2.1 demand and supply analysis Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q

Economics

A

the study of production, distribution, and consumption

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Macroeconomics

A

deals with aggregate economic quantities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Microeconomics

A

focuses on individual economic units

Demand and supply analysis is the key to microeconomics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Elasticity

A

the ratio of percentage changes and does not depend on the underlying units

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

inelastic demand

A

If demand is not very sensitive to price

This corresponds to an own-price elasticity between -1 and +1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

unit elastic

A

elasticity is -1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

the demand is elastic for lower quantities or higher quantities according to the linear demand curve

A

lower quantities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

the demand is inelastic for lower quantities or higher quantities according to the linear demand curve

A

higher quantities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

ith a vertical demand curve, the quantity demanded is the same regardless of the price. This is not possible at all prices, but it is often true over a specified price range

how elastic is this?

A

This means the demand is perfectly inelastic, which means it has zero elasticity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

A horizontal demand curve implies the consumers will buy an infinite amount at a given price, but zero at a price just a little bit greater. This is often true for perfectly competitive markets like the wheat market

how elastic is this?

A

The demand is perfectly elastic and thus has infinite elasticity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

how does the existence of close substitutes impact own-price elasticity?

A

the own-price elasticity of demand is likely high

Consumers could just switch to a competitors’ product

If there are no close substitutes, then the demand will be much less elastic

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

If the product is a small portion of people’s budgets, then the demand elasticity is high or low?

A

low

people would not likely buy less toothpaste even if the price of toothpaste rises by 10%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

The long-run demand is typically more elastic than the short-run demand

why?

A

Consumers have more time to adjust behaviors to changing prices. But this is not true for durable goods like washing machines. People would likely react to a drop in prices in the short-term but would not purchase more washing machines in the long run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

When demand is elastic, the price and total expenditure move in opposite directions

what does this mean?

what about when demand is inelastic?

A

if the price decreases, the total expenditure will increase

This occurs because the percentage change in quantity is bigger than the percentage change in price

When demand is inelastic, the price and total expenditure move in the same direction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

when will the total expenditure for a good or service be maximized?

A

at the quantity that is associated with the unit elastic point on the demand curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Income elasticity of demand

A

the percentage change in the quantity demanded divided by the percentage change in income

Income elasticity can be negative, positive, or zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

normal goods

A

consumption goods have positive income elasticity

the quantity demanded will increase when income increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

inferior goods

A

goods with negative income elasticity

19
Q

The cross-price elasticity will be positive or negative for close substitutes?

A

Positive

As the price rises on good Y, people will be inclined to purchase more of good X

20
Q

The cross-price elasticity is positive or negative for goods that are complements?

A

Negative

These goods are normally consumed together

21
Q

the substitution and income effect

A

When the price of a good like beef falls, people will tend to buy more beef than chicken. It is relatively cheaper than chicken, so the consumer will substitute beef for chicken

When the price of a good falls, it also leaves the consumer with more purchasing power or real income. Consumers will tend to buy more goods with this extra income. That is the income effect

22
Q

Giffen goods

A

The income effect could overpower the substitution effect for some inferior goods. This means more of a good would be consumed as prices rise

The slope of the demand curve would be positive

23
Q

Veblen goods

A

For some goods, a high price tag may drive consumer demand. This could be true for fancy jewelry or cars

positively sloped demand curves

24
Q

For a negatively sloped linear demand curve, own-price elasticity is most likely:

A
highest at relatively high prices.

B
the same at all points along the curve.

C
highest at relatively high levels of quantity demanded.

A

A
highest at relatively high prices.

25
Q

The shape of the demand curve for a good that is sold in a perfectly competitive market is most likely:

A
vertical.

B
horizontal.

C
upward-sloping.

A

B
horizontal.

In a perfectly competitive market, demand is perfectly elastic. In such conditions, the demand curve is horizontal because the same price is paid for any quantity sold. A seller cannot obtain a higher price than the market price because goods are perfect substitutes.

26
Q

increasing marginal returns

A

each additional resource will produce an increasing amount of output

Firms can experience this as they add more labor to the production process that optimizes efficiency, taking advantage of specialization

27
Q

the law of diminishing marginal returns

A

Each additional unit of input will produce a smaller amount of output

28
Q

Accounting profit

A

net income. It equals revenue less accounting costs (or explicit costs)

29
Q

Economic profit is also known as abnormal or supernormal profiit

A

the total revenue less economic costs (sum of accounting costs and implicit opportunity costs).

This measure of profit focuses on forward-looking depreciation, which is based on the opportunity cost of the fixed capital

30
Q

Firms in a perfectly competitive environment are price takers

A

They operate with a perfectly elastic, horizontal demand curve

The total revenue equals the price times the quantity

The total revenue is linear, with the slope equal to the price per unit.

31
Q

in a imperfect competition, profit is maximized when:

A
  1. The marginal revenue (MR) equals the short-term marginal cost (SMC)
  2. SMC is rising
32
Q

in a perfect competition, profit is maximized when:

A

so profit is maximized when the price equals SMC.

33
Q

Firms operating in a perfectly competitive environment may only expect to earn which type of profit

A

a normal profit

That means the economic profit is zero because the capital is just earning a rate commensurate with the risk

Profit above this point would attract competitors, which would drive the profitability down

Zero economic profit is still a positive accounting profit

34
Q

he short-run average total cost (SATC) curve

A

defines the per-unit cost in the short run

It is dependent on the choice of technology, physical capital, and plant size

35
Q

The long-run average total cost (LRAC) curve

A

derived from the SATCs available to the firm. For example, each SATC could utilize a different type of technology

36
Q

how can a firm gain economies of scale

A

by growing provided the output increases faster than the inputs

37
Q

when do diseconomies of scale occur

A

if the increase in output is slower than the increase in input

38
Q

the minimum efficient scale (MES)

A

The minimum per unit cost is the dividing line between economies of scale and diseconomies of scale

39
Q

Economies of scale can come from factors such as

A

Increasing returns to scale (increases in output are proportionately larger than increases in inputs)

Specialization in functions

Purchasing more expensive but more efficient equipment

Reducing waste

Better use of market information

Obtaining discounted prices on inputs from bulk purchases

40
Q

Diseconomies of scale can come from factors such as:

A

Decreasing returns to scale

(increases in output are proportionately smaller than increases in inputs)

Cumbersome management

Duplication of business functions

Higher resource prices due to supply constraints

41
Q

in the short run, maximum profit (or minimal loss) is determined when

A

marginal cost equals marginal revenue

42
Q

To maximize long-run profit under perfect competition, a firm should operate at which level

A

the minimum efficient scale point

Economic profit is zero in the long run under perfect competition

43
Q

A company that expects total revenue to be less than its total cost but greater than its total variable cost over the long term, will most likely:

A
exit the market.

B
continue operating.

C
temporarily suspend operations.

A

A
exit the market

When total revenue is sufficient to cover total variables costs but not the total cost, a firm can continue to operate in the short-run. However, if these conditions are expected to continue over the long term, the company should exit the market