Chapter 8 Flashcards
What do price income elasticities tell us
How a consumer may react to changes in price or income
What does economic theory help us understand 3 things
How individuals, firms and markets interact
Investments into securities sectors and firms
How wider economy can effect economic context in which they operate
What are economic analysts used for
For forecast and outlook
Economic analysts have well defined assumptions of…
Efficient markets - no systematic errors
Ceteris paribus -relationships understood if all else remain unchanged
Max personal utility
Agents well informed and rational
What is market economy
Prices vary depending on competition
What is command economy
Gov decides what is produced and how it is distributed
What. Is mixed economy
Mix of the market and command economy
Details about points inside production possibility frontier
Feasible but inefficient
What does moving along production possibility frontier mean
There is a trade off
Opportunity cost wrt apples and machines
Number of machines given up to increase apples by 1 = opportunity cost
What affects demand
Price
Availablility of substitutes
Income
Health
Veblen goods?
Higher prices equals higher demand -eg luxury watches
Positive price elasticity
Normal goods
Higher income equals increase demand
Inferior goods
Higher income equals less demand
Price elasticity of demand meaning and formula
Sensitivity of a change in demand when price changes
Change in quantity of change in price
When elasticity is greater than modulus of one, what is it
Elastic
What happens to revenue when you decrease price of elastic good
Increase revenue
What happens to revenue when you decrease price of Inelastic goods
Decrease total revenue
What happened to revenue when you decrease price of unit elastic good
No change in revenue
Cross price elasticity ?
Change in quantity demanded in response to a proportionate change in price of a other good
Cross price elasticity of demand of biscuits in relation to price of coffee
Change in biscuit demand over change in coffee price
What does negative cross elasticity mean
Complimentary goods
What does positive cross elasticity mean
Substitute goods
What is the elasticity of an easily susbstituted good
Elastic
Long term elasticity
Length of time that is necasrassary for all adjustments to be made in response to price change
Short term elasticity
Response when price changes and Consumers have not fully adjusted to price change
Income elasticity of demand
Measure chnage in demand relative to chnage in income
What elasticity do luxury goods have
Elasticity of greater than one
What elasticity do necessity goods have
Elasticity of less than 1
Budget share meaning and how it’s affected for luxury and necessity goods as income increases
Proportion of income spent on a good
Budget share increases for luxury and decreases for necessity as income increases
Given goods and example and why does this happen
Demand increases as price increases
Potatoes rice
Negative income effect out weighs sub effect
Opportunity costs
How much production costs would earn in their next best alternative use
Supernormal profit is
Accounting profit - oppcosts
How variable costs change with output
Low output = high VC due to inefficiency
Intermediate output = resources used more efficiently so vc slows down
High output = sharp vc increase due to increase rent and increase work space required
When do firms produce till
Mc= mr or until mc is greater than mr
What are the costs in long run
All varied
What are costs in short run
Some costs are fixed
What happens when LRAC is decreasing
Increasing returns to scale
As resources are used more efficiently
What happens when LRAC is increasing
Decreasing returns to scale
What is the lowest point on LRAC
Minimum efficient scale, MES
What’s happening to ac when mc is less than ac
Ac is falling
When can we ensure production in long and short run
Price is greater than LRAC in long run and SRAVC in short run
Perfect competition
Neither buyers nor sellers can influence the price
Characteristics of perfect competition
Large number of buyers and sellers
Homogenous goods
No barriers to market
What demand does perfect comp face
Horizontal demand curve
What determines supply in the long run in perfect comp
MC
What happens if all firms have same cost curves
Horizontal industry supply curve
What is flatter, long run supply or short run supply
Long run supply due to increased resource efficiency
What happens when price is greater than or less than equilibrium price
Price greater then p star then super normal profits occur so new entrants into market compete away the profit
Price less than p star then there would be unsustainable losses
Pure monopoly ?
One supplier that forces downward demand curve
Where do monopolies produce
On the elastic part of the demand curve
Natural monopolies occur when …
There is a falling LRAC over a large range of output, ie start up costs are very high
Perfect price discrimination
All customers are charged a different price
Monopolistic competition
Large numbers of small firms with no barriers to entry but products are differentiated
Oligopoly
Have some price power, few firms with significant barriers to entry, products homogenous or differentiated
Cartel agreement
Group of firms agree a price and quantity to sell
Tacit agreement
No legally binding cartel agreement
When do kinked demand curves arrive
If a single firm lowers its pricing then competing firms follow
Price leadership model
One firm sets price and others follow
What is the market share for price leadership model and what can this lead to
Market demand is shared between firms and so larger firms have incentive to drive smaller ones out of business called predatory pricing which is illegal
What is the output of a duopoly
Somewhere between Qpc and Qmonopoly
Bull market sequence
Transportation and energy lead market upwards
Credit and tech follow
Consumer growth and cyclicals
Capital goods and financial get strong as market peaks
When does bear market take hold
Just before economy tops out
What performs relatively well in bear markets
Basic industries and consumer staples, utilities
When is good for stock market recovery
Recessions and market recovery
Porters 5 competitive forces
Bargaining power of suppliers
Bargaining power of customers
Threat of new entrants
Threats of substitute product
Rivalry
Product life cycle
Introduction
Growth
Mature
Decline
Obsolete
Limitation of product life cycle
Assumes customers don’t return to old preferences
Nothing done to revive product
Firms have many products and not just one
Time scale of each phase
Swot analysis meaning
Strengths weakness # internal to business
Opps and threats - external to business
Introduction phase of product life cycle
Sales grow slowly and could attract competition but still low profits
Growth phase of product life cycle
Sales increase rapidly and competition is attracted but profits increase
Mature phase of product life cycle
Product well known with economies of scale, innovation needed to beat competition
Decline phase of product life cycle
Falling market share and profits and increased advertising or relaunch required
Product research 4 Ps
Product - it does what it’s supposed to
Place - easily accesible to customers
Promotion -adverts to target customer
Price - good value for money
3 Ps for service
People -waiter
Process- fast food or relax dininin
Physical - element of service is provided like food
What needs to be true for firms to produce in the long run
AR greater than AC
What do firms care about in the short run
Covering their variable costs and will ignore fixed
What is the supply curve in the long run
Long run MC above the average total cost curve
What is true with monopolies creating a downward demand curve
MR will always be less than AR
What is a short run supply in competitive industry
Short run marginal cost curve above its short run average variable cost curve
Is there a supply curve for a pure monopoly
No
Where does MR and AR relate in monopoly
MR is less than AR
