Chapter 16: Microeconomics Flashcards
1
Q
Opportunity Cost
A
- 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
2
Q
Accounting Profit
A
- excess revenue income over and above explicit costs
- explicit costs = wages, lease of property etc.
3
Q
Sub-Normal profit
A
- aka economic loss = the accounting profit does not cover its opportunity loss
4
Q
Normal profits
A
- accounting profit just covers its opportunity cost –> no incentive to switch
5
Q
Super normal profit
A
- accounting profits are in excess of opportunity costs = the producer has made correct choice in its production decisions
6
Q
What does a demand curve show
A
- the quantity of a good at different price levels
- displays the impact of price on effective demand
7
Q
What is effective demand?
A
- consumers are not only willing but also able to place on a particular good or service
8
Q
What is a shift in demand schedule
* What does a shift to the right represent?
A
- 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
9
Q
What does it mean if the market is in equilibrium?
A
- where the demand and supply curve crosses
10
Q
What does the elasticity of demand measure?
Calculation?
A
- 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
11
Q
What does PED = 1 mean for revenue
A
- revenue is at is maximum
12
Q
PED > 1 mean for revenue
A
- it will increase
13
Q
Income elasticity of demand measures & calculation?
A
- the sensitivity of demand to consumers’ disposable income
- Income elasticity of demand = Percentage change in quantity / Percentage change in price
14
Q
What are goods called where demand falls as income rises
A
- inferior goods
15
Q
What is a giffen?
A
- 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
16
Q
Cross elasticity of demand
A
- 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
17
Q
Difference in elasticity of substitute vs. complimentary goods
A
- 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.
18
Q
Price elasticity of supply
A
- the extent to which the change in price will impact the change in the quantity producers are willing to supply
19
Q
What factors influence elasticity of supply?
A
- 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)
20
Q
4 factors of production
A
- Land, Labor, Capital & Entrepreneurship
21
Q
Marginal product of labor
A
- the idea that for every worker above x, with x being the minimum number to run operations, each additional worker will contribute less value
22
Q
Law of diminishing return
A
- beyond some level of variable input, further increases will lead to a steadily decreasing marginal product
23
Q
Total costs
A
- include all explicit costs and opportunity costs of the firm
- made up of total fixed cost and total variable cost
24
Q
Marginal cost
A
- 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
25
What is the long run?
* the period of time where no factor of production is fixed
26
Economies of scale
* as output increases the long run average cost decreases
* produced by increased efficiency, purchasing power, reputation etc.
27
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
28
Diseconomies of Scale
* the idea that increasing output may lead to average costs rising in the long run
* tend to arise from management problems
29
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
30
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
31
Monopoly
* there is only one firm in the industry
* firm is a price maker
* there are barriers to entry
32
A monopolist will produce at a level where
* marginal revenue equals marginal cost
33
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
34
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
35
Porter´s five competitive forces
* bargaining power of suppliers
* bargaining power of customers
* threat of new entrants
* threat of substitutes
* rivalry between competitors
36
SWOT analysis
* to analyze a firm's position
* strengths
* weaknesses
*opportunities
* threats
