BEC Custom 3 Flashcards
What happens when demand is elastic? (elasticity coefficient is > 1)
% change in quantity is greater than the % change in price. For a given price decline, there will be a greater than proportional increase in quantity
Elasticity of demand equation
% change in quantity demanded / % change in price
Elasticity of supply equation
% change in quantity supplied / % change in price
When is demand inelastic (elasticity coefficient is < 1)?
quantity % change is less than the % change in price
When is demand unitary ( elasticity coefficient = 1)?
quantity % change is the same as the % change in price
Utility Theory
measurement of satisfaction (or utility) derived from the acquisition of a good or service
Total Utility (TU)
- increases with quantity acquired
- total utility is maximized where the last dollar spent on every commodity acquired gives the same marginal utility (MU)
Marginal Utility (MU)
- utility acquired from the last derived unit
- decreases with quantity acquired (Law of Diminishing Marginal Utility)
What happens to marginal utility when total utility is maximized?
- the marginal utility of the last dollar spent on each and every item acquired must be the same
Short-run analysis
period during which at least one input to the production process can’t be varied
Long-run analysis
period during which all inputs to the production process can be varied
Average fixed cost (AFC)
- per unit fixed cost
- total fixed cost / units produced
Average variable cost (AVC)
- per unit variable cost
- total variable cost / units produced
Law of Diminishing Returns
- in a system with both fixed and variable cost inputs, adding more variable inputs will eventually result in less and less (diminishing) output per unit of input
- variable inputs overwhelm fixed factors
Average total cost (ATC)
Average fixed cost (AFC) + Average variable cost (AVC)
Marginal cost
- cost of last acquired unit of input
- computed as the change in successive variable costs or change in successive total costs
Market structure
economic environment within which a firm produces and distributes its good/service
What are the primary factors that distinguish different market structures?
- number of sellers and buyers in the market
- nature of the commodity in the market
- difficulty of entry into the market
What are the main four market structures?
- perfect competition
- perfect monopoly
- monopolistic competition
- oligopoly
What are the characteristics of a perfectly competitive market or industry?
- large # of independent buyers and sellers, each too small to affect price
- sell a homogeneous product
- market entry and exit are easy
- buyers & sellers have complete information
(virtually non-existent in modern society)
marginal revenue
revenue derived from the last unit sold
Where should a firm produce in a perfectly competitive market?
where marginal cost = marginal revenue
Will a firm always make a profit in the short-run in perfect competition?
no, it depends on the firm’s average total cost (ATC) / average variable cost (AVC) vs. market price
What happens in the long-run under perfect competition?
- no profit, breakeven
- MR = MC = long-run average cost (LAC)
What are the characteristics of a perfect monopoly?
- single seller
- good or service for which there are no close substitutes
- market entry is restricted
- single firm = market
Two basic reasons monopolies exist
- economies of scale - a single producer can produce at a lower cost than multiple producers
- legal authority or control - a single producer has sole legal authority or sole control of resources
What does the demand curve and marginal revenue curve look like in a perfect monopoly?
- the demand curve is negative - downward sloping
- the marginal revenue curve is also negative, but less than the demand curve
Short run results in a perfect monopoly
- depends on firm’s average total cost (ATC) vs. market price
- ATC < market price = profit
- ATC = market price = breakeven
- ATC > market price = loss
how to make a profit in the long-run in a perfect monopoly
marginal revenue = marginal cost
Characteristics of monopolistic competition
- large number of sellers
- firms sell differentiated product, or one that is similar, but not identical
- product sold has close substitutes
- market entry and exit are easy
What do the demand curve and marginal revenue curve look like in monopolistic competition?
- the demand curve is downward sloping
- the marginal revenue curve is even more downward sloping
When will a firm in monopolistic competition in the short-run maximize profits?
marginal revenue = marginal cost
What is the ultimate long-run result in monopolistic competition?
equilibrium = all firms just break even; no long-run excess profits
- resources are mis-allocated versus perfect competition because P > MC
Characteristics of a oligopoly
- few sellers
- firms sell either homogeneous or differentiated products
- market entry is restricted
- few sellers = interdependence among sellers
What is the demand curve of an oligopoly?
negative sloping, but has a kink - more elastic demand before the kink and less elastic demand after
What are the long-run results in a oligopoly?
- if firms make profits in the long run, the firms can continue to make profits because entry is restricted
- price > MC = misallocation of resources
Why does price tend not to change in a oligopoly?
may result in a price war
- as a result, firms tend to compete on factors other than price
Overt collusion
conspiring to set outputs, prices or profits among firms, which is illegal in the U.S.
Tacit collusion
involves firms following prices set by market leader - not illegal
Macroeconomics
study of economic activity and outcomes for an entire economy
What are all the major sectors involved in macroeconomics?
- foreign sector
- financial sector
- government
- individuals
- business firms
what are “leakages” in the free market model?
Individuals’ income not spent on domestic consumption
- i.e. - taxes, savings, and imports
What are “injections” in the free market model?
additions to domestic production not from individuals’ expenditures
- i.e. - investment expenditures, government spending, and exports
Nominal Gross Domestic Product (GDP)
measures the total output of final goods and services produced for exchange in the domestic market during a period
*not adjusted for changing prices
GDP expenditures approach
measures GDP using final sales/purchases; the sum of spending by - individual, businesses, governments, and foreign buyers (exports)
GDP income approach
measures GDP as the value of incomes and resources’ costs; the sum of: compensation, rental income, proprietors and corporate income, net interest, taxes on production and inputs, depreciation, and miscellaneous other items
Real GDP
measures the total output of final goods and services produced for exchange in the domestic market during a period at constant prices
*real GDP = nominal GDP adjusted for changing prices
Real GDP per capita
real GDP per individual
*real GDP/population
Net GDP
measures GDP less capital consumption during the period (GDP - depreciation)
Potential GDP
measures maximum output that can occur in domestic economy at a point in time without creating upward pressure on general level of prices
GDP Gap
difference between real GDP and potential GDP
Positive GDP Gap
Real GDP < Potential GDP
*inefficiency in the economy
Negative GDP Gap
Real GDP > Potential GDP
*creates upward pressure on prices
Gross National Product (GNP)
measures the total output of all goods and services produced world-wide using U.S. resources
*includes goods and services produced by U.S. entities in foreign countries
Net National Product (NNP)
measures the total output of all goods and services produced world-wide using U.S. resources, but does not include a value for depreciation
*NNP = GNP - depreciation factor
National Income (NI)
measures the total payments for economic resources included in the production of all goods and services; includes payments for - wages, interest, rents, and profits
Personal Income (PI)
measures total payments for economic resources received by individuals
Personal Disposable Income (PDI)
measures the amount of income individuals have to spend
*PDI = PI - income taxes
