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BEC > 4 Micro Economics > Flashcards

4 Micro Economics Flashcards

1
Q

What are normal good?

A

Commodities for which demand is positively/directly related to income. Demand increase as incomes increase.

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2
Q

What are inferior goodds?

A

Commodities in which demand is negatively related to income. Demand decreases as incomes rise. Ex. - potatoes, used clothing, bus transportation.

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3
Q

What are substitute goods?

A

Substitute goods are when a price increase in one good creates a higher demand for another good. Ex. - A price increase in product A results in an increase in demand for product B. When beef prices rise, the demand for chicken increases because consumers switch to chicken as the more affordable option.

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4
Q

What are complements?

A

If a price increase in a product results in a decrease in demand for another product. Ex. - A price increase in product A results in a decrease in demand for product B. If the price of printers increases the demand for printer ink cartridges decreases because consumers never use cartridges alone.

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5
Q

What is the law of supply?

A

If all other factors are constant, the price of a product and the quantity supplied are directly related. The higher the price the greater the quantity supplied. The lower the price the lower the quantity supplied.

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6
Q

What is market equilibrium?

A

The combination of price and quantity at which the market demand and market supply curves intersect. Equilibrium is at the market-clearing price and the market-clearing quantity. Ex. - Supply = Demand at a given price point

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7
Q

What does it mean when the market price exceeds the equilibrium price?

A

The quantity exceeds the quantity demanded by consumers. A surplus results.

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8
Q

What does it mean when the market price is lower than the equilibrium price?

A

The quantity demanded by consumers is higher than the quantity supplied. A shortage results.

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9
Q

When both the supply and demand curves move in the same direction (to the left = lower, to the right = higher), and they are equal (demand & supply move by the same amount) what happens to the price?

A

The equilibrium price stays the same.

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10
Q

When both the supply and demand curves move in the same direction to the right (higher), and they are demand is moves less than supply, what happens to the price?

A

The equilibrium price drops.

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11
Q

When both the supply and demand curves move in the same direction, to the right (higher), and they are demand is moves more than supply, what happens to the price?

A

The equilibrium price increases

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12
Q

When both the supply and demand curves move in the same direction, to the left (lower), and they are demand is moves more than supply, what happens to the price?

A

The equilibrium price increases

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13
Q

When both the supply and demand curves move in the same direction, to the left (lower), and they are demand is moves less than supply, what happens to the price?

A

The equilibrium price increases

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14
Q

What is elasticity of demand (Ed)?

A

Measures the sensitivity of the quantity demanded of a product to a change in its price

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15
Q

What are the two common methods to calculate the price elasticity of demand?

A

The point method and the midpoint(Arc) method

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16
Q

What is the point method of measuring the elasticity of demand?

A

The point method measures the price elasticity of demand at a given point on the demand curve for a specific change in the product’s price

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17
Q

What is the point method formula?

A

The % of change in quantity demanded / the percentage change in price

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18
Q

What is the midpoint (Arc) method of measuring elasticity of demand?

A

The midpoint method measures the price elasticity of demand of a range for a specific change in the product’s price. This method uses the midpoint of the quantities and prices to measure elasticity.

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19
Q

What does it mean when the demand elasticity is greater than one?

A

Demand is in a relatively elastic range. The % change in quantity demanded is higher than the % change in price.

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20
Q

What does it mean when the demand elasticity is equal to one?

A

The demand has unitary elasticity, a relatively inelastic range. The % change in quantity demanded is lower than the percentage change in the price.

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21
Q

What does it mean when demand elasticity is less than one?

A

The demand is relatively inelastic. The % change in the quantity demanded is lower than the % change in the price.

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22
Q

What is infinite demand?

A

When demand is perfectly elastic. In pure competition the number of firms is so great that one cannot influence the market price.

23
Q

What happens when the demand elasticity is equal to zero?

A

Demand is perfectly inelastic. The consumers’ need for a certain product is so high that they will pay whatever price the market sets. The number of these consumers is limited and the amount they desire is relatively fixed.

24
Q

What is price elasticity of supply?

A

The measure of sensitivity of quantity supplied of a product to a change in its price.

25
Q

What is the formula for price elasticity of supply?

A

% change in quantity supplied / % change in price

26
Q

What happens when the supply elasticity coefficient is greater than one?

A

Supply is in a relatively elastic range. The % in change in the quantity supplied is higher than the % change in the price.

27
Q

What happens when the supply elasticity is equal to one?

A

Supply has unitary elasticity (limited range). The % change in the quantity supplied is equal to the % change in the price.

28
Q

What happens when the supply elasticity is less than one?

A

Supply is in a relatively inelastic range. The % in change in the quantity supplied is lower than the % in change in the price.

29
Q

What is infinite supply?

A

When supply is perfectly elastic.

30
Q

When supply elasticity is equal to zero it is?

A

Perfectly inelastic

31
Q

What are examples of price controls by the government?

A

Rent controls and usury laws

32
Q

What are examples of price floors?

A

Price supports for agricultural products and minimum wage legislation

33
Q

What are nominal wages?

A

The amounts actually paid and received

34
Q

What are real wages?

A

Real wages represent the purchasing power of goods and services that can be acquired by the nominal wages.

35
Q

What are explicit costs?

A

Costs that require actual cash payments. Also known as out-ot-pocket or outlay costs.

36
Q

What are implicit costs?

A

Costs not recognized in formal accounting records. An implicit cost is an opportunity cost.

37
Q

What is an opportunity cost?

A

The maximum benefit forgone by using a scarce resource for a given purpose instead of the next-best alternative.

38
Q

What are economic costs?

A

The total of explicit and implicit costs.

39
Q

What is accounting profit?

A

When the earned income exceeds it’s explicit costs.

40
Q

What is economic profit?

A

When the earned income exceeds economic costs. It exceeds both explicit and implicit costs.

41
Q

When does normal profit occur?

A

When total revenue equals total cost (explicit & implicit), when economic profit equals zero.

42
Q

What are short run costs?

A

The short run is a period so brief that a firm cannot vary its fixed costs. Short-run costs = variable costs + fixed costs

43
Q

What are long run costs?

A

The long run is a period long enough that all inputs, including those incurred as fixed costs can be varied. Long-run costs = variable costs.

44
Q

What is marginal product?

A

The additional output obtained by adding one extra unit of input

45
Q

How is marginal product calculated?

A

The change in total output at a given input / the change in inputs

46
Q

What is the law of diminishing returns?

A

As inputs are added to a process, each additional unit of input results in increased production. However, past the point of diminishing marginal returns, the increase is smaller with each unit. That is, the benefit of adding input units decreases.

47
Q

What is the point of negative marginal returns?

A

Eventually, so many inputs enter the process that it becomes inefficient and total output actually decreases. This is the point of negative marginal returns. Ex - too many cooks in the kitchen get in each other’s way and slow production.

48
Q

What are economies of scale?

A

Initially, as production increases, average costs of production tend to decline and the marginal cost of production tends to decrease. Some of the reasons are:

  • increased specialization and division of labor
  • better use and specialization of management
  • use of more efficient machinery and equipment
49
Q

What are diseconomies of scale?

A

Eventually as output continues to increase, the marginal cost of production tends to increase. The most frequent reason for diseconomies of scale is the difficulty of managing a large-scale entity.

50
Q

When do constant returns to scale occur?

A

When a certain range of output, an increase in production results in no change in average costs and marginal cost of production does not change as output changes.

51
Q

What are the characteristics of a market monopoly?

A
  • the industry consists of one seller
  • the product has no close substitutes
  • the seller can strongly influence price because it is the sole supplier of the product
  • entry by other sellers is completely blocked
52
Q

What are the two types of a monopolist’s pricing behavior?

A

Price maker - sets the prices as high as it wants because it’s not limited by competition
Price searcher - does not set prices arbitrarily high but seeks the price that maximizes profits

53
Q

What is kinked demand curve theory?

A

In an oligopolist market,, firms will follow a price decrease by a competitor but not a price increase. This is based on the assumption that a firm in an oligopoly strives to protect existing market shares.

BEC (16 decks)

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