with the demand function 2. Multiply each term by the number of buyers 2. to find the new demand curve solve for Px.

question

If wages increase, the supply curve

answer

i.e. 6360 - 400Px = -1116 + 300Px
Px = 10.68

question

Aggregate demand curves

answer

The coeff of the slope of the supply curve is positive, the coeff of the slope of the demand curve is negative

question

Equating the supply and demand function will give us equilibrium price (partial equilibrium) full equilibrium includes wages and income.

answer

Buyers keep buying based on an idea that the value will go up

question

When there is stable equilibrium, the coefficients of the supply and demand curve

answer

Qdx = 6360 -400(12) = 1560
Qsx = -1116 + 300(12) = 2484
Excess supply = 2484-1560 = 924
Subtract Qd from Qs

question

When there are bubbles

answer

Subtract Qsx from Qdx
3160-1284 = 1,876

question

Find the excess supply when Px = 12

answer

question

Find excess demand when Px = 8
Qdx = 6360 -400(8) = 3160
Qsx = -1116 + 300(8) = 1284

answer

57:52 Surplus

question

Modified Dutch Auction

answer

total expenditure = P * Q

question

Left off at Video one

answer

Use 1/2bh to figure out consumer surplus, height = intercept - price

question

total expenditure

answer

downward, buyers want to buy less at every price

question

consumer surplus on a graph

answer

Change in Q/Change in P will give you the price coeff/slope

question

price ceiling

answer

Qdx = 11,200 - 400(3) = 10,,000
Edpx = -400(3/10,000) = -.12
If the price elasticity of demand is < 1, then the demand is inelastic

question

price floor

answer

the more elastic demand gets, people will buy less at higher prices

question

An increase in taxes shifts the demand curve

answer

demand is not very sensitive

question

Own price elasticity of demand

answer

demand is very sensitive

question

Calculate price elasticity of demand at a price P=3
Qdx = 11,200-400Px

answer

Edpx = 1

question

As price moves up the downward sloping demand curve,

answer

Edx = 0

question

Inelastic

answer

Edx = infinity

question

Elastic

answer

More elastic, people will cut back if price increases

question

unit elastic

answer

Inelastic/less elastic, people will cut back very little if price increases

question

perfectly inelastic

answer

If it's a small part of budget, it's more inelastic, we'll be insensitive to price changes

question

Perfectly elastic

answer

results in greater quantity demanded and an increase in total expenditure

question

If availability of substitutes is high

answer

results in greater quantity demanded and a DROP in total expenditure

question

If availability of substitutes is high

answer

Quantity demand at each price increase by .8% for each 1% increase in income
If EdI > 0 normal good
If EdI < 0 inferior good

question

Elasticity in regards to % of budget a good represents

answer

1. Completeness - consumers know their preferences, they can be ranked
2. Transitivity - Preferences are transitive A>B, B>C, A>C
3. Non-satiation - consumers prefer more

question

When demand is elastic, a fall in Px

answer

MRS = Y/X - the slope of the line, as Towards the right of the indifference curve we are willing to give up very little of the y-axis item to receive a little bit of good x, smaller slope

question

When demand is inelastic, a fall in Px

answer

The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater

question

if Income Elasticity of demand = .8

answer

On an indifference curve, if income goes up, the indifference curve will shift out to the right

question

Utility Theory

answer

We are willing to buy more

question

Graph of Perfect Substitutes

answer

We will consume less of that good

question

Graph of perfect compliment

answer

decreases, demand becomes more elastic, we can buy more for less

question

Marginal Rate of Substitution (MRS)

answer

question

The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater

answer

There will be more substitutions, we move to the right along the indifference curve, the income effect decreases the quantity we purchase

question

On an indifference curve, if income goes up, the indifference curve will shift out to the right

answer

question

If income increase for a normal good

answer

Higher prices indicate to consumers that the good is more valuable, status products

question

If income increases for an inferior good

answer

This is a normal return

question

As price for a normal good decreases, the slope of the line tangent to the distance curve

answer

This is an abnormal return

question

For a normal good, if price drops

answer

Price X Quantity

question

For an inferior good, if price drops

answer

Horizontal, no matter how much it makes it can't effect the price

question

What is a Giffen Good

answer

Total Revenue/ Quantity = Price

question

What is a Veblen good?

answer

When all companies sell identical products, market share does not influence price

question

If accounting profit - opportunity costs = 0 (Opportunity cost is Required Rate of Return)

answer

AFC + AVC (Avg fixed cost + avg variable cost)
The min of the ATC shows the min/cost per unit

question

If accounting profit - opportunity costs > 0

answer

The marginal cost is the change in the total cost that arises when the quantity produced is incremented

question

Total Revenue =

answer

At point a, the firm profit < 0 because price is lower than cost. This is a shutdown point.

question

An individual firm's demand curve is...

answer

At point B, the economic breakeven has been reach, TR=TC, ROE=RRR, above B Accty profit > 0

question

Average revenue =

answer

Short-run | Long-run
Below A - shutdown | Leave
A-T - produce | leave
Above B - produce | stay

question

Perfect competition

answer

question

Production Function

answer

Output or Q

question

Total fixed cost

answer

Quantity/Quantity of Labor

question

Average Total Cost (ATC)

answer

chg in Q/ chg in labor

question

marginal cost curve

answer

question

Shutdown point

answer

question

Breakeven

answer

Gives us the additional output (units) of product we get for an additional $1 of labor

question

Summary of cost curve analysis

answer

Gives us the additional output in unit we can get by adding $1 of capital

question

Profit maximization

answer

Increase output by adding labor until the two are equal

question

What happens to prices in an increasing cost industry, decreasing cost industry and constant cost industry?

answer

question

total product =

answer

Profit is maximized when MRP/Pl = l
If MRP/l > 1 then add labour

question

avg product =

answer

Look at the sign in front of the price of good B. Qdx = 8.45 - 6.39Px + .25I - 2Py (Py represents price of good B)
Negative = complement
positive = substitute

question

marginal product =

answer

question

factors of production

answer

question

diminishing marginal returns

answer

In the dominant firm model where there is a price leader, all competitive firms follow the price of the leader. The slope of the follower demand curve is steeper than the leader firms demand curve.

question

Marginal product of labor

answer

Sum of the squares of the top 50 firms' market shares
- Higher is closer to monopoly
- Max is 10 000

question

MPl/Pl (Marginal product of labor/price of labor)

answer

Sum of the market share of the n largest firms. Aproblem with this approach is it does not take into account elasticity of demand. When e of demand is high, there is near perfect competition.

question

MPk/Pk (Marginal product of capital/Price of capital)

answer

MC = P(1-1/price elasticy of demand)
40 = P(1-1/1.5)
P = 120

question

If marginal product of labor > marginal product of capital

answer

HHI is an index in which the market shares of n companies are squared and then added. A score of 2500 or higher indicates a high concentration.

question

rule of least cost

answer

old value - new value/ old value

question

Profit maximization of an input
profit is maximized at MR = MC or M/Mc =
MR = MP * P = MRP
MC = P input

answer

negative

question

How do we determine if a good is a compliment or a substitute using the demand function?

answer

positive

question

Courtnot Oligopoly

answer

We demand a lot more of a good when the price of it's compliment or substitute changes a little

We drive 2 more mile for every 1% decrease in the gas price
2:1 = 2

question

Nash Equilibrium

answer

A 2% increase in demand for Crest for every 3% price decrease in the price of toothbrushes
2/-3 = -2/3 which means the good is a compliment

question

Dominant firm model

answer

The price coeff of A * (Price of B/QD of A substituting the price of B)

question

Herfindahl Index

answer

associated with deflation, no matter how much money is pumped into the system, interest rates do not fall and people continue to hoard their money

question

concentration ratio

answer

undefined

question

Calculate the price a company will be most likely to set it's price at given price elasticity of demand 1.5, and marginal cost 40.

answer

undefined

question

HHI Index

answer

undefined

question

Percent Change Formula

answer

undefined

question

A complement will have a blank cross price elasticity of demand

answer

undefined

question

A substitute will have a blank cross price elasticity of demand

answer

undefined

question

When cross price-elasticity of demand is greater than 1

answer

undefined

question

when cross price elasticity of demand is greater than 0

answer

undefined

question

Calculating cross-price elasticity of demand of A

answer

undefined

question

A liquidity trap is

answer

undefined

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