Microeconomics Concepts Quiz

Demand & Supply

• Microeconomics begins with scarcity, meaning limited resources exceed human needs. This forces economic agents (consumers, businesses, governments, banks) to make choices.
• Market price and quantity are influenced by demand and supply.
• Demand is the quantity a customer is willing to buy at various prices during a specific period.
• Supply is the quantity producers are willing to offer at different prices during the same period.
• Both demand and supply curves are U-shaped, downward-sloping (convex to the origin) for demand, and upward-sloping (cannot be negative, but can start from zero) for supply.

General Demand & Supply Factors

• Demand:

  • Price: Higher prices decrease demand, lower prices increase demand.
  • Income: Higher income increases demand (except for inferior goods).
  • Related goods: The price of related goods influences demand (complementary or substitute).
  • Population: Increased population generally increases demand.
  • Taste: Changes in customer preferences impact demand.

• Supply:

  • Price: Higher prices increase supply to maximize profits.
  • Production Cost: Increased costs limit the willingness to supply more.
  • Related Goods: Prices of related goods (complementaries) affect supply.
  • Government Policies: Policies like regulations impact supply decisions.
  • Future Price Expectations: Expectations on future prices influence present-day supply.

Demand-Income Relation

• Normal Goods: Demand increases with income.
• Inferior Goods: Demand decreases with income.
• Giffen Goods: A specific type of inferior good where demand increases as price rises.
• Cross-Price Effect: Change in demand for one good due to a price change in another good.
  • Substitute Goods: If the price of one good rises, demand for a substitute good increases.
  • Complementary Goods: If the price of one good rises, demand for a complementary good decreases.

Elasticity

• Elasticity is the percentage change in quantity divided by the percentage change in price.
• Perfectly Inelastic: Elasticity = 0. Demand is unresponsive to price changes.
• Inelastic: Elasticity < 1. Demand is relatively unresponsive to price changes.
• Elastic: Elasticity > 1. Demand is highly responsive to price changes.
• Perfectly Elastic: Elasticity = ∞. Demand is infinitely responsive to price changes.
• Unit Elastic: Elasticity = 1. Percentage change in quantity demanded equals percentage change in price.

Budget Line

• A budget line shows all possible combinations of goods and services that can be purchased with a certain budget.
• It is always a straight line concave to the origin.

Utility

• Total Utility: Overall satisfaction from consuming a quantity of a good or service.
• Marginal Utility: Extra satisfaction gained from consuming one more unit of a good.
• Diminishing Marginal Utility: Marginal utility decreases as more units of a good or service are consumed.
• Rational Choice: Consumers aim to maximize total utility while considering marginal utility and budget constraints.

Indifference Curves

• Graphical representation of various combinations of two goods that provide the consumer with the same level of satisfaction.
• Downward sloping, concave to the origin.
• They do not intersect.

Production Theory

• Production involves using factors of production (land, labor, capital, and entrepreneurship) to create goods and services.
• Production Possibility Frontier (PPF): A graphical representation of the maximum possible output combination given the available resources and technology.
• Implicit Cost: Cost of forgone opportunities.
• Explicit Cost: Actual out-of-pocket expenses.
• Opportunity Cost: Cost of the next best alternative forgone.
• Break-Even Point: Where total cost equals total revenue.
• Equilibrium Point: Where supply equals demand in a market.
• Economies of Scale: Reductions in average cost as production increases.

Law of Diminishing Marginal Returns

• Increasing one input (such as labor) while holding other inputs constant will eventually lead to diminishing increases in production.

Cost Functions

• Relationship between production (inputs) and costs.
• Total Cost (TC): Sum of fixed cost (FC) and variable cost (VC).
• Marginal Cost (MC): The change in total cost resulting from producing one more unit of output.
• Average Total Cost (ATC): Total cost divided by the number of units produced.

General Microeconomic Key Points

• Marginal Productivity: Explains differing earnings based on input contribution (labor, rent).
• Nash Equilibrium: Participants' strategy decisions are independent of others decisions in a game, making changes in strategy not beneficial for a participant.
• Pareto Efficiency: A state where one participant cannot be made better off without making someone else worse off.
• Gini Coefficient: Measure of income inequality.
• Free Rider Problem: Benefiting from a public good without contributing.
• Veblen Goods: Luxury goods with increasing demand as price rises.

Market Structures

• Perfect Competition: Many buyers and sellers; homogeneous products.
• Monopoly: One seller with unique product; high barriers to new entry.
• Monopolistic Competition: Many sellers; differentiated products.
• Oligopoly: Few dominant sellers; interdependent firms.
• Duopoly: Only two sellers.

Macroeconomics

• GDP: Total value of goods and services produced within a country's borders.
• GNP: Total value of goods and services produced by a country's citizens, including earnings from abroad.
• NNP: Gross National Product minus depreciation.
• National Income: Wage, rent, and profit before taxes.
• Personal Income: Income earned by people after taxes and other obligations.
• Disposable income: Money left after taxes and obligations.
• Real income: Money adjusted for inflation.
• GDP Calculation (3 approaches):
  • Production: Sum of value added each stage of production.
  • Income: Sum of all income earned.
  • Expenditure: Sum of all expenditures.

Inflation & Deflation

• Inflation: Rising prices, decreasing purchasing power.
• Deflation: Falling prices, increasing purchasing power.
• Nominal GDP: Uncorrected GDP measures.
• Real GDP: Adjusted GDP for inflation.
• Recessions: Negative economic growth periods.
• Depressions: Severe and prolonged recessions.
• Economic Models:
  • Classical Model: Free Market
  • Keynesian Model: Government Intervention

Fiscal and Monetary Policy

• Fiscal Policy: Government spending and taxation to manage the economy.
• Monetary Policy: Central bank actions to control money supply and credit conditions.

Unemployment

• Cyclical Unemployment: Driven by economic downturns (recessions).
• Frictional Unemployment: Temporary unemployment between jobs.
• Structural Unemployment: Unemployment due to mismatch between skills and job market demands.
• Key Economic Sectors:
  • Primary: Direct resource use (agriculture, mining).
  • Secondary: Manufacturing.
  • Tertiary: Services (retail, finance, tourism).

Money and Banking

• Functions of Money: Medium of exchange, store of value, unit of account, standard of deferred payment.
• Reserve Bank of India (RBI): Issuing currency, managing exchange reserves, and regulating banks.
• RBI Monetary Tools: Statutory liquidity ratio (SLR), cash reserve ratio (CRR), open market operations (OMO), and repurchase agreements (REPO).
• Commercial Banks: Accept deposits, make loans, support transactions (cheques, transfers, electronic payments).

International Trade

• Balance of Trade: Difference between a country's exports and imports of goods.
• Balance of Payments: Record of a country's transactions with the rest of the world.
• Current Account: Exports, imports, income, and current transfers.
• Capital Account: Capital transfers and ownership of non-produced assets.
• Financial Account: Foreign investment (direct and portfolio).
• Foreign Exchange Reserves: A country's central bank holds these reserves for stability.
• Foreign Direct Investment (FDI): Long-term investment in a business activity.
• Foreign Institutional Investors (FII): Short-term investments in financial assets (bonds, stocks).

Public Finances

• Taxes: Government revenue from income, consumption, property, and other sources.
• Direct Taxes: Paid directly by taxpayers.
• Indirect Taxes: Paid indirectly through goods/services.
• GST: Comprehensive value-added tax; widely implemented in India.
• Government Budgeting: Estimating revenue and planning expenditures.
• Capital Budget: Managing assets and investments.
• Revenue Budget: Managing recurring revenue and expenditure.
• Budget Deficit: Difference between total expenditure and total receipts.
• Fiscal Deficit: Budget deficit excluding borrowing.

Nationalisation, Privatisation and Disinvestment

• Nationalization: Transferring ownership and control from private to public sector.
• Privatization: Transferring ownership and control from public to private sector.
• Disinvestment: Reducing government stake in a public sector enterprise (e.g., by selling shares)

Economic Planning

• Imperative Planning: Centralized government planning regarding production and distribution.
• Indicative Planning: Government provides guidelines, but private sector retains flexibility.
• Perspective Planning: Long-term planning covering several years.
• Rolling Plan: Updated and revised plan regularly to allow for feedback

Environmental Reforms

• Cost-Benefit Analysis : Assessing economic and environmental factors.
• Environmental Valuation: Assigning economic values to environmental benefits in order to gain more support for conservation or restoration measures.
• Green GDP: Modifying GDP to account for environmental effects of production/consumption.
• Carbon Trading: Market system for trading emission permits in order to limit emission levels.
• UNFCCC: United Nations Framework Convention on Climate Change
• Kyoto Protocol: International agreement on reducing greenhouse gas emissions.

Sustainable Development Goals

• The global effort to improve conditions and create a better future for all

Economic Laws and Theories

• Say's Law: Supply creates its own demand.
• Phillips Curve: Inverse relationship between inflation and unemployment.
• Laffer Curve: The relationship between tax rates and tax revenue.
• Trickle-Down Economics: Benefits for wealthy will "trickle down" to others.
• Multiplier Effect: Initial spending leads to greater increases in income and activity.