Economics Flashcards
What is the law of demand?
The principle that as the price of a good rises, buyers will choose to buy less of it, and as its price falls, they will buy more.
What is the demand function?
A relationship that expresses the quantity demanded of a good or service as a function of own-price and possibly other variables.
What is own price?
The price of a good or service itself (as opposed to the price of something else).
What is the inverse demand function?
A restatement of the demand function in which price is stated as a function of quantity.
What is the demand curve?
Graph of the inverse demand function. A graph showing the demand relation, either the highest quantity willingly purchased at each price or the highest price willingly paid for each quantity.
Elasticity of demand
A measure of the sensitivity of quantity demanded to a change in a product’s own price: %∆QD/%∆P.
Elasticity of Supply
A measure of the sensitivity of quantity supplied to a change in price: %∆QS/%∆P.
Elasticity
The percentage change in one variable for a percentage change in another variable; a general measure of how sensitive one variable is to a change in the value of another variable.
What is the shutdown point?
The point at which average revenue is equal to the firm’s average variable cost.
What is the breakeven point?
Represents the price of the underlying in a derivative contract in which the profit to both counterparties would be zero.
Economies of scale
A decline in costs per unit as output grows, generally resulting from having fixed costs in the cost structure that are spread over more units of output.
Diseconomies of scale
Increase in cost per unit resulting from increased production.
As a firm grows in size, economies of scale and a lower Average Total Cost (ATC) can result from what factors:
- Achieving increasing returns to scale when a production process allows for increases in output that are proportionately larger than the increase in inputs.
- Having a division of labor and management in a large firm with numerous workers, which allows each worker to specialize in one task rather than perform many duties, as in the case of a small business (as such, workers in a large firm become more proficient at their jobs).
- Being able to afford more expensive, yet more efficient equipment and to adapt the latest in technology that increases productivity.
- Effectively reducing waste and lowering costs through marketable by-products, less energy consumption, and enhanced quality control.
- Making better use of market information and knowledge for more effective managerial decision making.
- Obtaining discounted prices on resources when buying in larger quantities.
What are the five factors that determine market structure?
The number and relative size of firms supplying the product;
The degree of product differentiation;
The power of the seller over pricing decisions;
The relative strength of the barriers to market entry and exit; and
The degree of non-price competition.
What are price takers?
Producers that must accept whatever price the market dictates.
What are Porter’s five forces of market strategy
Threat of entry;
Power of suppliers;
Power of buyers (customers);
Threat of substitutes; and
Rivalry among existing competitors.
Market structure can be broken down into four distinct categories:
perfect competition, monopolistic competition, oligopoly, and monopoly.
perfect competition
A market structure in which the individual firm has virtually no impact on market price, because it is assumed to be a very small seller among a very large number of firms selling essentially identical products.
monopolistic competition
Highly competitive form of imperfect competition; the competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation.
oligopoly
Market structure with a relatively small number of firms supplying the market.
monopoly
In pure monopoly markets, there are no substitutes for the given product or service. There is a single seller, which exercises considerable power over pricing and output decisions.
Cournot assumption
Assumption in which each firm determines its profit-maximizing production level assuming that the other firms’ output will not change.
Game theory
The set of tools decision makers use to incorporate responses by rival decision makers into their strategies.
The Nash Equilibrium
When two or more participants in a non-coop-erative game have no incentive to deviate from their respective equilibrium strategies given their opponent’s strategies.
Cartel
Participants in collusive agreements that are made openly and formally.
What six major factors affect the chances of successful collusion?
- The number and size distribution of sellers. Successful collusion is more likely if the number of firms is small or if one firm is dominant. Collusion becomes more difficult as the number of firms increases or if the few firms have similar market shares. When the firms have similar market shares, the competitive forces tend to overshadow the benefits of collusion.
- The similarity of the products. When the products are homogeneous, collusion is more successful. The more differentiated the products, the less likely it is that collusion will succeed.
- Cost structure. The more similar the firms’ cost structures, the more likely it is that collusion will succeed.
- Order size and frequency. Successful collusion is more likely when orders are frequent, received on a regular basis, and relatively small. Frequent small orders, received regularly, diminish the opportunities and rewards for cheating on the collusive agreement.
- The strength and severity of retaliation. Oligopolists will be less likely to break the collusive agreement if the threat of retaliation by the other firms in the market is severe.
- The degree of external competition. The main reason to enter into the formal collusion is to increase overall profitability of the market, and rising profits attract competition. For example, in 2016 the average extraction cost of a barrel of crude oil from Saudi Arabia was approximately $9, while the average cost from United States shale oil fields was roughly $23.50. The cost of extracting oil from the Canadian tar sands in 2016 was roughly $27 per barrel. It is more likely that crude oil producers in the gulf countries will successfully collude because of the similarity in their cost structures (roughly $9–$10 per barrel). If OPEC had held crude oil prices down below $30 per barrel, there would not have been a viable economic argument to develop US shale oil fields through fracking or expand extraction from Canada’s tar sands. OPEC’s successful cartel raised crude oil prices to the point at which outside sources became economically possible and, in doing so, increased the competition the cartel faces.
Define: Econometrics
Econometrics is the application of statistical methods to economic data to analyze and quantify economic phenomena, test theories, and make predictions
What are Business Cycles
Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of events is recurrent but not periodic; in duration, business cycles vary from more than one year to 10 or 12 years.
The diffusion index
Reflects the proportion of the index’s components that are moving in a pattern consistent with the overall index.
