Econ Test 2 Flashcards
Definition of a market
When and where buyers and sellers meet to negotiate prices and quantities for a particular product
Demand Definition
The whole curve. The level of desire for a product
Supply Definition
is the different quantities of good/service that sellers are willing/able produce at different prices
Law of Demand
As Price (P) of a product increases, quantity demands (QD) decreases and vice versa
What does it mean to say that for demand, price and quantity demand have an inverse relationship?
As the price goes up, the quanity demand goes down. As price goes down, quantity demand goes up
On a supply/demand graph, what is on the x-axis, what is on the y-axis?
Price is the y-axis
Quantity is the x-axis
Basic Demand Curve
It goes high on the y-axis to lower
What happens to the demand curve if price changes and the quantity demand changes?
It just moves the point on the graph.
What direction does the demand curve shift if demand increases or decreases?
It moves right if the demand increases, left if it decreases.
What are 5 non-price determinant that can shift demand.
Buyer Number
Related Good
Income
Taste/trend
Expectation
What is a substitute? 2 goods that can be subsitutes
Products that serve the same utility:
In-n-out Burger and McDonalds Hamburger
Coke and Pepsi
What is a complement? 2 goods that are a complement
2 goods that are a complement: If the demand of the complement decreases, the
-Hotdog and Hotdog bun
-Coffee and Coffee Creamer
What is the law of supply
As the price increases, the quantity producer supply increases. QS=QP, the graphs slope goes and is positive.
What does it mean to say that for supply, price and quantity supplied have a direct relationship.
Price increases, so does the quantity supply increases. the QS and QP go up eaqually.
What happens on a supply curve if price changes? What happens if the quantity supplied changes?
The point moves on the graph.
What is the difference between a tax and a subsidies.
If a company is being taxed for supplying a good. This increases the cost to make a product.
->the supply curve decreases
It is the opposite for subsidies.
The 6 non-price determinants
T-technology
I-input prices (think Factors of Production)
N-Number of Sellers (More Olive Gardens in the same vacinity
T-Taxes/Subsidies
E-Expectation
R-Related Good.
Definition of Equillibrium
It is the level on the graph where the point on the Quantity Demanded equals the Quantity Price
-The Market is the most stable at equilibrium where both buyers and sellers can agree on P and Q of a product
What is a Surplus?
More quantity supplied than quantity demanded.
->Surplus=Sellers try to increase sales by cutting price.
Look on Graph on study written sheet.
What is a shortage?
When quantity demanded is greater than quantity supplied.
-Below Equilibrium
-Sellers raise prices
What is a shortage?
When quantity demanded is greater than quantity supplied.
-Below Equilibrium
-Sellers raise prices
Graph with equilibrium
On paper
What will suppliers do if they have an shortage in order to get equilibrium? What will suppliers do if they have a surplus?
Shortage=raise price to equalibrium
Surplus=lowers prices
Elastic good
Consumers will determine if they buy this good based on their prices. Change in price will make the consumers react
Inelastic Good
Prices don’t matter as much to the consumer (unresponsive to price change)
5 elastic goods example
Restaurant meals
Car (if you have time to get a car)
Fresh Tomatoes
Foreign Travel, long run
Airline travel long un
5 Inelastic products
Salt
Gasoline (short and long run)
Insoline
tooth picks
Legal services short run
What are the 4 factors/criteria which affect demand elasticity
Substitutes:many subsitutes=elastic
Portion of income: Large portion of income= elastic
Small portion of income=inelatic
Luxury/Necesity
Time
What do different potential coefficients tell us about a product’s elasticity?
Coefficient is between 0 and 1
-Inelastic Demand
—Consumers are not sensitive to price
Coefficient is 1
-Unit elastic Demand
—–Demand changes in the same proportion the price did
Coefficient is Greater than 1
——Elastic demand
-Consumers are sensitive to price
What is the equation for the Total Revenue Test
TR=Price x Quantity
Same direction=Inelastic
Oposite Direction: TR(up) Price(down)= Elastic
Stays the same:Unit elastic
What are fixed costs?
Costs for fixed resources that DON’T change with the amount produced.
-Factory Rent, Manager Salaries
What are variable costs?
costs for variable resources that do change based on how much is produced when more or less is made.
How do you find the economic profit for a business
How to find the economic cost if you add the variable cost and fixed cost together.
What is the law of Marginal Diminishing Utility to Marginal Costs
Businesses are going to stop producing a certain amount and having a certain amount of people when its going to hurt. Why make a good and not gain. You are going to stop a the bottom of the curve.The law of diminishing marginal utility states that all else equal, as consumption increases, the marginal utility derived from each additional unit declines.
What is a price ceiling
A price ceiling is the maximum price sellers are allowed to charge.
—Rent Control is a good example
Price ceilings are for consumers, are placed below equilibrium, and they cause shortages
what is a price floor (examples)
The minimum amount sellers are allowed to charge.
-They are for the seller, they cause surpluses.
-government does it to help producers
-above equilibrium
-Minimum wage is a good example
Pros and cons of price ceilings and floors
Pros
-Price ceilings help keep prices low for the consumers
-Price floors help suppliers make more money
Cons
-Causes persistant shortages/surpluse
-Resources aren’t allocated efficiently
-Can cause Illegal(floor) and black market (ceilings) activity
-Special interest groups push for price controls for political reasons
Monopoly
-a market dominated by a single firm/seller (Rockefeller)
-No actual competition for the one firm in the market
-this benefits the seller
Perfect Competition (theoretical)
-Large number of firms all produce and sell the same product for the same preice
-Requirements
–Many buyers and sellers
–Sellers offer identical products
–Sellers are able to enter and exit the Markey freely very low barries
Monopolistic Competition
-Relatively large number of sellers
-Differentiated products
-Some control over price
-Easy entry and exit (low barrier)
-Non price competition
Oligopoly
-A few large producers (less than 10)
-Identical or differentiated products
-High barriers to entry
-Mutual Independence
—Firms use strategic Interdependence
—–Pepsi/Coke
Game theory
The study of how people behave in strategic situations
Prisoners dilemma
If one business goes lower in price, either the other firm goes lower or stays. The risk is that the other company will make more money so they have to raise their prices. If they both raise their prices, then they both get more money. They can’t discuss it though
Why do you think that Tobacco and Coffee are fairly inelastic
They have addictive qualities that make them a necessity
Who benefits from an Oligopoly
Consumers can even benefit from lower prices and better quality goods and services in this situation. The market itself will still lack competition, but the behavior of the organizations can still be highly competitive
Who benefits from Monopolistic Competition
Consumers benefit because of differentiated products
