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CPA > BEC Custom 3 > Flashcards

BEC Custom 3 Flashcards

1
Q

What happens when demand is elastic? (elasticity coefficient is > 1)

A

% 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

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2
Q

Elasticity of demand equation

A

% change in quantity demanded / % change in price

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3
Q

Elasticity of supply equation

A

% change in quantity supplied / % change in price

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4
Q

When is demand inelastic (elasticity coefficient is < 1)?

A

quantity % change is less than the % change in price

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5
Q

When is demand unitary ( elasticity coefficient = 1)?

A

quantity % change is the same as the % change in price

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6
Q

Utility Theory

A

measurement of satisfaction (or utility) derived from the acquisition of a good or service

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7
Q

Total Utility (TU)

A
  • increases with quantity acquired
  • total utility is maximized where the last dollar spent on every commodity acquired gives the same marginal utility (MU)
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8
Q

Marginal Utility (MU)

A
  • utility acquired from the last derived unit

- decreases with quantity acquired (Law of Diminishing Marginal Utility)

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9
Q

What happens to marginal utility when total utility is maximized?

A
  • the marginal utility of the last dollar spent on each and every item acquired must be the same
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10
Q

Short-run analysis

A

period during which at least one input to the production process can’t be varied

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11
Q

Long-run analysis

A

period during which all inputs to the production process can be varied

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12
Q

Average fixed cost (AFC)

A
  • per unit fixed cost

- total fixed cost / units produced

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13
Q

Average variable cost (AVC)

A
  • per unit variable cost

- total variable cost / units produced

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14
Q

Law of Diminishing Returns

A
  • 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
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15
Q

Average total cost (ATC)

A

Average fixed cost (AFC) + Average variable cost (AVC)

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16
Q

Marginal cost

A
  • cost of last acquired unit of input

- computed as the change in successive variable costs or change in successive total costs

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17
Q

Market structure

A

economic environment within which a firm produces and distributes its good/service

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18
Q

What are the primary factors that distinguish different market structures?

A
  • number of sellers and buyers in the market
  • nature of the commodity in the market
  • difficulty of entry into the market
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19
Q

What are the main four market structures?

A
  • perfect competition
  • perfect monopoly
  • monopolistic competition
  • oligopoly
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20
Q

What are the characteristics of a perfectly competitive market or industry?

A
  • 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)
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21
Q

marginal revenue

A

revenue derived from the last unit sold

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22
Q

Where should a firm produce in a perfectly competitive market?

A

where marginal cost = marginal revenue

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23
Q

Will a firm always make a profit in the short-run in perfect competition?

A

no, it depends on the firm’s average total cost (ATC) / average variable cost (AVC) vs. market price

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24
Q

What happens in the long-run under perfect competition?

A
  • no profit, breakeven

- MR = MC = long-run average cost (LAC)

25
Q

What are the characteristics of a perfect monopoly?

A
  • single seller
  • good or service for which there are no close substitutes
  • market entry is restricted
  • single firm = market
26
Q

Two basic reasons monopolies exist

A
  • 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
27
Q

What does the demand curve and marginal revenue curve look like in a perfect monopoly?

A
  • the demand curve is negative - downward sloping

- the marginal revenue curve is also negative, but less than the demand curve

28
Q

Short run results in a perfect monopoly

A
  • depends on firm’s average total cost (ATC) vs. market price
  • ATC < market price = profit
  • ATC = market price = breakeven
  • ATC > market price = loss
29
Q

how to make a profit in the long-run in a perfect monopoly

A

marginal revenue = marginal cost

30
Q

Characteristics of monopolistic competition

A
  • 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
31
Q

What do the demand curve and marginal revenue curve look like in monopolistic competition?

A
  • the demand curve is downward sloping

- the marginal revenue curve is even more downward sloping

32
Q

When will a firm in monopolistic competition in the short-run maximize profits?

A

marginal revenue = marginal cost

33
Q

What is the ultimate long-run result in monopolistic competition?

A

equilibrium = all firms just break even; no long-run excess profits
- resources are mis-allocated versus perfect competition because P > MC

34
Q

Characteristics of a oligopoly

A
  • few sellers
  • firms sell either homogeneous or differentiated products
  • market entry is restricted
  • few sellers = interdependence among sellers
35
Q

What is the demand curve of an oligopoly?

A

negative sloping, but has a kink - more elastic demand before the kink and less elastic demand after

36
Q

What are the long-run results in a oligopoly?

A
  • if firms make profits in the long run, the firms can continue to make profits because entry is restricted
  • price > MC = misallocation of resources
37
Q

Why does price tend not to change in a oligopoly?

A

may result in a price war

- as a result, firms tend to compete on factors other than price

38
Q

Overt collusion

A

conspiring to set outputs, prices or profits among firms, which is illegal in the U.S.

39
Q

Tacit collusion

A

involves firms following prices set by market leader - not illegal

40
Q

Macroeconomics

A

study of economic activity and outcomes for an entire economy

41
Q

What are all the major sectors involved in macroeconomics?

A
  • foreign sector
  • financial sector
  • government
  • individuals
  • business firms
42
Q

what are “leakages” in the free market model?

A

Individuals’ income not spent on domestic consumption

- i.e. - taxes, savings, and imports

43
Q

What are “injections” in the free market model?

A

additions to domestic production not from individuals’ expenditures
- i.e. - investment expenditures, government spending, and exports

44
Q

Nominal Gross Domestic Product (GDP)

A

measures the total output of final goods and services produced for exchange in the domestic market during a period
*not adjusted for changing prices

45
Q

GDP expenditures approach

A

measures GDP using final sales/purchases; the sum of spending by - individual, businesses, governments, and foreign buyers (exports)

46
Q

GDP income approach

A

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

47
Q

Real GDP

A

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

48
Q

Real GDP per capita

A

real GDP per individual

*real GDP/population

49
Q

Net GDP

A

measures GDP less capital consumption during the period (GDP - depreciation)

50
Q

Potential GDP

A

measures maximum output that can occur in domestic economy at a point in time without creating upward pressure on general level of prices

51
Q

GDP Gap

A

difference between real GDP and potential GDP

52
Q

Positive GDP Gap

A

Real GDP < Potential GDP

*inefficiency in the economy

53
Q

Negative GDP Gap

A

Real GDP > Potential GDP

*creates upward pressure on prices

54
Q

Gross National Product (GNP)

A

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

55
Q

Net National Product (NNP)

A

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

56
Q

National Income (NI)

A

measures the total payments for economic resources included in the production of all goods and services; includes payments for - wages, interest, rents, and profits

57
Q

Personal Income (PI)

A

measures total payments for economic resources received by individuals

58
Q

Personal Disposable Income (PDI)

A

measures the amount of income individuals have to spend

*PDI = PI - income taxes

CPA (16 decks)

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