BEC-ECON Flashcards
Derived demand
Derived demand is the demand for a good or service that results because it is an input needed in order to provide another good or service for which there is demand. The demand for a good or service is derived from the demand for another good or service. The theory of derived demand explains why an increase in product A increases the demand for resources used to produce product A.
cross-price elasticity
The calculated coefficient of cross-price elasticity of demand reflects the proportional change in the quantity of one good expected as a result of a change in the price of the other good. The coefficient is negative for complementary goods and is positive for substitute goods.
Elasticity
Elasticity = Percentage change in quantity demanded/
Percentage change in price
Elasticity Chart
Less than 1 = inelastic: quantity percentage change is less than the percentage change in price.
Equal to 1 = unitary: quantity percentage change is the same as the percentage change in price.
Greater than 1 = elastic: quantity percentage change is more than the percentage change in price.
marginal utility
marginal utility decreases as consumption of a commodity increases
total utility
total utility increases (though at a decreasing rate)
law of diminishing marginal utility
As an individual acquires or consumes more units of a commodity, the total satisfaction or utility derived increases with each unit; however, the additional (marginal) utility derived from each additional unit acquired or consumed decreases.
Marginal Utility Calculation
law of diminishing returns
short-term concept (where at least one input is fixed—usually productive capacity). Diminishing returns result where, in the short run, increased input of variables overwhelms the fixed factor(s).
as more units of a variable input are added to fixed inputs, a point is reached at which the continued addition of variable inputs results in decreasing output per unit of variable input. Generally, this diminishing return results when the increasing variable inputs overwhelm the fixed inputs, which results in inefficiencies.
For example, as you put more machinery and personnel in a fixed-size plant, eventually the machinery and personnel will “get in each other’s way” and output will suffer. Add another machine or person and eventually output will actually go down.
scale of operations
the returns from increasing the scale of operations in the long-run are less than proportionate to the inputs incurred in increasing the scale of operations.
This is a long-run concept in which all inputs are considered variable and primarily result from problems (communication, coordination, etc.) associated with managing very large-scale operations.
long run analysis
In the long run, it is assumed that all inputs to the production process can be varied, including the number and size of production facilities.
normal profit
normal profit occurs when total revenue is exactly equal to the sum of explicit and implicit costs. In that case, economic profit is exactly zero, neither positive nor negative. So a firm that is just earning a normal profit is not earning a positive economic profit.
Economic Loss Vs. Accounting Profit Loss
cartel
A cartel is a group of firms that conspire to make price and output decisions for a product or service; it is overt collusion and illegal in the U.S. A prime example is OPEC, which meets regularly to set output quotas for oil for member oil-exporting countries.
Collusive pricing
Collusive pricing occurs when the few firms in an oligopolistic market (or industry) conspire to set the price at which a good or service will be provided. Such collusion typically is carried out to establish a price higher than would exist under normal competition. Overt collusive pricing is illegal in the U.S.A.
dual pricing
dual pricing occurs when a good or service is offered at different prices in different markets or market segments. The market/market segment may be within a country (e.g., different pricing of electricity to commercial and residential customers) or across countries (e.g., different pricing for domestic and foreign buyers).
Predatory pricing
Predatory pricing is the setting of prices low in an attempt to eliminate the competition. Predatory pricing is illegal under anti-trust laws, as it makes markets more vulnerable to a monopoly.
Transfer prices
Transfer prices is the setting of the amount (price) at which goods or services are transferred between affiliated entities.
Tacit collusion
Tacit collusion is a type of collusive behavior where firms coordinate their actions without explicitly communicating or reaching an agreement.
injections
injections are the sources of amounts added to domestic production that do not result from domestic consumption expenditures, including government spending, government subsidiaries, investment spending, and amounts received from exports, but not amounts paid for imports.
In a macroeconomic free-market flow model
leakages
leakages result when income is used for purposes other than domestic consumption. Both savings and taxes (as well as payments for imports) are uses of income for purposes other than domestic consumption.
In a macroeconomic free-market flow model
Comparative advantage
Comparative advantage exists when one entity has the ability to produce a good or service at a lower opportunity cost than the opportunity cost of the good or service for another entity. Comparative advantage is the basis for international trade
Dollar Appreciation
An appreciation in the value of the dollar against the currency of the country in which the investment is located would reduce the dollar value of the foreign direct investment, thus increasing the likelihood of the investment suffering a loss. If the dollar appreciates against the foreign currency, the foreign currency will exchange for fewer dollars than before the appreciation. Therefore, the conversion of the foreign currency value of the investment into dollars will result in a lower investment value in dollars and a greater likelihood of a loss.
Capital Market
A market in which financial securities are traded.
A capital market brings together the providers of capital (investors) and the users of capital (“borrowers”).
Providers invest to earn a return on the funds they provide.
Users seek funds to finance their investments, operations, or for other purposes.
Capital markets facilitate the interaction of providers and users of capital.
Generally, capital markets consist of three specific major component markets:
Stock market
Bond market
Money market
