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LSE > Demand & Costs > Flashcards

Demand & Costs Flashcards

1
Q

Defining economics

A

Economics is the study of how scarce resources are allocated to competing needs (Samuelson & Temin, 1976).

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2
Q

What resources at a company are finite?

A
  • Money
  • Human Capital
  • Source Materials
  • Time

All have an upper limit

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3
Q

What must a business manager decide?

A

How best to allocate resources to create the most value

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4
Q

What are the 3 economic fundamentals?

A
  • Trade-off
  • Individuals + firms act rationally
  • Individuals + firms pursue their own self-interests
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5
Q

“Pursuit of self-interest”

A

People act and behave in ways that promote positive personal benefits

The Butcher example

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6
Q

What is demand?

A
  • How much a consumer desires a product and how much they are willing to pay
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7
Q

Price of a product + how many a consumer is willing to buy at that price =

A

Demand

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8
Q

WTP

A

Willingness to pay

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9
Q

Defining Economics

A

Economics is the study of how scarce resources are allocated to competing needs (Samuelson & Temin, 1976).

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10
Q

What can influence WTP?

A
  • The individual
  • Time
  • Prices of other goods
  • Income
  • Sometimes no logic. Personal choices.
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11
Q

Law of demand

A

Price goes down = demand goes up

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12
Q

Demand curves are specific to a particular ????? and ?????.

A

Place and Time

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13
Q

What affects the demand curve?

A
  • Characteristics of a good changes
  • Prices + characteristics of other goods
  • Consumer income and wealth
  • Firms adjust market strategy
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14
Q

Consumer Surplus

A

Consumer surplus is the value that consumers receive beyond what they pay for a product (Boulding, 1945)

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15
Q

What is price elasticity of demand (ED)?

A

Price elasticity of demand refers to the percentage change in quantity demanded when the price of a product changes by 1% (Moffatt, 2017).

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16
Q

Inelastic

A

Changes in price doesn’t have a major impact on the quantity demand

17
Q

Elastic

A

Small changes in prices have a signification change in demand

18
Q

Ed formula

A

ED = AQ/ Q over AP/ p

P - price
Q - quantity demanded
AQ - change in quantity
AP - change in price

19
Q

ED < -1

A

Elastic

The quantity demanded changes by more than 1% for every 1% change in price.

Supply Curve - Slopes downward gradually; leans towards being horizontal

20
Q

ED = -1

A

Unit Elastic

The quantity demanded changes proportionally with a change in price.

Supply Curve - Downward sloping demand curve close to a 45° angle

21
Q

ED > -1

A

Inelastic

The quantity demanded changes by less than 1% for every 1% change in price.

Supply Curve - Slopes downward sharply; leans towards being vertical

22
Q

ED = 0

A

Perfectly inelastic

The quantity demanded does not change with a change in price.

Supply Curve - Perfectly vertical

23
Q

E = oo

A

Perfectly elastic

The quantity demanded is infinite at a particular price. Any change in price results in no demand for the product.

Supply Curve - Perfectly horizontal

24
Q

How can managers estimate the shape of the demand curve of their business?

A

Past Data!

25
Q

Examples of inelastic products?

A

Food

26
Q

Examples of elastic products?

A

Luxury/ goods you can do without

27
Q

2 types of costs

A
  1. Accounting
  2. Economic
28
Q

Accounting costs

A
  • Actual expenses incurred during production (fixed and variable)
29
Q

Fixed costs

A

Starting productions or participating in the market

E.g. Rent

30
Q

Variable costs

A

Vary dependant on production.

E.g. Materials

31
Q

Fixed + Variable =

A

Total Costs

32
Q

Define Marginal Costs?

A

Marginal cost is the cost of producing one additional unit of a product (O’Sullivan & Sheffrin, 2003).

33
Q

Example of a low marginal cost product?

A

Software

34
Q

Difficult to sustain growth (marginal costs)

A

Once a firm’s production grows beyond a certain point, it is difficult to sustain that growth without -

  • Renting additional space
  • Paying employees
  • Hiring more staff
35
Q

What happens until you reach economies of scale?

A

Marginal costs go up

36
Q

Opportunity costs

A

What is relinquished when a resource is deployed

LSE (3 decks)

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