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59 Cards in this Set
- Front
- Back
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What is economics? |
The necessity to chose how to allocate scare resources to fit unlimited needs |
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What are the types of economies |
Traditional, command, free-market, mixed |
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What role to governments play in modern mixed economies |
Private property, freedom of contract and redistribution of income |
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PeD formula |
% change in Qd / % change in price |
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When is demand inelastic |
E<1 |
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When is demand elastic |
E>1 |
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Where is demand most elastic |
Long run |
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How does total expenditure correlate with PeD |
If e<1 te is + related with p. If e>1 te is - related with p. If e=1 te is constant |
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PeS formula |
% change in Qs / % change in price |
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Where is supply more elastic |
Long run, because it takes time for producers to adjust output in response to price changes |
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How to determine who takes the burden of excise tax |
Relative elasticities |
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What is income elasticity of demand? |
How quantity demanded changes when income changes |
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Income elasticity of demand formula |
% change in Qd / % change in income |
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What is normal goods income elasticity |
Positive |
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What is inferior goods income elasticity |
Negative |
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What is cross elasticity of demand |
Demand for one product as price of another product changes |
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Cross elasticity of demand formula |
% change in Qd of good x / % change in price of good y |
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What does cross elasticity of demand define |
Substitutes (when +) and complements (when -) |
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What are government price controls |
Attempt to hold price at disequilibrium |
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Price floor |
Above Pe, leads to excess supply |
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Price ceiling |
Below Pe. Leads to excess demand and black marketeers |
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Rent controls |
Price ceilings that lead to shortage of rentals and allocation by sellers preference. Shortage is worsened over time |
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When is market surplus maximized |
At equilibrium (it is efficient) |
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Government intervention often leads to |
Reduction in total economic surplus |
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Why are demand curves negatively sloped |
To restore the ratio of marginal utility to price |
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Substitution effect of price changes |
Increase in purchases of product with new lower price |
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Income effect of price changes |
Decrease in price leads to increase of real income thus increase in purchase of normal goods |
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Consumer surplus |
Consumer values good higher than price |
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Paradox of value |
Utility vs command price (diamonds v water) |
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Types of firms |
Single proprietorship, ordinary partnership, limited partnership, corporations |
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How do firms finance themselves |
Selling shares, using retained earnings, borrowing from lenders |
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Accounting profit |
Revenue - explicit costs (labour, capital, intermediate inputs, depreciation) |
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A firms profits |
Total revenue - total costs |
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What is a firms goal |
Maximize profit |
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Economic profit |
Revenue - total costs, explicit and implicit (opportunity cost) |
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What attracts resources to an industry |
Positive economic profits |
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What detracts resources from an industry |
Negative economic profits |
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Law of diminishing returns in short run |
Mc and ac eventually rise as outputs rise |
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Why are SRAC u shaped |
Average product increases at low levels of output but eventually declines sufficiently to offset advantages of spreading overhead |
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Mc and mp is sr |
Mc is downward when mp is raising and vice versa |
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Where is a plants capacity |
Output that corresponds to the minimum point of a SRATC |
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Cost minimization formula for long run |
(MPk/MPl) = (Pk/Pl) |
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LRAC and SRATC relation |
Each SRATC reps capacity at a specific plant size (optimal output) |
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Effect of technological improvements |
Downward shift of LRAC curve, they are endogenous responses. |
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Types of technological change |
New production techniques, improved inputs and new products |
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Theory of perfect competition |
1. All firms produce homogeneous product 2. Consumers know nature of product and it’s price 3. Each firms min efficient scale is at a level relatively small to industry’s total output 4. Industry displays freedom of entry and exit |
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Demand and price in perfect competition |
Price takers with horizontal demand curve for each firm, downward for the industry |
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Level of output in perfect competition |
If profit maximizing, P >= AVC MC = MR MR = P MC = market price |
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Perfect competition in the short run |
Supply curve = MC curve above the min average variable cost
Each firm is maximizing profits but may be making losses or breaking even |
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Perfect competition in the long run |
Profits and losses lead to entry and exit Pushes to long run zero profit equilibrium and moved production to min AVC Older plants are discarded and replaced when P is below AVC Long run response of declining industry is to continue to satisfy demand by employing existing plants until P>SRAVC |
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What is monopoly |
Entire industry supplied by one firm |
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Monopolists market demand curve |
Market demand curve is a monopolists average revenue curve which lies below its demand curve |
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When is a monopolist maximizing profits |
MR = MC |
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Where does a monopolist produce to |
P > MC |
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What is the inefficiency of a monopoly |
By restricting output below competitive level they impose a DWSL |
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Monopolists profits in the short run |
+,-,0 |
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Monopolies in the long run |
There must be effective barriers to entry, it is very difficult to maintain these in the very long run |
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Cartel |
A group of firms agreeing to restrict joint output to the monopoly level. Total profits at this level exceed those in a competitive equilibrium. They are unstable due to strong incentive to cheat |
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Price discrimination |
A firm that discriminates between different market segments will equate MC and ME in each market. The market with less elastic demand will have the higher price. If price discrimination leads the firm to increase outputs, market efficiency is improved. |
