Economics - Roger CPA Flashcards
Total Revenue
Unit Price / Unit
Cross-Elasticity of Demand
- measures change in quantity demanded of good to change in price of another good
- determine if 2 goods are substitutes, complement, unrelated
(% change quantity demanded product X) / (% change price product Y)
Price Elasticity of Demand (Ed) (Elasticity of Demand)
- measures how responsive quantity demanded (of good of service) is to a change in price
- (% change quantity demanded) / (% change price)
“Arc method” (midpoint or average) between before and after a change)
[(change quantity demanded) / average quantity demanded)] / [(change price) / (average price)]
Ed theory
Ed > 1 = Elastic
Ed < 1 = Inelastic
Ed = 1 = “Unit Elastic” or Unitary
Income Elasticity of demand
- measures effect of changes in (consumer) income on changes in quantity demanded of product
(% percent change quantity demanded) / (Percent change Income)
Normal Good vs Inferior Good
Normal Good: positive #; Income increases, quantity demanded increase
Inferior Good: negative #; Income increases, quantity demanded decrease
Substitutes vs Complements vs Unrelated
Substitutes: direct relationship (positive number); ex) butter and margarine
Complements: inverse relationship (negative number); ex) chips and salsa
Unrelated: Zero; products not related
Demand (Demand Curve)
- Slopes down
- Inverse Relationship between price and quantity of a product or service that group of consumers are willing to buy at particular time
- Price increases, demand decreases
- Price decreases, demand increases
Demand curve shifts
- changes in relevant factors other than change in price
Describe changes in demand curve where quantity demanded becomes larger for each and every price
“Demand curve shifted upward”, outward, right, demand increased
Describe changes in demand curve where quantity demanded becomes smaller for each and every price
“Demand curve shifted downward”, inward, left, demand decreased
Direct Relationship with demand curve
- demand curve shift upward, increase
- price of substitute good
- expectations of price changes
- income (normal goods)
- extent of market
Expectations of price changes
Consumers buy now if price increase in future
Ex) tax increase next year so product demand is high this year
Price of substitute good
When product A acceptable alternative product B, increase in price of Product A will make Product B more attractive
- ex) hamburger price increase, hot dog demand increase
Income (Normal goods)
For any goods, when income (wealth) increase, demand increases
Extent of the Market
New consumers may increase demand, therefore increasing size of the market
Ex) baby boom will increase baby food
Inverse Relationship
- demand curve shifts downward (decrease)
- The price of a complement good
- Income (for inferior goods)
- Consumer boycotts
The price of a complement good
When products are usually used together, an increase in price of one of the goods, decreases demand of the other
Ex) increase price of chips,
Decrease demand of salsa
Income (for inferior goods)
For some goods (e.g. Used cars), when income increase (wealth), demand decreases as consumers shift their spending to other goods (e.g. New cars)
Consumer boycotts
Organized boycott will, if effective, temporarily decrease the demand for a product.
Ex) members of unions commonly refuse to buy from businesses that are involved in labor disputes
Changes in consumer tastes (indeterminate relationship)
Affect demand but whether demand increases/decreases as a result depends on whether change in tastes favors/disfavors specific product
sUPply (sUPpply Curve)
- Slopes up
- Shows direct relationship between the price of a product or service and the quantity that a group of producers and/or sellers are willing to supply at particular time (i.e. quantity supply)
ex) The price of product increases (e.g. from 10 to 20), quantity supplied by sellers increases (e.g. from 30 to 50)
Direct Relationship with Supply Curve
- Increases in that factor cause supply curve to shift outward (increase)
Ex)
- Number of producers
- Government subsidies
- Price expectations
- Reductions in costs of production and technical advances
Number of producers
- more producers normally increase the quantity supplied of a product at a given price
ex) entry by foreign suppliers into the U.S. auto market increases the supply of cars in the U.S.
Government subsidies
Additional funding permits producers to purchase more inputs and, thus, increase quantity supplied at any given price
Price expectations
If producers expect higher prices, producers will increase their quantity supplied at any given price
Reductions in costs of production and technological advances
Reductions in costs of production mean producers will increase their quantity supplied at any given price
Inverse Relationship with supply curve
- Increases in that factor cause the supply curve to shift inward (decrease)
ex)
- Increases in production costs (e.g. production taxes)
- Prices of other products
Increases in production costs (e.g. production taxes)
- If producers’ costs increase, producers will decrease their quantity supplied at a given price
Prices of other products
If producers may produce both product A and B, and producing A becomes more profitable, producers will decrease their quantity supplied of B at any given price.
Price Elasticity of Supply (Es) (Elasticity of Supply)
- Measure of how sensitive quantity supplied of a good or service to a change in price or cost
(% change quantity supplied) / (% change change price)
Surpluses
- Economic rents
- excess payments for factors (labor, natural resources, capital, and entrepreneurship) when used most productively over their best alternative use (opportunity cost)
Opportunity Cost
benefit given up from not using the resource for another purpose.
Economic Profit
- Excess of the profits are receiving over the normal profit rate in the economy
- Usually result in more suppliers entering the market, and economic losses will usually result in suppliers existing the market
Market Equilibrium
- Quantity demanded = Quantity Supplied
Some Government actions that affect Equilibrium
- Government impose price ceiling (setting max. legal price at which a product or service may be sold) below equilibrium, the quantity demanded will exceed quantity supplied, resulting in shortage prices
- If government imposes price floor (setting minimum legal price at which product or service may be sold) above equilibrium, the quantity supplied will exceed quantity demanded resulting in unpurchased surpluses of goods or services
Law of Diminishing Marginal Utility
the more a consumer consumes of a particular product, the less satisfying will be the next unit of that product
Indifference Curve
Represents the combination of quantities of each product that yield a certain total utility
Personal Disposable Income
Available income of a consumer after subtracting mandatory payment of taxes(or adding receipt of government benefits if applicable)
- Consumers can either spend or save personal disposable income
Marginal Propensity to Consume (MPC)
- percentage of the next dollar of income that the consumer would be expected to spend
(Change in savings) / (Change in Disposable Income)
Marginal Propensity to Save (MPS)
- Percentage of the next dollar that the consumer would be expected to save
[Change in consumption (Spending)] / (Change in disposable income)
Fixed Costs (FC)
Costs that won’t change even when there is a change in the level of production
Average Fixed Costs (AFC)
(Total fixed costs) / (# of Units Produced)
Variable Costs (VC)
Costs that rise as production rises
Average Variable Costs (AVC)
(Total variable costs) / (# of Units Produced)
Total Costs (TC)
FC + VC
Average Total Costs (ATC)
(Total Costs) / (# of Units Produced)
Marginal Costs (MC)
- Increase in costs that result from producing one extra unit
- Variable costs are only relevant
Marginal Revenue (MR)
Change in Total Revenue associated with the sale of one more unit of output
Marginal Revenue Product
Increase in total revenue received by the additional of one additional unit or an input or resource (e.g. one more worker)
Returns to Scale
- Increases in units produced (output) that result from increases in production costs (i.e. costs of inputs)
(% increase output) / (% increase input)
Increasing returns to scale
- Output increases by a greater proportion > 1.0
- Range of output for which increase in the use of inputs yield more than proportionate increases in output
- Increasing output involves falling per unit costs
Economies of Scale
Increased efficiencies from producing more units of a product
Constant returns to scale
- Output increases in same proportion = 1.0
- Range of output for which increases in the use of inputs yield proportionate increases in output
- Increasing output involves constant per unit costs
Decreasing returns to scale
- Output increases by a smaller proportion < 1.0
- Range of output for which increases in the use of inputs yield less than proportionate increases in output
- Increasing output involves rising per unit costs
- There is only one producer
- No close substitute are available
- There is blocked entry (patent or government franchise-public utility)
- The firm’s demand curve is substantially downward sloping (almost vertical)
Pure monopoly
Only one firm that sells a product or service for which there are no close substitute
Predatory Pricing
charging temporarily low prices to drive their competitors out of existence , only to increase their prices as monopolists, once they have eliminated their competitors
The Sherman Act (1890)
prohibited price fixing, boycotts, market division, and restricted resale agreements among suppliers
The Clayton Act (1914)
Prohibited stock mergers that reduce competition, price discrimination, and common directorships among competing firms
The Robinson-Patman Act (1936)
Prohibited discounts to large purchasers not based on cost differentials
The Cellar-Kefauver Act (1950)
prohibits acquisition of the assets of a competitor if it would reduce competition
Monopolistic Competition
- Large number of firms produce heterogeneous products and engage in a great deal of non-price competition
- It includes a large number of sellers
- Firms sell heterogeneous products
- There is lots of non-price competition(advertising, products with slightly differing features, actual quality differences)
- It is relatively easy to enters and exit to market
- Each individual firm faces a demand curve that is slightly or somewhat downward sloping
Oligopoly (Oligopolistic Competition)
- A small number of large sellers
- Barriers to entry (cost or patents)
- Non-price competition exists
- Rival actions are observed
- The firm’s Demand curve is Kinked
Price War
Company’s decision to gain market share by lowering its prices may result in other companies matching its pricing
Collusive Pricing
Price Fixing
Cartels
Forbidding formal quantity agreements among competitors
Game Theory
Actions by one firm are likely to affect the decisions of other firms
Competitor Analysis
Analyzing to understand and predict the behavior of a major competitor
Target Market
Determining who their customers are and why they are purchasing their products
Business Strategies
Managers commonly engage in formal analyses of their strengths, weaknesses, opportunities, and threats (SWOT analysis)
Mission Statement
Outlines the long term purposes of an organization
Goal and Objectives
Goals - General terms
Objectives - specific targets
Increase in output (equilibrium GDP)
(Change in spending) / (Marginal Propensity to Save)
