08. Micro-economics Flashcards
What is the production possibility frontier?
Describes the max amount of goods produced using all available resources in an economy.
Demand refers to what?
The quantity of a good or service demanded at every possible price.
What are Veblen goods?
Goods where a higher price may make the product more attractive in the eyes of the consumer.
What is a normal good?
One where demand for a good increases as income rises.
What does elasticity refer to?
The sensitivity of the relationship between changes demanded in quantity to changes in related factors, e.g. price or income.
Price elasticity of demand
% change in quantity demanded /
% change in price
When is price elasticity of demand:
- elastic?
- inelastic?
- When greater than -1 e.g. -2
- When less than -1 e.g. -0.5
What is cross-price elasticity?
The proportionate change in quantity demanded in response to a proportionate change in the price of another good.
A -ve cross-price elasticity refers to what?
Complementary goods.
A +ve cross-price elasticity refers to what?
Substitutes.
What is income elasticity of demand?
Measures the change in demand for a good or service in relation to a change in income.
Most goods have __ve income elasticities, and why?
- positive
- because as they become wealthier, they spend more
Inferior goods are ones where income elasticity is __ve?
negative
What is supernormal profit?
Excess profit above production costs
+
Unborrowed capital
+
Owner’s time
i.e. all opportunity costs
Typically, what type of costs may not rise smoothly as output increases?
Variable costs.
Firms will produce output until MC?
= MR
What is a production function?
The set of all technically efficient ways of combining inputs to produce output.
In the LR, all costs (inputs) can be ___ whereas in the SR, some costs are ___ over a period of time.
- varied
- fixed
LRAC curves are typically what shaped, and why?
- U-shaped.
- Increasing returns to scale then decreasing returns to scale
What is the minimum efficient scale (MES)?
The lowest level of output where LRAC is at a minimum.
If MC > AC, then AC must be?
Therefore, LRMC crosses LRAC where on the LRAC?
- rising
- at the lowest point on the LRAC (i.e. the MES output)
What does perfect competition refer to?
Example industry?
A market in which neither buyers nor sellers believe they can influence the market price by any actions of their own. e.g. agriculture
In perfect competition, what do both buyers and sellers regard themselves as?
Price-takers
In perfect competition, the model requires different firms to produce similar products, known as what?
Homogenous products
