economics 1 Flashcards
What 2 factors are consumers choice limited by
income, price
What is a budget line/ constraint
line describing limits in consumption choices
How does a budget constraint change when price or income increases
if price increases only relative price changes. Gets smaller
if income increases then parallel shift
what does it mean if the slope of budget constraint changes
relative price between the two products has changed
blue= new line. How has the relative price between product 1 and 2 changed
relative price to buy product 2 increases compared to 1
How has the real income and the relative price changed in this graph
real income has increased. relative price is the same because gradient is the same
What is the relative price of beers to cocktails
10/5 = 2
What can the person afford and what can’t they
On the line are different consumptions possibilities
What is an opportunity cost
best alternative forgone
what is real income in terms of the graph
income expressed as the quantity of goods you can afford e.g (number of cocktails you can buy) if income is £10 and cocktails=£2 then your real income is 10/2=5 cocktails
What is the opportunity cost of buying a cocktail
(1 cocktail =) 2 beers
What is the opportunity cost of buying a beer
to buy two beers you must give up 1 cocktail. So opportunity cost 2 beers = 1 cocktail
What is a preference/ indifference curve
curve showing all possible good combinations that the individual is indifferent between/ yields same level of utility
What are the 4 rules of an indifference curve
- always slopes downwards
- convex
- more is always better
- curves cannot cross
Why is an indifference curve always convex
law of diminishing marginal utility/ substitution
Why does an indifference curve slope downwards
When one good is increased, the other has to go down to keep the same utility
What is the law of marginal rate of substitution (MRS)
rate at which a person will give up y to get an additional unit of x and at the same time remain indifferent
How do you measure the marginal rate substitution (MRS) of the curve
its magnitude
If the marginal rate substitution (MRS) is high/low what will the curves look like
high MRS- steep/ willing to give up large amount of y for small x
low MRS- flat/ give up only small amount of y for large x
Which curve is the most preferred
the higher/ more=better.
Anything on I3 gives higher utility than the others
What does ceteris paribus mean
all other influences being held constant
What are the 4 determiners of demand and ceteris paribus
- substitution effect (price of related goods)
- income
- tastes
- expectations
What is the law of demand
other things remaining the same- higher the price of the good= smaller the quantity demanded/ lower price= more quantity demanded
What happens to the sale of a product if its opportunity cost increases
opportunity cost= you could buy more of something else for one unit of this product
so people buy less of that good and buy more substitutes
If prices rise but income stays the same what happens to the sale of a product
price relative to income increases so people decreases their spending (consumers real income falls)
If a products substitute gets more expensive what will happen to the sale of a rival substitute
sales will increase/ opportunity cost becomes less
Which of the letters is optimal/ sub-optimal/ unattainable
b= unattainable
a= maximum utility on budget
c=sub optimal (utility not maximum)
d= sub-optimal (leaves budget unspent)
What is a normal good
a fall in price always increase the quantity bought/ quantity demanded rises with income
What is an inferior good
quantity demanded decreases with income/ If your income goes up you will eat better than pot noodles
What is libertarian paternalism
nudges/ someone is making the choice for us (cigarette packages and alcohol behind till)
How do firms find out how responsive quantity demanded is to changes in price
price elasticity of demand
Is D1/D2 and increase or decrease in demand
D1= increase in (quantity demanded) demand
D2= decrease (quantity demanded) in demand
what is a total revenue of a sale of a product
price x quantity sold
What its a demand curve
relationship between the price of a certain commodity and the quantity of that commodity that is demanded at that price
what does PED stand for
price elasticity of demand between 2 points
What is the equation for PED
PED are negative but we ignore the negative sign. If PED=-2, a 10% price cut will generate a — increase in quantity demanded
10% price cut = 20% increase in quantity demanded
Is a PED inelastic/ elastic at -2 or -0.5
-2= elastic (price cut has large effect on demand)
-0.5= inelastic (price cut has small effect on demand)
If PED=0.5, a 10% price cut will generate a — increase in quantity demanded
10% price cut = 5% increase demanded
How to calculate PED from A to B
5
How the elasticity of a demand curve change down the curve
starts elastic at the top and becomes less elastic
If elasticity= 1, a 10% change in price will generate a — increase in quantity demanded
10% price change= 10% quantity change
PED> 1 = inelastic/ elastic
PED< 1 = inelastic/ elastic
PED= 1 = inelastic/ elastic
PED> 1 = elastic
PED< 1 = inelastic
PED= 1 = unitary elasticity
if PED> 1, then a 10% change in price= bigger/smaller than 10% change in quant demanded
PED> 1= elastic
bigger than 10% change
if PED< 1, then a 10% change in price= bigger/smaller than 10% change in quant demanded
PED< 1= inelastic
smaller than 10% change
What are each of these graphs elasticity
For an inelastic graph how does a price change effect a demand change
price change= small impact on amount demanded
For an elastic graph how does a price change effect a demand change
price change= large impact on amount demanded
what is the equation for profit
profit= revenue - costs
What are the 4 factors of production
land (resources)
labour
capital (machines or human capital such as investments)
entrepreneurship
In a bar setting what is capital and what is labour
capital= bar pumps, glasses etc
labour= staff
What is the production function
Y= output
L= labour
K= capital
What is fixed in the short run
(K) capital is always fixed and labour is the variable
How does a firm increase profit in the short term
increase labour
What does this mean
capital is fixed
In the long run which ones are variable
both
Define total product (TP)
total amount produced
Define marginal product (MP)
change in total product resulting from a 1 unit increase in a variable (labour)/ how much extra output each worker gives
What is the (MP) marginal product of a worker
the extra Y they bring in
Define average product (AP)
total product / quantity of input used (number units of labour). It is the average amount of output each worker can produce
What does the average product (AP) basically tell us about labour
the average productivity of the workers within the firm
Define short run
time frame in which the quantity of at least 1 factor of production is fixed
Define long run
time frame where all quantities are variable
What are the shape of production process curves in both the long and short run
U shaped
What does diminishing marginal return mean in writing
As each worker is added to a fixed amount of capital, each worker has less and less capital to be productive with. After a point the addition to output per added worker will diminish
How is the total product and marginal product effected by diminishing marginal return
total product increases at a decreasing rate + marginal product starts to fall
Why does output initially increase when more labour is added
specialisation/ division of labour boots productivity
Define each of the terms in relation to a bar setting
What is a total product curve plotted against
plotted against labour
What side of the total product curve is attainable and unattainable. Where is the graph efficient/inefficient
inefficient in the attainable section. Anything not on the line is using more labour than necessary for a given output. On the line = technologically efficient
What is a marginal product curve plotted against
plotted against labour/ marginal product is the product per additional worker
Which side of the graph is increasing/ decreasing marginal return
diminishing= too many workers for capital
Where does the marginal product curve always interact with the average product curve
MP curve interacts AP curve at its highest point.
MP= change in total product from 1 addition labour
AP= how much average output per worker adds
What is the total fixed cost (TFC)
cost of the fixed inputs (capital in short run)
What is total variable costs (TVC)
cost of the variable inputs (labour in short run)
What are the total costs (TC)
(TFC + TVC) total fixed costs + total variable costs
What are the total fixed costs in a bar setting
how much the capital costs to run per day
What are the TVC total variable costs in a bar setting
cost of variables which is labour. So will be workers wages
The TVC shape follows the law of the diminishing marginal returns. Which part of the curve is increasing marginal returns and which one is diminishing
DMR- cost increases at an increasing rate so this must be the steep part of the graph
The TVC shape follows the law of the diminishing marginal returns. Which part of the curve is increasing marginal returns and which one is diminishing
DMR- cost increases at an increasing rate so this must be the steep part of the graph
Define marginal cost (MC)
change in total cost resulting from 1 unit increase in output/ increase in production costs with 1 more unit of output
What is the equation for marginal cost (MC)
Question- An increase in output from 10–> 13 jumpers, increases total cost from £75 –> £100. What is the marginal cost (MC)
change in output= 3 jumpers
change in total cost= £25
What the average fixed cost (AFC)
total cost per unit of output
What is the average variable cost (AVC)
total variable cost per unit output (cost for (labour) per unit output )
What is the average total cost (ATC)
total cost per unit output + total variable cost per unit output
ATC= AFC + AVC
Describe the shape of the MC curve
- initially decreases at low output because of greater specialisation
- Increases due to law DMR.
Over time, to get 1 additional unit output more and more workers are needed. Therefore the MC must increase (change in total cost resulting from 1 unit increase in output)
Describe the shape of the ATC curve
ATC= AFC + ATC
is an average of the AVC and ATF curve together, which is why It is that U shape
Describe the shape of the AVC curve
AVC= total variable cost per unit output
1. As output increases more and more labour is needed to produce 1 extra unit due to DMR, so eventually the curve slopes upwards
Describe the AFC shape
AFC= total cost per unit of output TFC/Q
When output increases, the firm spreads its total fixed costs over a larger output, so its average fixed cost decreases, so the curve slopes downwards
What is the equation for ATC, AFC and AVC respectively/ another way of writing this equation
What is the difference between accounting profit and economic profit
economic profit= includes entrepreneurship
accounting profit= doesn’t include
What is the difference between diminishing marginal return in the long run and the short run/ why are long run curves flatter than short run curves
DMR doesn’t exist in long run as you can alter any level of capital
In the short run DMR sets in quickly as you apply more labour to a fixed capital
This is a long run average total cost curve (LRATC) which section is the economies of scale and which is the diseconomies
What is economies of scale
As a company gets bigger they can operate at smaller costs per unit output
What is internal economies of scale
The cost of producing a unit decreases as the scale of your business expands as a result of factors controlled by the firm
What is external economies of scale
A firm’s costs per unit of output decrease as the size of the whole industry grows/ driven by factors associated with a firm’s industry but external to the firm. Benefits all firms not just one
What are some examples of external economies of scale (factors outside firm)
innovations+ new tech, benefits all companies involved and lowers all of their average costs or benefits from more efficient labour
e.g. if gov invests in infastrcutre (railroads)
gov can set up Agglomeration economies
What are some examples of internal economies of scale
1.Specialisation in departments/ managers
2.Purchasing Economies (Bulk-Buying)
3.Technical Economies
4.Financial Economies
Agglomeration economies can help economies of scale. What are they
Benefits of clustering business in a geographical location (create a hub)
-reduces transit costs so cost per unit output will decrease
What does CRS, IRS and DRS stand for
CRS- constant returns to scale (10% increase in price= 10% increase in output)
IRS- increasing returns to scale
DRS- decreasing returns to scale
CRS is constant returns to scale (10% increase in price= 10% increase in output). If a business grows and it get economies of scale, how does this percentage change
economies of scale lower price per unit output so 10% price increase will give higher than 10% increase in output
What are the reasons for increasing returns to scale
- specialisation/ division of labour
- financial economies- bigger firms can get loans at lower interest
- can afford to invest in expensive specialised equipment
Where is the most technically efficient point on the graph
CRS
What are the reasons for decreasing returns to scale
- difficulties in managing a large company/ communication along chain of command becomes difficult/ less clear instructions from managers
- loss of direction- workers might not all be working towards same goal
- management problems and communication failure
What are normal profits
the profit an entrepreneur could have earned in the next best alternate buisness/job
You start your own buisness and give up a job that paid £20,000. Your business earnt £100,000 but you paid out £70,000 for all land and labour. What is the economic profit and what is the accounting profit
accounting= 100,000-70,000= 30,000
economic= 100,000-70,000-20,000 = 10,000
What is the law of supply
when prices are higher, firms are willing to supply more
Why does a supply curve slope upwards
If the price of an item is expensive, firms are more willing to supply/ make it. Because of the higher price of the good its is profitable to supply.
Therefore new firms might be encouraged to enter the market and sell the product, so quantity available increases with price
If supply increases/decreases does the curve shift to the left/right
when supply increases= curve to right
supply decreases= curve to left
What are the determinants of supply/ when one of these change we need to draw a new curve
- prices of factors of production
- prices of related goods produced
- expectation of future prices
- number of supplies
- technology
What are the 5 determinants of supply/ when one of these change we need to draw a new curve
- prices of factors of production (firms supply less if its expensive to make)
- prices of related goods
- expectation of future prices
- number of suppliers
- technology (can lower the cost of production+increase supply)
Why can expectations of future prices determine wether a company will supply a certain item
If the company thinks an item price will go up in the future they may temporarily reduce the amount they sell, thus reducing supply. They build up stock then release the stock when prices are high
On which line has there been an increase in input price and which has had a decrease in input price
green- increase in input price
blue- decrease in input price
On which line has there been an increase in input price and which has had a decrease in input price
green- increase in input price
blue- decrease in input price
When is there a surplus of a good
if price is too high- quantitiy supplied exceeds quantity demanded/ too much of the good
When is there a shortage of a good
if price is too low- quantity demanded exceeds quantity supplied/ not enough of the good
At which price its there a shortage and which is the surplus of a good
price 1= surplus. price is too high. customers want Q1 but suppliers have Q2
price 2= shortage. price too low. customers want Q2 but suppliers have Q1
How is this government action price ceiling non-binding
price ceiling is above equilibrium price/ market retains Eq price as if the ceiling is not there
How is this government action price ceiling binding
quantity demanded exceeds supply, resulting in a shortage of supply
What is economic scarcity
gap between limited resources and theoretically limitless wants
What is a public limited company
business managed by directors and owned by shareholders
What are share prices
prices to buy one stock/ share in a company
Define land
natural resources- land/mines/ farms
Do total fixed costs include entrepreneurship
yes. in a question if there is an opportunity cost as well as capital cost, use both of them to calculate TC
How would you work out the AFC column
average fixed costs= total fixed cost/total prod; 1200/20= 60
ATC = AFC + AVC
TC/Q= TFC/Q + TVC/Q
How would you work out the AVC column
average variable cost= total variable cost/ total prod; 20/20= 1
ATC = AFC + AVC
TC/Q= TFC/Q + TVC/Q
How would you work out the MC
MC= change total cost/ change total product
△TC/Q; 20/20 = 1
What is the relationship between the Marginal Product of Labour and Marginal Costs
Inversely related. In increasing marginal returns, MC will decline because each additional worker is increasingly marginally productive
What is the marginal product of labour
additional units sold per worker
What is responsible for the U shape of the AVC curve
DMR
What is the relationship between AVC and MC
If ATC is rising MC has to be greater than ATC
When MC is below AVC, AVC will be falling. When MC is above AVC, AVC will be rising
When average cost is at its minimum what does it equal
MC
Is MC effected by changes in variable prices
MC= TC/Q
yes-if variable factors change (eg labour) the amount in wages you have to pay changes (total variable costs). If the variable costs change this directly effects total costs and MC
What does operating below capacity mean
not getting the maximum amount of customers
Which is the lowest utility indifference curve
I2; higher vertically but consuming less of everything
What are some advantages and disadvantages of advertising
disadvantages-
1.Cost of advertising doesn’t improve the product but leads to higher prices for consumers
2.needs regulating to prevent firms from making false claims
advantages-
1.High barriers to entry (cola and Pepsi) difficult for new entrants
2. Consumers like buying goods where they feel they can rely on a minimum standard
What is the relationship between the demand curve and the MR curve
-if demand is downward sloping then the MR falls at twice the rate
-in perfect comp and in price discrimination D=MR because perfectly elastic demand curve
