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eco105 > eco105 7-8 > Flashcards

eco105 7-8 Flashcards

1
Q

Depreciation

A

the decrease in value of equipment over time because of wear and tear and because it becomes obsolete

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2
Q

Obvious costs

A

also known as explicit costs, they are plain to see

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3
Q

Implicit costs

A

hidden opportunity costs of what a business owner could earn elsewhere with time and money invested

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4
Q

Accounting profits

A

Revenues - obvious costs (including depreciation)

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5
Q

Risk-loving

A

gamblers, might not require much risk compensation to go for the uncertain investment as long as the returns are just a bit higher than the guaranteed return

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6
Q

Risk-averse

A

more cautious, it would take a very high risk compensation to get you to go for the uncertain investment over the guaranteed bank investment

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7
Q

Normal Profits

A

compensation for the use of a business owner’s time and money, the sum of the hidden opportunity costs

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8
Q

time component of normal profits

A

the value of the best alternative use of the owner’s time

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9
Q

money component of normal profits

A

the best alternative return on investment, including risk compensation

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10
Q

Economic profits. =

A

revenues - (obvious costs + normal profits)

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11
Q

Economics losses

A

negative economic profits

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12
Q

Breakeven point

A

business just earning normal profits, no economic profits or losses

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13
Q

Short-Run Market Equilibrium

A

term used to describe a market where quantity demanded equals quantity supplied

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14
Q

When there are economic losses,

A

prices are not covering all of the business’s opportunity costs of production; consumers don’t value the product/service enough to pay the price that covers all business costs, including normal profits

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15
Q

When businesses exit the industry,

A

supply decreases, moving the market price up along the unchanged demand curve; businesses keep exiting, supply keeps decreasing, prices keep rising, and losses keep decreasing

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16
Q

Long-Run Market Equilibrium

A

term used to describe an industry where businesses have 0 economic profits; quantity demanded equals quantity supplied, economic profits are 0, no tendency for change

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17
Q

As new businesses enter the industry,

A

supply increases

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18
Q

Monopoly

A

Only seller of a product or service; no substitutes available

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19
Q

Market power

A

business’s ability to set prices; A monopoly has maximum power to set prices

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20
Q

Price maker

A

Pure monopoly with maximum power to set prices

21
Q

The price maker’s goal

A

to find the price and quantity combination that yields the greatest profits

22
Q

demand curve for a monopoly

A

steep and inelastic because there are no close substitutes

23
Q

Perfect competition

A

many sellers producing identical products or services

24
Q

Price taker

A

business with zero power to set prices; Profits are limited to normal profits

25
Q

The best any business in perfect competition can hope for is to

A

recover all their opportunity costs of production, including normal profits → economic profits are 0

26
Q

why does perfect competition have Perfectly Elastic Demand

A
  • no matter how much you supply, the market will demand it
  • you will find buyers for any quantity you can produce, and you don’t have to lower your prices to sell more
27
Q

Market structure

A

characteristics that affect competition and pricing power

28
Q

main characteristics that affect competition and pricing power

A

available substitutes, number of competitors, barriers to entry of new competitors

29
Q

Available substitutes

A

How we define a market depends on how we define a particular product or service

The more broadly we define a market the more substitutes there are, and the more competitors there are → less pricing power

The more narrowly a market is defined, the fewer substitutes and competitors → more pricing power

30
Q

Number of Competitors: pricing power

A

The fewer competitors, the more pricing power

The more competitors, the less pricing power

31
Q

Impact on number of competitors caused by technology

A

Can be good as it allows for businesses to extend their market, selling services anywhere in the world consequently increasing sales

Can be bad as companies around the world can compete, which limits pricing power

For consumers, the internet’s explosion of competition is good → more choices and lower prices

32
Q

Barriers to entry

A

legal/economic barriers preventing new competitors from entering a market

33
Q

Legal barriers to entry

A

governments keep new competitors out of a market by passing laws, giving a business the exclusive right to supply a product/service

34
Q

Patents

A

exclusive right to the inventor to supply his new product/service

35
Q

Copyright

A

exclusive rights to creator of a literary, musical, dramatic, or artistic work

36
Q

Average total cost

A

total cost per unit of output

Average total cost decreases as the business produces larger quantities of output

37
Q

Economics of scale

A

average total costs of producing decreases as quantity (scale) of production increases

If a big business is already supplying most of a market, a new competitor trying to enter will start will lower sales and therefore higher average total cost → new business can’t compete on price

38
Q

Product differentiation

A

attempt to distinguish product/service from those of competitors → fewer substitutes, more pricing power

39
Q

Higher pricing power with inelastic demand

A

Businesses with the highest pricing power tend to have the most inelastic demand

With fewer substitutes, consumers have less choice and are in a weaker bargaining position

Businesses have more market power to be able to raise prices and still keep selling

40
Q

Low pricing power with elastic demand

A

businesses with the lowest pricing power tend to have the most elastic demand

With more substitutes, consumers have more choice and are in a stronger bargaining position → businesses gave no power to raise prices

With perfect substitution there is no product differentiation or brand loyalty, so the demand for every supplier’s particular product is perfectly elastic

41
Q

The higher the pricing power, the more ___ demand is; the lower the pricing power, the more ___ demand is

A

inelastic, elastic

42
Q

Oligopoly

A

a market structure with a few big businesses that control most of the market

43
Q

In an oligopoly with available substitutes, demand is more ____ than for monopoly, but more ___ than perfect competition

A

elastic, inelastic

44
Q

Why are there barriers to entry in an oligopolistic market

A

Sellers are usually big, with economies of scale that make it hard for new competitors to enter

45
Q

Monopolistic Competition

A

Many small businesses make similar but slightly differentiated products/services

46
Q

Are there any barriers to entry in monopolistic competition

A

There are no barriers to entry, so the only hope for economic profits comes from the product differentiation that gives each business some slight pricing power or from producing at lower cost

47
Q

What do businesses do to compete

A
  1. Cut costs
  2. improve quality and product innovation
  3. Build barriers to entry
48
Q

What does competitive pressure do

A

Causes the matching of competitor’s actions usually means matching price cuts on existing products/services

49
Q

Creative destruction

A

competitive business innovations generate economic profits for winners, improve living standards for all, but destroy less productive or less desirable products and production methods

eco105 (3 decks)

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