Economics SS3 Flashcards
Quantity of demand is a function of …:
Price of good Px
Individuals’ incomes I
Price of relatated products (Py)
Many other factors may be added
What is the Law of Demand?
Increase in quantity as Decrease in Price
Quantity supplied is a function of …:
Price of good Px
Cost of Production Cx
- Labor Cost
- Material Cost
- Production overheads
- Technology
- Many other factors may be added
Formula of Elasticity of Demand
% Variation Q / % Variation Px
Definition of Elastic Demand
% Increase in price leads to a larger % decrease in quantity demanded
PED in absolute terms is greater than one (i.e. PED |1.0|)
Definition of Inelastic demand
% increase in price leads to a smaller percentage decrease in quantity demanded.
PED in absolute term is less than one (PED < |1.0|)
Influence of :
- Availability and closeness of substitues
- Proportion of income spent on item
- Time elapsed since previous price change
- Increase substitues –> Increase in Elasticity
- Increase in proportion of income –> Increase in Elasticity
- Increase in Time –> Increase Elasticity
Price Elasticity of Demand and Total Revenue : Impact of inelastic/elastic range on revenue when price increase
Inelastic range : Increase total revenue
Elastic Range : Decrease total revenue
Formula of Income elasticity
% Change in quantity demanded / % change in income
Impact of income elasticity on
a. normal good
b. inferior good
a. Normal Income : Increase in income; Increase in demand (i.e. Elasticity > 0)
b. Inferior good : Increase in income; Decrease in Demand (i.e Elasticity < 0)
Cross Price Elasticity of demand on
a. Substitutes
b. Complements
a. Elasticity > 0
b. Elasticity < 0
Cross Price Elasticity of demand on
a. Substitutes
b. Complements
a. Elasticity > 0
b. Elasticity < 0
Substitution effect when the price of a good decreases
Always increases consumption of the good which the price has fallen.
Income effet when the price of a good decreases
Normal good : Positive effect
Inferior good : Negative effect
Substitutions and Income Effect on :
a. Normal goods
b. Inferior goods
c. Giffen goods
d. Veblen good
a. Quantity increase due to both substitution and income effect
b. The quantity purchased increases as the substitution effect outweighs the income effets.
c. The quantity decrease (Income effects have outweigh the substitution effect)
d. Decrease in quantity purchases (people put less value on the good when its price is lower)
Definition of diminishing marginal returns
- Additional unit will begin to decrease at some amount of the input
- The marginal product may become negative at some quantity of the input.
What is the situation when a company is at :
a. Breakeven
b. Shotdown in LR
c. Shotdown in SR and LR
a. MC = ATC
b. MC = AVC
c. MC < AVC
What are the characteristics of Perfect Competition?
a. How many firms?
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price Power
a. Many firms
b. Very low Barriers to entry
c. Very good substitutes
d. Nature of competition : Price only
e. Price power : none
What are the characteristics of Monopolistic Competition?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Many firms
b. Barriers to entry : Low
c. Good substitutes but differentiated
d. Nature of competition : Price, Marketing, features
e. Price power : Some
What are the characteristics of oligopoly?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Few firms
b. Barriers to entry : High
c. Very good substitutes or differentiated
d. Nature of competition : Price, marketing, features
e. Price power : Some to significant
What are the characteristics of Monopoly?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Single firm
b. Barriers to entry : Very High
c. No good substitutes
d. Nature of competition : Advertising
e. Price power : Significant
In the Short-Run situation under Perfect Competition, when a firm :
a. Maximize profit
b. Zero profit
c. Loses
a. MC = MR = Price
b. ATC = Price
c. ATC > Price
What is the Perfect Competition - Equilibrium in long term?
MR = AR = D
Study Graph
Assumptions on Cournot Model (Duopoly model)
- Homogeneous Product
- Firms have market power (quantity will affect price)
- Firm choose quantities simultaneously
- Both firms have identical and constant marginal costs of production
What is game theory?
Game theory suggests that if competitors cannot detect cheating, they will choose to violate collusion agreement and increase output.
What is strategic games?
Strategic games models the best choice for a firm depending on the actions and reactions of competitors.
What are the characteristics of a dominant firm oligopoly?
- One dominant firm is the low cost producer
- Dominant firm produce most of the output
- Dominant firm essentially sets the market price P*
What are the characteristics of Monopoly?
Barries to entry :
- Economies of scale (natural monopoly)
- Government licensing and legal barriers
- Resource control
Price setting strategies :
- Single-price, price discrimination
Perfect price discrimination is efficient when…
- Charge each consumer the maximum the consumer is willing to pay for each unit
- No deadweight loss
- Produce same quantity as perfect competition
- No consumer surplus; entire surplus goes to producer