ECO402 FAQs by VUBuddy

ECO402 - Microeconomics FAQs By

Question: How does opportunity cost relate to problem of scarcity?

Answer: The problem of scarcity exists because of limited production. Thus, each society must make choices about what to produce and how to produce. The opportunity cost of what to produce consists of the goods and services which are sacrificed in order to produce the selected combination of goods and services. For example, the opportunity cost of producing military goods is the quantity of consumer goods that is not available because of decision to produce military goods.

Question: What is the difference between a shift in demand(supply) and a movement along the demand(supply) curve?

Answer: Change in price of a good or service leads to Change in quantity demanded. It causes the movement along the demand curve. Change in income, preferences, or prices of other goods or services leads to Change in demand. It causes the shift of demand curve.

Question: What is the difference between 'scarcity' and 'shortage'?

Answer: ' Scarcity' and 'shortage' have different definitions. In reality, when most of the goods and resources are scarce goods, we called this phenomenon 'scarcity'. On the other hand, 'shortage' is defined as the situation where the quantity demanded is greater than the quantity supplied because the market price is lower than the equilibrium price.

Question: Why does Excess Demand tend to raise the price of a good while Excess of Supply tends to reduce prices?

Answer: Excess Demand is a situation in which the quantity demanded exceeds the quantity supplied. This situation is created when prices are below the equilibrium. Thus, price tends to rise until it reaches the equilibrium where the quantity demanded equals the quantity supplied. Excess Supply is a situation in which the quantity supplied exceeds the quantity demanded, that happens when prices are above the equilibrium. Therefore, price tends to reduce until it reaches the equilibrium.

Question: Define demand.

Answer: Desire refers to people's willingness to own a good. Demand is the amount of a good that consumers are willing and able to buy at a given price.

Question: Is the indifference curve be upward sloping ?

Answer: Indifference curve cannot be upward sloping because if it sloped upward it would violate the assumption that more of any commodity is preferred to less.

Question: Differentiate between arc Elasticity of demand and

Answer: Point Elasticity of demand. Numerical value of price elasticity of demand at a point of a demand curve is known as point elasticity. In Microeconomics formula for point elasticity is as follows: E = (-) dQ/dP P/Q Arc elasticity: Any two points on the demand curve form an arc and the price elasticity between any two points making an arc on a demand curve is known as arc elasticity of demand.

Question: Define “network externalities”?

Answer: Network externalities are the effects on a user of a product or service of others using the same or compatible products or services.

Question: Differentiate between positive and negative network externalities.

Answer: Network externalities can be positive or negative. A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers. A negative network externality exists if the quantity of a good demanded by a consumer decreases in response to an increase in purchases by other consumers.

Question: What is meant by utility?

Answer: The satisfaction, or pleasure, that people receive from consuming a good or service. Utility received from consumption of goods or services varies from person to person.

Question: Differentiate between total utility and marginal utility.

Answer: Total utility: the amount of satisfaction received from all the units of a good or service consumed. Total utility is measured in mythical units called "utils." Marginal utility: the change in total utility from one additional unit of a good or service. Marginal utility measures the amount of extra utility received from consuming each additional unit.

Question: In which case MU will be zero and negative?

Answer: Marginal utility is zero when a person receives no satisfaction from consuming an additional unit. Marginal utility is negative when a person receives dissatisfaction from consuming an additional unit.

Question: What is meant by consumer equilibrium? In which case consumer will be in equilibrium?

Answer: A condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good. A consumer will be in equilibrium if the marginal utility per last dollar spent on each good is equal and the entire budget is spent, total utility is maximized.

Question: Differentiate between explicit cost and implicit cost.

Answer: Explicit costs: Payments to non-owners of a firm for their resources. For example, wages, rent, utilities, etc. Implicit costs: The opportunity costs of using resources owned by the firm. No actual payment is made to outsiders.

Question: What is perfect competition?

Answer: Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand.

Question: What are the conditions of perfect competition?

Answer: 1-Large no of buyers and sellers 2-Free entry and exit 3-Homogenous product

Question: Can perfectly competitive firms earn economic profit?

Answer: In the short run, yes while in the long run the answer is no.

Question: What will be the effect of output tax on MC and output in competitive Firm’s output?

Answer: An output tax raises firm’s marginal cost by the amount of tax. And firm will reduce output to the point at which the marginal cost plus the tax equal the price.

Question: Differentiate between short run and long run?

Answer: In short run we are restricted as producer. We can not change our fixed factors but in long run a firm can alter all its inputs, including the size of the plant.

Question: What is graph?

Answer: “A graph is a two-dimensional representation of a set of numbers or data”.

Question: What does the slope show?