Chapter 4 Flashcards
Focuses on the decisions made by individual consumers and companies
Microeconomics
Focuses on the economy as a whole and considers the effects such factors as inflation, interest rates and unemployment have on economic activity.
Macroeconomics
Focuses on the exchange of products, services, and capital across borders.
International trade
The study of production, distribution, and consumption for the study of choices in the presence of scarce resources, and it is divided into two broad areas.
Economics (microeconomics and macroeconomics)
Quantity demanded and price of a product are usually inversely related which is known as ______.
Law of demand
A measure of relative satisfaction.
Utility
The marginal (additional) satisfaction derived from an additional unit of a product decreases as more of the product is consumed.
Law of diminishing marginal utility
A change in demand for a product resulting from a change in purchasing power
Income effect
For most goods - called ________ - as income increased, demand increases too.
Normal goods
The relationship works in the opposite direction. That is, demand for ______ decreases as income increases.
Inferior goods
A product that could generally take the place of another product
Substitute product or substitute
Products that are frequently consumed together. When the price of the product decreases, it leads to an increase in demand for both the product and for its ___________ products.
Complementary products or complements
Demand for a particular product may be affected by prices of other products that are not substitute or complementary products. For example, a substantial increase in oil prices often causes demand for ________ products, including pizzas, to decrease.
Unrelated products
When the price of a product increases, the quantity supplied increases too
Law of supply
Occurs at the price where quantity demanded equals quantity supplied
Market equilibrium
The price at which the quantity demanded equals the quantity supplied. In other words, it is the point at which the demand and supply curves intersect.
Equilibrium price
How the quantity demanded or supplied changes in response to small changes in a related factor, such as price, income, or the price of a substitute or complementary product.
Elasticity
The percentage change in the quantity demanded of a product as a result of the percentage price change in that product.
Own price elasticity of demand
Products for which demand increases as price increases have positive own price elasticities. This result usually indicates that the product is a ________.
Luxury product
If price elasticity is between -1 and 0, the price elasticity is low, or ______.
Inelastic
If the price elasticity of demand is exactly -1, it is said that demand is ______.
Unit elastic
When price elasticities is less than -1, the price elasticity of demand is _____, or ______.
High or elastic
For a given percentage increase in price, the quantity demanded will decrease by a greater percentage than the increase in price.
Less than -1, negatively, highly elastic
For a given percentage increase in price, the quantity demanded will decrease by the same percentage.
-1, negatively unit elastic
For a given percentage increase in price, the quantity demanded will decrease by a lesser percentage than the increase in price.
Greater than -1 to 0, inelastic
For a given percentage increase in price, the quantity demanded will increase by a lesser percentage than the increase in price.
Greater than 0 but less than 1, inelastic
For a given percentage increase in price, the quantity demanded will increase by the same percentage.
+1, positively, unit elastic
For a given percentage increase in price, the quantity demanded will increase by a greater percentage than the increase in price.
Greater than +1, positively, highly elastic
The percentage change in the quantity demanded of a product in response to a percentage change in the price of another product.
Cross – price elasticity of demand
What is the formula for the cross price elasticity of demand?
(Percent change in the quantity demanded of product one)/(Percent change in the price of product 2)
A negative cross – price elasticity of demand, as in the case of coffee and cream indicates ________.
Complementary products
A positive cross - price elasticity of demand characterises _______ in many but not all. It depends on how close of a ________ one product is for the other product. For example, a decrease in the price of Coke may be accompanied by a reduction in the quantity demanded of Pepsi.
Substitute products
The percentage change in the quantity demanded of a product divided by the corresponding percentage change in income.
Income elasticity of demand
A luxury product usually has an income elasticities of…
Greater than one
A necessity product may have an income elasticity of….
Approximately 0
Considers only the explicit costs
Accounting profit
This takes a broader view of costs and also then deducts implicit costs from revenues and explicit costs to arrive at _______.
Economic profit
The value forgone by choosing a particular course of action relative to the best alternative that is not chosen.
Opportunity cost
Costs that do not fluctuate with the level of output of the company
Fixed costs or overhead
Costs that fluctuate with the level of output of the company
Variable costs
Cost savings arising from a significant increase in output without a comparable rise in fixed cost.
Economies of scale
Although adding variable inputs of one factor, such as labor, to fixed inputs of production, such as machinery, increases total output, the gain in output will increase at a decreasing rate even if the fixed inputs of production remain unchanged.
Law of diminishing returns
Refers to the extent to which fixed costs are used in production
Operating leverage
The cost to the company of producing an incremental or additional unit
Marginal cost
At one extreme, where there is a high degree of competition, a market is said to be _______. At the other extreme, where there is no competition, a market is said to be a ________.
Perfectly competitive/a monopoly
Obstacles, such as licenses, brand loyalty, or control of natural resources, that prevent competitors from entering the market.
Barriers to entry
Where there is no competition, a market is said to be a…
Monopoly
A market where there are many buyers and sellers who are able to differentiate their products to buyers
Monopolistic competition
A market dominated by small number of large companies because the barriers to entry are high.
Oligopoly
A special case of oligopoly in which a group jointly controls the supply and pricing of products or services produced by the group.
A cartel
