Microeconomic Theory Essay

1. Explain wherefore society faces a work-off between consumption goods and capital goods. Society is faced with trade off between consumption goods and capital goods in that resources ar scarce, and accordingly it has to make choices based on the opportunity be of benefiting from consumption at present or having a greater level of consumption tomorrow by dint of investment in capital goods.2. have sex between unassailable and comparative utility. Absolute advantage refers to that trade, which is not reciproc wholey favorable as opposed to a Comparative trade, where trade is reciproc aloney favorable. 3. Explain the lawfulness of Demand. The law of demand shows that as the charge of a service or good improvers, consumer demand for the service or good pass on subside and vice versa, provided all other factors remain constant. 4. Explain the Law of tote up The law of put up states that as the worth of a service or good increases, the measuring rod of services or goo ds tendered by suppliers increases and vice versa, provided all the factors remain constant. 5. Explain the cause of terms ceilings.It is a manakin of administration measure, where it fixes a limit on the price to be charged on a crossing. Effective price ceiling essential(prenominal) be diametrical from the handsome market price. A price ceiling positioned below the free market price ordain put suppliers in a state where they behind no longer charge what they had been charging, for that give awayicular product. This forget ram down some suppliers to move out of the market, hence reduction in the quantity sayd. On the other side quantity demanded allow for increase for the analogous product because consumers be able to buy at a start price.Since quantity demanded exceeds quantity produced, a wretchedage bequeathing occur and it will pass to non-price competition 6. Explain the effects of price floors. It is a kind of government measure where it imposes a limi t on the lowest price that heap be charged on a product and for it to be effective it must be set high uper than the symmetricalness price. When the price floor is position above the market symmetry price, consumers observe that they right off have to pay a higher price for that particular product.Suppliers, on the other part are ensured higher price than what they were charging before. This has the effect of change magnitude work, hence excess preparation of the product in the market. Thus to note price floor over a longer period, the government will be forced to take action to reduce the excess supply 7. Distinguish between private goods and public goods and apologize the nature of the free-rider problem. reclusive goods are the kind of goods whose profits, are indivisibly spread over the whole community, level if the individuals do not desire to purchase it.While private goods refers to the ones that are divisible and potbelly be provided sepa ordinately to various individuals, without external be or benefits to others. Positive externalities that are not remune valuated normally result from the production of public goods. When private organizations are not getting all the profits of a public good that they have produced, there will be no sufficient incentives to produce it voluntarily. Hence, consumers will take advantage of public goods without sufficiently contributing to their production.Distinguish between average impose treasures and marginal impose rates. intermediate tax rate refers to the get along amount of taxes paying(a) divide by income. It shows the sum of tax paid per dollar earned while marginal tax rate refers to the income tax rate paid on the coda dollar of income earned 9. Distinguish between average tax rates and marginal tax rates. Average tax rate refers to the total amount of taxes paid divide by income. It shows the sum of tax paid per dollar earned while marginal tax rate refers to the income tax rate paid on the last dollar of income earned10. Explain the bodily structure of the US income tax system. The structure of US tax system is very complex one that entails stipend to at least four various levels of government and m each shipway of taxation. US taxation comprises local government possibly consisting of one or more of township, municipal, county and district governments. It may also embrace regional entities like school and utility and transit districts as well as incorporating federal official government and state 11. unwrap how prices indexes are calculated and define the primeval types of price indexesPrice indexes refers to a standardized average or a weighted average of prices for a given category of services and goods in a given place, over a given intermission of eon Types of price indexes include consumer price index, producer price index and gross domestic product deflator 12. Distinguish between nominal and corporeal number have-to doe with group rates. Nominal interest is the rate of interest prior to adjustment for inflation in differentiate to real interest rate and it encompasses all three risk factors confident(p) the magazine value of cash in contrast to real interest rate, which includes only systematic and regulatory risks.Generally, real interest rate is catch to nominal interest rate minus inflation and currency adjustment. 13. Describe the circular guide of income and output. The circular flow of income and output shows joint flow of income between consumers and producers. The mutually supporting entities of consumers and producers, referred to as households and firms respectively offer distributively other with factors to facilitate the easy flow of income. Firms supply consumers with services and goods in exchange for consumer spending and factors of production from the household. 14. Define gross domestic product (gross domestic product).Gross domestic product is the total market value of all the final services and good s produced within a countrified over a given period. 15. Define stinting growth. Economic growth refers to the sturdy unconscious process by which the productive capacity of the economy is increased over time to produce growing levels of national income and output 16. Discuss the fundamental factors that put up to a nations stinting development. Policies of national development privation to be formulate in conformity with national postulates, development priorities and conditions and should accent on the lessons erudite from decades of development.International cooperation in the formulation and implementation of macroecomic policies need to be reinforcing with an analysis to enhancing greater lucidity and consistency of domestic policies and in so doing reinforcing their metier. 17. Describe the effect of economic growth on the long haul compound supply twist around. Economic growth will cause the conglomeration supply curve to shift. Positive economic growth will slip a way to increase in productive resources that will make it possible to produce more final services and goods, thus the subjective level of real GDP increases.Positive economic growth will make the LAS curve to shift to the right and vice versa 18. Discuss the meaning of the long-run equilibrium for the economy as a whole. Long run equilibrium refers to where the gist demand and long run nub supply curves intersect. Output is furbish up and the price level is variable in the long- run. Thus increases in amass demand leads to higher prices and vice versa 19. Discuss the primaeval assumptions of the classical model.The commutation assumptions of classical model are that it assumes that economic agents posses perfect information and the markets are characterized by perfectly flexible wages and prices. The result of these assumptions if functional on the short run with fixed capital stock is that output is moody by independent supply factors 20. Describe the short-run determination of equilibrium real GDP and the price level in the classical model. The aggregate supply-aggregate demand is the fundamental macroeconomic tool for studying output variations and the sink of the price level and inflation rate.The intersection of the aggregate demand and supply curves determines the economys equilibrium price level and equilibrium real domestic output 21. Distinguish between saving and savings and explain how saving and consumption are related. Saving refers to that process of constantly putt aside a sum of notes while savings is that income legitimate by a consumer not used in the output of firms through spending. Savings and consumption cornerstone be related in the equivalence where income is equal to the sum of savings and expenditure (consumption) 22. draw the primary determinants of intend investment. The primary determinants of a planned investment include the expected reaping from investments, the taxation of returns, the cost of capital in relation to interest rate and the ease of use of savings to meet investments 23. Discuss ways in which indirect crowding out and direct expenditures offsets can reduce the effectiveness of pecuniary policy actions. Inflation has an indirect outcome on external competitiveness. As prices increase, products tend to be more expensive relative to opposed products.This will result to reduced demand for exportings as compared to deductions. Net export being a parameter of aggregate demand will contracts GDP and partly offsets the expansionary fiscal policy. Expansionary fiscal policy makes interest rates to increase because the government must borrow to finance the increased deficit. The government raises revenues through taxes or borrowing. Hence, as the interest increases, private investment decreases. In the short run, it will decrease private investment demand, a parameter of aggregate demand and this will effectively lower GDP.Describe how certain aspects of fiscal policy function as spo ntaneous stabilizers for the economy. Automatic stabilizers are programs that mechanically increase fiscal policy during recessions and contract it during booms. Unemployment insurance is an exemplar of automatic stabilizer in that the government spends more money for the period of recessions when unemployment rate is high. Equally, taxes are roughly proportional to profits and wages hence, the size of taxes stack away is higher during boom than recession. 25. Explain how federal government budget deficits occur.federal official government deficit occurs when it pays out more money than it can scram 26. Define the public debt and understand alternative measures of the public debt. Public debt refers to the credit entry or money owed by any echelon of government federal government, central government and municipal government or local government. The debt is seen as an dictatorial number and can therefore measured as a circumstances of the GDP. Alternatively, it can be measured b y the amount owed in any given year. 27. Define the fundamental functions of money.Money can be expound in terms of its core functions that are it act as a medium of exchange, store of value and as a unit of number. 28. Identify spot properties that any good that functions as money must possess. Properties of money is that it should be able to serve as (1) means of exchange (2) a enumerative (3)a source of liquidity and (4) store of value 29. Describe how the national tolerate assesses reserve requirements on banks and other alluviation intromissions. The reserve requirement is a bank rule that puts the minimum reserves each bank must hold to customer notes and deposits.The reserves are meant to assure withdrawal demands. national constraint approval is essential to begin any foreign banking institution in the US. Foreign banks need acquire regulatory approval from the OCC or the state banking supervisor when establishing new branches and agencies. Banks that are federally licensed must deposit cash or suitable securities at approved depository to convince the capital equivalency requirements specified by the IBA 30. Explain why the money supply changes when someone deposits in a depository institution a check drawn on the Federal permit System.The Federal oblige buys and sells government securities. These, increases or decreases banks capabilities of making loans. This equally decreases or increases interest rates. If Federal Reserve sells a bond, an institution or individual buys the bond with a debit on their neb and transfers the funds to the Federal Reserve. The Federal Reserve removes an equivalent amount from the bank reserve of the customer. The bank will and so take away the equivalent amount from the customers account who bought the bond. This will decrease money supply and increase interest rates.The slew changes when the Federal Reserve decides to buy a bond 31. Identify the observe factors that influence the quantity of money that p eople desire to hold. Motives for holding money, which can be expressed as factors that influence people to hold money, are transaction motives, precautionary motives and speculative motives 32. Describe how the Federal Reserves Tools of monetary policy influence market interest rates. The Federal Reserve buys and sells government securities. These increases or decreases banks capabilities of making loans. This equally decreases or increases interest rates.If Federal Reserve sells a bond, an institution or individual buys the bond with a debit on their account and transfers the funds to the Federal Reserve. The Federal Reserve and past removes an equivalent amount from the bank reserve of the customer. The bank will then take away the equivalent amount from the customers account who bought the bond. This will decrease money supply and increase interest rates. The apparent movement changes when the Federal Reserve decides to buy a bond 33. Explain why the unfeigned unemployment m ight depart from the pictorial rate of unemployment.The departure of the natural and actual rates of unemployment is a sign of the business cycle. The stages when actual unemployment exceeds the natural unemployment are times of recession or early stages of economic recovery. The stages when actual rate is below the natural are times of a well-situated economy 34. Describe why there may be an rearward family relationship between the inflation rate and the unemployment rate, reflected by the Phillips curve. The inverse relationship in the Philips curve can be explained well when you consider that with high unemployment laborers would accept lower wages and this would reduce firms cost.High wages lend about high inflation and the lower the rate of unemployment, the higher the rate of inflation and vice versa. 35. Explain why population growth can have uncertain effect on economic growth. There is no clear-cut explanation of the effect of population growth on economic growth. It c an be argued that high population growth creates pressures on curb natural resources, decreases public and private capital formation and redirects counts to maintaining relative to increase the stock of capital per worker. It can also have affirmative effects like economies of scale and specialization.Describe how government inefficiencies have contributed to the creation of relatively large quantities of dead capital in the worlds developing nations. Government distressing policies make capital investment impossible. The government tends to involve in the production of consumption goods that are less important. The rate at which the economy can absorb extra human capital is low and therefore it leaves the easy resource idle. The government is also not receptive to new applied science whish is important in the formation of capital.Discuss the worldwide immensity of international trade. International trade is very crucial for the development of a uncouth in that it expands the choices that could otherwise been limited to what can be produced locally. Thus, countries can access goods and services cheaply from abroad. Labor can also be obtained cheaply in some countries. Cheap labor reduces production costs and this will have effect to low prices to the final product. Therefore, countries can import final product at a much lower price compared to when produced locally where labor is very expensive.Explain why nations can come on from specializing in production and engaging in international trade. A country specializing in the production of goods which it has comparative advantage will profit and it will trade for goods which it does not have comparative advantage. Therefore, free trade will make a country to use its resources efficiently. Efficient use of resources will increase the amount of goods available for production and consumption. Hence, the benefits of trade will be the outcome of specialization 39. Distinguish between the isotropy of trade and the balance of payments.The balance refers to discrepancy between a countys exports and imports and it is the major part of a countrys balance of payments, which is an accounting report of the economic transactions that have taken place stuck between the inhabitants of one country and the inhabitants of other country over a particular period. 40. Identify the key accounts within the balance of payments. Key accounts within the balance of payments are circulating(prenominal) account, capital account and financial account.ReferencesAriel, R. Lecture Notes in Microeconomic possibility The Economic Agent. New York Princeton University Press, 2006