Chapter 16: Microeconomics Flashcards
Opportunity Cost
- the cost of foregoing the next best alternative
- considers not only monetary advantage but also the comparative circumstances, risk, rime and effort for one option against another
Accounting Profit
- excess revenue income over and above explicit costs
- explicit costs = wages, lease of property etc.
Sub-Normal profit
- aka economic loss = the accounting profit does not cover its opportunity loss
Normal profits
- accounting profit just covers its opportunity cost –> no incentive to switch
Super normal profit
- accounting profits are in excess of opportunity costs = the producer has made correct choice in its production decisions
What does a demand curve show
- the quantity of a good at different price levels
- displays the impact of price on effective demand
What is effective demand?
- consumers are not only willing but also able to place on a particular good or service
What is a shift in demand schedule
* What does a shift to the right represent?
- when the demand for a good changes because of a factor other than the price of the good
- shift to the right = overall increase in demand
What does it mean if the market is in equilibrium?
- where the demand and supply curve crosses
What does the elasticity of demand measure?
Calculation?
- how sensitive demand is to changes in various factors: price, income and cross elasticity of demand
Price elasticity of demand = Percent change in quantity / Percent change in price
What does PED = 1 mean for revenue
- revenue is at is maximum
PED > 1 mean for revenue
- it will increase
Income elasticity of demand measures & calculation?
- the sensitivity of demand to consumers’ disposable income
- Income elasticity of demand = Percentage change in quantity / Percentage change in price
What are goods called where demand falls as income rises
- inferior goods
What is a giffen?
- an inferior good where demand increases as the price increases ex. bread - if price increases, less wealthy people are even less able to afford more expensive food items, and will have to buy more bread
Cross elasticity of demand
- measures the change in quantity demand against the change in price of either a substitute or a complementary good
- = percent change in quantity / percent change in price of substitute / complementary good
Difference in elasticity of substitute vs. complimentary goods
- substitute = positive cross elasticity of demand
Ex. If the price of cars go up, the demand for tube travel will increase - complimentary = negative cross elasticity of demand
Ex. if the price of petrol increases, the demand for cars decrease.
Price elasticity of supply
- the extent to which the change in price will impact the change in the quantity producers are willing to supply
What factors influence elasticity of supply?
- levels of unemployment (producers find it difficult to increase supply as prices fall)
*Durability of goods (durable goods tend to have higher levels of supply elasticity) - manufactured goods (can more easily meet an increase in demand than for example growing the goods)
4 factors of production
- Land, Labor, Capital & Entrepreneurship
Marginal product of labor
- the idea that for every worker above x, with x being the minimum number to run operations, each additional worker will contribute less value
Law of diminishing return
- beyond some level of variable input, further increases will lead to a steadily decreasing marginal product
Total costs
- include all explicit costs and opportunity costs of the firm
- made up of total fixed cost and total variable cost
Marginal cost
- the cost of producing an additional unit of production
- as long as the marginal cost is below average cost, the average cost will reduce as production increases
What is the long run?
- the period of time where no factor of production is fixed
Economies of scale
- as output increases the long run average cost decreases
- produced by increased efficiency, purchasing power, reputation etc.
Minimum Efficient Scale
- the lowest point on the long run average total cost curve
- the level of output of a business in the long run where the internal economies of scale have been fully exploited
- in industries with large minimum efficiency scales - only a few major players tend to dominate the space due to the high ratio of fixed cost to variable cost
Diseconomies of Scale
- the idea that increasing output may lead to average costs rising in the long run
- tend to arise from management problems
Perfect competition
- large number of firms supplying a large number of customers
- each firm’s output has no overall effect on price
- there are no barriers to entry
- there is no different in the produce of different firms
What type of demand curve do firms in perfect competition face?
- Flat demand curve, it’s level of output does not influence the price it receives
Monopoly
- there is only one firm in the industry
- firm is a price maker
- there are barriers to entry
A monopolist will produce at a level where
- marginal revenue equals marginal cost
What is monopolistic competition features
- many producers and consumers with no business having total control of market price
- few barriers to entry and exit
- consumers feel there are differences other than price in relation to each competitor´s products
- Few barriers to entry and exit
- Producers have a degree of control of the price
Oligopoly
- most common form of market
- industry must be dominated by relatively few firms
- must be independent of each other
- typically significant barriers to entry
Porter´s five competitive forces
- bargaining power of suppliers
- bargaining power of customers
- threat of new entrants
- threat of substitutes
- rivalry between competitors
SWOT analysis
- to analyze a firm’s position
- strengths
- weaknesses
*opportunities - threats