BEC 1 - Economic Concepts & Strategy Flashcards
Economics
The study of how scarce resources are allocated to satisfy unlimited wants.
Microeconomics
The study of descisions related to the allocation of scarce resources by small, individual economic agents, such as households or firms. Buyers in the economy provide the demand for the products & sellers provide the supply of products/services.
Demand
&
Demand Curve
Demand - The amount of a product/service that a market will consume at a given price, assuming all other factors remain constant.
Demand Curve - a graph showing the inverse relationship between price & quantity of a product/service that a group of consumers are willing & able to buy at a particular time.
Demand Curve Shifts
What causes Demand to Shift Upward? (4)
What causes Demand to Shift Downward? (2)
Demand Curve Shifts - Changes in the quantity demanded of a product/service for reasons other than price.
Direct Relationship - Shift Upward or “to the right” (Increase):
- Price of a substitute good - For example, an increase in the price of hamburgers will increase the demand for hot dogs.
- Expectations of price changes - consumers are more likely to buy now if they think prices will increase in the future.
- Income
- Increases for normal goods
- Decreases for inferior goods
- Extent of Market - new consumers in the market.
Inverse Relationship - Shift Downward or “to the left” (Decrease):
- Price of a complement good (increases)
- Income
- Decreases for normal goods
- Increases for inferior goods
- Consumer boycotts
Changes in Consumer Tastes - May affect demand whether increases or decreases.
Elasticity
A measure of the sensitivity of Supply or Demand to a change in a determinant , such as price, which normally has a direct relationship with supply & an inverse relationship with demand.
What are the three types of Elasticity for Demand?
- Price Elasticity of Demand (likely tested)
- Income Elasticty of Demand
- Cross Elasticity of Demand
Price Elasticity of Demand (ED)
(ED>1, ED<1, ED=1)
TESTED
The ratio of change in demand compared to a change in price measured as the change in demand. To determine if a good is either a necessity or not.
ED = % Change in Qty Demand / % Change in Price
- ED > 1* = Elastic (many subs); Revenue declines
- “Qty increases proportionally more than the Price declines”
- ED < 1* = Inelastic (necessity); Revenue increases
- “Price increases proportionally more than the Qty declines”
- ED = 1* (Unit Elastic)
Income Elasticity of Demand (EI)
(EI>1, EI<1,)
The ratio of change in demand compared to a change in income measured as the change in demand. To determine if a good is either Normal or Inferior.
EI = % Change Qty Demanded / % Change in Income
EI > 0 = Normal Good
EI < 0 = Inferior Good
Cross-Elasticity of Demand (Exy)
(EXY>1, EXY<1)
A measurement comparing the change in demand for one product (X) to change in price of another (Y) to determine if the producs are substitutes or compliments.
Exy = % Chng Qty Demand in X / % Chng in Price of Y
Exy > 0 = Comliments
Exy < 0 = Substitutes
Supply
&
Supply Curve
Supply - A graph showing the amount of a product/service that will be provided at any price, assuming all other factors remain constant.
Supply Curve - a graph showing the direct relationship between price & quantity of a product/service that suppliers are willing to supply at a particular time.
Supply Curve Shifts
What causes Supply to Shift Outwards? (4)
What causes Supply to Shift Inwards? (2)
Supply Curve Shifts - Changes in the quantity supplied of a product/service for reasons other than price.
Shift Outwards (Supply Increases) Examples:
- Number of Producers (increases)
- Government Subsidies (additional funding)
- Price Expectations (high prices = more supply)
- Reductions in cost of Production & Tech Advances
Shift Inwards (Supply Decreases) Examples:
- Increases in Production Costs (eg. production taxes)
- Prices of Other Products (different products are more profitable, shift of production)
Price Elasticity of Supply (ES)
(ES>1, ES<1, ES=1)
The ratio of change in supply compared to a change in price measured as the change in supply.
ES = % Change in Qty Supply / % Change in Price
- ES > 1* = Elastic
- ES < 1* = Inelastic/Same
- ES = 1* (Unit Elastic)
Opportunity Cost
The value of the best alternative that is not selected when resources can be applied to more than one purpose, such as the salary associated with a job offer that was rejected in order to accept a more desirable alternative. (The forgone benefit from alternatives NOT selected)
Example: Worker accepts a job paying $60K instead of another offer of $50K, the $50K is the opportunity cost.
What are two Gov’t actions that may affect equilibrium?
(Price Ceiling & Price Floor)
Price Ceiling = Shortage of Goods - Is a maximum legal price at which a product or service may be sold, usually imposed by governments.
- Example: Rent Control
Price Floor = Surplus of Goods - Is a minimum legal price at which a product or service may be sold, usually imposed by the government.
- Example: Minimum wage, airline tickets
Changes in Equilibrium Price Scenarios
D↑ & S↑
D↓ & S↓
D↑ & S↓
D↓ & S↑
(TESTED)
- D↑ & S↑ = EqPrice is Uncertain, Qty Purchase Increases
- D↓ & S↓ = EqPrice is Uncertain, Qty Purchase Decreases
- D↑ & S↓ = EqPrice is Increase, Qty Purchase is Uncertain
- D↓ & S↑ = EqPrice is Decreases, Qty Purchase is Uncertain
Law of Diminishing Marginal Utility
The theory that the more of a resource is consumed, the lower the marginal utility (satisfaction) will be for the next unit.
- Example: The marginal utility of a second cookie, for example is greater than the marginal utility of a third cookie.
Indiference Curve (IC)
A graphic representation of the various combinations of two resources that will provide equal value such that a consumer will be indifferent as to which combination of the resources was to be aquired.
Marginal Propensity to Consume (MPC)
vs.
Marginal Propensity to Save (MPS)*
1 = MPC + MPS
Marginal Propensity to Consume (MPC) is the percentage of the next dollar of income that the consumer would be expected to spend.
MPC = Chng in Spending / Chng in Disposable Income
Marginal Propensity to Save (MPS) is the percentage of the next dollar that the consumer would be expected to save.
MPS = Chng in Savings / Chng in Disposable Income
Production Cost
(FC, VC, TC)
Production Costs - over short period of time & limited ranges of production, firms have costs that include both fixed & variable costs.
- Fixed Cost (FC) - costs that wont change even when there is a change in the level of production.
- AFC = FC/# Units Produced
- Variable Cost (VC) - costs that rise as production rises.
- AVC = VC/# Units Produced
- Total Cost (TC) - the sum of VC + FC.
Returns to Scale
Returns to Scale - are the increase in units produced/output resulting from an increase in production cost incurred, input is measured by the ratio.
RTS = % Increase in Output / % Increase in Input (costs)
RTS > 1, Increasing returns to scale (Increased Efficiency)
RTS < 1, Decreasing returns to scale (Deacreased Efficiency)
RTS = 0, Constant returns to scale
What are the four market structures?
- Perfect/Pure Competition
- Pure Monopoly
- Monopolistic Competition
- Oligopoly
Pure/Perfect Competition (5)
An industry would be perfectly competitive if:
- Includes a large number of sellers, with each too small to affect the overall market price
- All firms sells a homogeneous product
- NO non-price competition (e.g. advertising)
- NO barriers to entry (easy entry/exit)
- NO price controls (ceiling/floor)
- Demand Curve = Stright Line Across (elastic)
Pure Monopoly (3)
An industry would be a pure monopoly if:
- Only one producer/seller
- No substitute products
- Blocked Entry (Govt law or patent)
- Demand Curve = Almost Vertical (Inelastic)
Monopolistic Competition (4)
An industry would be monopolistically competitive if:
- Includes a large number of sellers
- Firms sells heterogeneous products
- MANY non-price competition (e.g. advertising)
- NO barriers to entry (easy entry/exit)
- Demand Curve = Downward Sloping (normal)