Economics -2 Flashcards
How is Price Elasticity of Supply calculated?
ES= % Change in Quantity Supplied / % Change in Price
OR
ES= (Change in Quantity Supplied/Avg Quantity Supplied) / (Change in Price/Avg Price)
Elastic if ES >1, Unitary if ES=1, Inelastic if ES<1
Opportunity Cost
Opportunity Cost is value of the best alternative that is not selected when resources can be applied to more than one purpose
What is the Equilibrium Price?
- The price at which all the goods offered for sale will be sold
- Quantity Supplied = Quantity Demanded
- demand and supply cures intersect
What is the result of a Price Floor?
- Price Floor is minimum legal price
- Causes a surplus if above equilibrium price
What is the result of a** Price Ceiling**?
- Price Ceiling is maximun legal price
- Causes a shortage if below equilibrium price
The effects of shifts in demand and supply
- If Demand ↑ & Supply No change ⇒ Equilibrium Price↑ & Quantity Purchase↑
- If Demand ↓ & Supply No change ⇒ Equilibrium Price ↓ & Quantity Purchase↓
- If Demand No change & Supply↑ ⇒ Equilibrium Price ↓ & Quantity Purchase↑
- If Demand No change & Supply↓ ⇒ Equilibrium Price ↑ & Quantity Purchase↓
- If Demand ↑ & Supply ↑ ⇒ Equilibrium Price Uncertain & Quantity Purchase↑
- If Demand ↓ & Supply ↓ ⇒ Equilibrium Price Uncertain & Quantity Purchase↓
- If Demand ↑ & Supply ↓ ⇒ Equilibrium Price↑ & Quantity Purchase Uncertain
- If Demand ↓ & Supply ↑ ⇒ Equilibrium Price↓ & Quantity Purchase Uncertain
Perfect (Pure) competition
- An industry is perfectly competitive if (a) It is composed of a large number of sellers, each of which are too small to affect the price of the product or service (b) The firms sell a virtually identical product (c) Firms can enter or leave the market easily (i.e., no barriers to entry)
- In this market, the firm’s demand curve is perfectly elastic (horizontal).
- There are a number of assumptions involving perfect competition:
- There are many small independently acting buyers and sellers, none of whom can influence price.
- Firms produce a standardized or homogeneous product.
- Each firm produces such a small portion of total output that they have n_o influence over price. The firm is a price take_r, that is, the firm must accept the market price.
- There is free entry into and exit from the industry. There are no significant legal, technological, or financial barriers to entry.
- Information is free and readily available.
- Firms face a perfectly elastic demand curve at the market price that is determined where consumer demand equals industry supply.
- For the perfectly competitive firm, Price = Average Revenue = Marginal Revenue.
- If the firm is making an economic profit, there is an incentive for new firms to enter the market. The entry of new firms will increase supply and shift the industry supply curve to the right, reducing the equilibrium price. Entry will continue until there is no economic profit, that is, the firm is earning only a normal profit.
Pure monopoly
- A pure monopoly is a market in which there is a single seller of a product or service for which there are no close substitutes.
- The monopolist sets the price for the product (unless it is set by regulation).
- The demand curve for the firm is negatively sloping - almost vertical
Monopolistic competition
Monopolistic competition is characterized by many firms selling a differentiated product or service.
The demand curve is negatively sloped and firms tend to produce and sell products until the marginal revenue is less than average variable cost.
There are a number of assumptions for monopolistic competition:
- There are a relatively large number of independent and small buyers and sellers.
- There is free entry into and exit from the industry.
- Firms are producing a differentiated product. The differences may be found in product attributes such as materials, design and workmanship, varying degrees of customer service, convenient location, packaging, and brand image.
Oligopoly
- Oligopoly is a form of market characterized by significant barriers to entry. As a result there are few (generally large) sellers of a product.
- Limited ability to control price.
- The kinked-demand-curve model seeks to explain the price rigidity in oligopolistic markets.
- There are a number of assumptions for an oligopoly:
- *1.** There are a small number of relatively large firms.
- *2.** Firms may produce either a standardized or differentiated product.
- *3**. Firms in the industry are interdependent.
- *4.** Firms tend to engage in non-price competition.
How is Return to Scale calculated?
Return to Scale = % Increase in output / % Increase in input
Greater than 1 → Increasing returns to scale - Economy of Scale
Less than 1 → Decreasing returns to scale - Diseconomy of Scale
In the long-run production function - all costs are variable
Economies of Scale vs. Law of diminishing returns
Economies of Scale - in the long run firms may experience increasing returns because they operate more efficiently.
Economies of Scale occur when increases in a firm’s capacity and output are accompanied by decreases in the firm’s long-run average cost of production. These are the economies provided by mass production.
Law of diminishing return – at some point firms get too large and diminishing returns occur.
The law of diminishing returns does not exist in the long-run since all factors are variable.
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
What is a Depression?
A prolonged- severe recessrion with high unemployment rates
No requisite period of time for the economy to officially be in a depression
What are the stages of the Business Cycles?
A business cycle is a fluctuation in aggregate economic output that lasts for several years.
- Peak (highest)
- Recession/Contraction (decreasing)
- Trough (lowest)
- Recover (increasing)
- Expansion (higher again)
