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Uni > ECON130 > Flashcards

ECON130 Flashcards

1
Q

The competitive model

A

Examins supply & demand
Assums that:
- Firms are interested in max profit
- Consumers are rational/self -interested
- Markets are perfectly competitive

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2
Q

Efficiency of competitive model

A

The allocation of resources predicted in the competitive model is efficient e.g.
- scarce produce is not wasted
- Not possible to produce more of one good without producing less of another good
- Not possible to make one person better off without making someone else worse off

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3
Q

Rationality

A

A rational decision is one where a decision-maker choose the option that gives them the best possible payoff subject to the constraints they face

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4
Q

Main characteristics of a competitive market

A
  • many firms
  • Selling identical products
  • too many customers
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5
Q

General equilibrium

A

Concept where all markets are balanced and that supply equals demand in every market
- All consumers max utility
- All firms max their profit

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6
Q

When is a pareto efficienct?

A

An economy is pareto efficient if:
- An economy has its resources and goods relocated to the maximum level of efficiency & no changes can be made without making someone worse off

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7
Q

4 elements of consumer choice

A
  • Consumer’s income
    • Prices of goods
    • Consumer preference
    • Rationality
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8
Q

the budget set

A

All the different bundles of goods a consumer can afford

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9
Q

What does the budget line show?

A

shows the different bundles a person could buy when they spend all their income

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10
Q

Utility

A

The benefits derived from consuming a bundle of goods are called utility

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11
Q

When can two different bundles be represented using indifference curves

A

When the bundles have the same utility

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12
Q

Utility function

A

Evaluates a bundle according to a person’s preference

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12
Q

Sunk costs

A

Unavoidable costs

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13
Q

Marginal costs

A

Costs added by producing on additional unit of a product or service

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14
Q

Opportunity costs

A

The loss of other alternatives when one alternative is chosen

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15
Q

Production possibility frontier

A

An economic model showing the production possibilities of an economy when resources are maximised in production

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16
Q

What do point along & inside a curve (PPF) show

A

Along: show productive efficiency in the economy, where resources are fully utilised
Inside: show an economy that has not fully utilised its resources

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17
Q

What does the bundle of MUx/Px= MUy/Py mean

A

Means that the person derives the same satisfaction per $ of expenditure from each good

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18
Q

equi-marginal principle

A

The consumer should continue to adjust his consumption so that MUx/Px falls and Muy/Py rises until they are equal

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19
Q

Normal goods

A

Goods that experience an increase in demand when income rises

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20
Q

Inferior goods

A

Good which demand drops when income rises
Consumers do not always buy more of a good when their income rises. Consider an income increase

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21
Q

How can a price change impact the budget line?

A
  • it alters the slope of the BL, reflects the change in relative prices (the substitution effect)
  • it changes the real purchasing power of income - some bundles are no longer affordable (the income effect)
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22
Q

What determines costs?

A

Depend on the inputs a firm uses
- The productivity of factors of production
- The price of factors of production
- What can be changed - fixed/variable costs

23
Q

Short-run costs

A

Cost of a product that has short term implications in the production process

24
Q

Marginal costs (MC)

A

is the rise in total cost if output increases by 1 unit

25
Q

Average cost (AC)

A

is the typical cost of a unit of output, for a particular level of output

26
Q

Marginal product (MP)

A

Shows the additional output created as a result of additional input
MP = ?Y/?X
X =change in use of input
Y= Change in quantity of output

27
Q

Input choice

A

level & mix of inputs will depend on the timeframe across which it is making decisions: short or long run

28
Q

Production function

A

Explains relationship between physical inputs and outputs
outputs = number of goods/services produced in a given time
inputs = number of resources used to produce these outputs

29
Q

What does the production isoquant show?

A

Line on a curve that shows combination of inputs that will produce a specific level of outputs

30
Q

In the short run how do changes in the fixed costs impact competitive markets

A

changes to fixed costs do not affect a firm’s marginal cost of production
As long as min AVC < P, then a firm should continue to produce at the quantity where MR = MC
- Increase in fixed costs does have an effect in the short run it increases the firm’s total costs = reduced profit

31
Q

In the long run how do changes in production impact competitive markets

A
  • if a firm makes a loss it will exit the industry
  • at an industry level this alters the price that the remaining firms face
  • eventually they will return to making zero profit
32
Q

If a perfectly competitive firm shuts down in the short run & exits the industry in the long run, the firms short run condition is

A

TR<TVC
TR = total revenue
TVC = Total variable cost

33
Q

Perfectly competitive firms are… (3)

A
  • Price takers
  • Sell homogeneous products
  • Small relative to the size of the market
34
Q

The rising part of a perfectly competitive firm’s ____ cost curve is the firm’s short run ___ curve

A
  1. marginal
  2. supply
35
Q

As a new firm enters an increasing-cost industry what happens to the LRAC curve

A

the LRAC curve shifts up
(Long run average cost)

36
Q

As long as price is sufficient to cover____, the firm is better off by operating rather than shutting down

A

Average variable cost

37
Q

Average variable cost

A

total variable cost per unit of output

38
Q

In the long run firms will expand as long as there are more____ and new firms will enter the industry as long as they earn ____

A
  1. economics of scale
  2. Positive economics profits
39
Q

If a firm shuts down in the short run what is equal to what?

A

Their losses are = to fixed costs

40
Q

The best explanation for the slope of a short run marginal cost schedule is

A

A fixed factor causes diminishing returns to other factors

41
Q

When does the profit-maximising output occur?

A

When MC= MR
Marginal cost = marginal revenue

42
Q

What does the capital- to- labour ratio

A

This indicates how much capital is being used per unit of labour in the production process

43
Q

Define production function

A

is a set of technically efficient production plans i.e. it gives the maximum amount of output that can be made given the specific inputs and available technology

44
Q

Define marginal product

A

Extra output from the use of one extra unit of an input

45
Q

Input choice

A

Level & mix of inputs will depend on the timeframe across which it is making decisions: short or long run

46
Q

How can a firm achieve cost minimization?

A

A firm should use a mix of inputs so that it does not want to spend any more/less on either input i.e. it has the best mix of inputs for a given level of output

47
Q

What does the production isoquant show ?

A

shows a set of efficient techniques that produce a given level of output

48
Q

Profit maximisation in competitive markets

A
  • Firms produce where the difference between total revenue and total cost is greatest
    • This occurs when the slope of TR and the slope of TC are equal
    • The slope of the TR curve is MR
    • The slope of the TC curve is MC
      Competitive firms maximise profits at a production level when MR = MC
49
Q

Production & fixed costs in the short run

A

changes to fixed costs do not affect a firm’s marginal cost of production
As long as min AVC < P, then a firm should continue to produce at the quantity where MR = MC

50
Q

Production & fixed costs in the long run

A

if a firm makes a loss it will exit the industry - at an industry level this alters the price that the remaining firms face - eventually they will return to making zero profit

51
Q

Accounting costs

A

Actual payment made by a firm in a period

52
Q

Normal profit

A

in a competitive industry, the long run firms make zero economic profit i.e. ‘normal’ profit where TC=TR - difference between is 0

53
Q

Supernormal profit

A

Profit over & above the return earned at the market rate i.e. above normal profit - a firm might like this but competition can drive this profit down to a normal level - not good in the long term

54
Q

Equilibrium

A

Constituted by a price & a quantity (in a free, perfect market) - in particular a price where the market clears - price at which quantity supplied = quantity demanded

55
Q

The demand curve Qd = 10 - 1Px + 0.5Py
What do the letters stand for & (-) & 10

A

Px = price of good x
Py = price of substitute good
Qd = the quantity demanded of good x
- = inditaes that as the price of good x goes up the quantity demand of good x goes down
10 = other factors

Uni (4 decks)

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