Fundamentals of Economics Flashcards
Define Buyers and Sellers (Market Participants)
Refers to who is included and who is excluded from a particular market
What do Market Participants do?
Households, Firms, or Government that…
Provide Demand - Those who buy Goods and Services
Provide Supply - Those who sell goods and services
What is Demand
How much people want to buy.
What are the “determinates of demand”
Price
Tastes (preference)
Income
Related goods (Substitute Items)
Future Price Expectation
What makes up the Demand Function?
(Qd - function(Pi, Y, T, Ps, Pc, Pe)
Quantity = the function of (Price of an item, Income, Tastes (preferences), price of substitutions, price of compliment items, price expected)
What is Quantity Demanded
The amount of a good or service that people are willing and able to buy at various prices, (centers paribus)
What is the Law of Demand
Price and Quantity demanded are negatively related, centers parades
as prices rise, quantity demanded drops and visa versa.
Market Demand Curve
Will be a downscoping line that is the Sum of all individual demand curves at each price
What defines an increase in demand
Any change in the world (Other than price) that will cause people to want to buy more of the good or service)
(Same line slope shifts to the right)
What defines a decrease in demand
Any change in the world (other than price) that will cause people to want to buy less of the good or service
(Same line slops shifts to the left)
What is Elasticity
Measure of the responsiveness of one variable to changes in another variable.
The Sensitivity of one variable when related to variable changes value
Specifically, it measures the % change in one variable when another variable changes by 1%
What is Own Price Elasticity?
The % Change in Qd (demand) in response to a 1% Change in price of the product
What is Cross Price Elasticity
The % Change in Qd (demand) in response to a 1% Change in the Price of a related good
What is Income Elasticity
The % change in Qd(demand) in response to a 1% Change in income
What is Price Elasticity of Demand (Ed)
The responsiveness of Qd (demand) to changes in P (Price)
Ed = ((%change Qd) / (%change P))
What are the three possible relationships between Qd (demand) and P (price)
Elastic - Responsive
Inelastic - Unresponsive
Unit Elastic - Change is the same percentage
Calculating Elasticity
Arc Method
Ed = %change Q / %change P
%change Q = (Change in Qd / Average Qd) x 100
%change P = (Change P / Average P) x 100
What does price elasticity of demand mean for me and my business?
What will happen to my total revenue if I change price?
Revenue Formula
Revenue = Price * Quantity
What is Supply
How many units you want to produce
What are the determinants of supply?
Price
Technology of production
prices of inputs
Expected future price of the good
What makes up the supply Function?
Qs = function(Pi, A, Pinputs, Pe)
Quantity of Supply
Price of the item
Technology (A)
Price of Inputs
Expected future Price
What is quantity supplied
the amount of a good or service that sellers are willing and able to produce(sell) at various prices, ceteris paribus
What is the Law of Supply?
Price and quantity supplied are positively related
as prices rise, quantity rises and visa versa
What is the Market Supply Curve?
an upscoping line that is the sum of all the individual supply curves we find in the market
What is Market Equilibrium
Where the supply and demand curves cross.
there are no forces changing the price. Sellers can sell as much as they want and buyers can buy as much as they want.
Why do we use a supply and demand model?
Explain how prices of things are determined
Explain how quantities of things are determined
Explain how we allocate those things
What is a market
a collection of buyers and sellers that determine the price and amount of goods/services/resources
What is a “Competitive Market”
Many buyers competing to buy the good
many sellers competing to sell the good
nearly identical products or services
relatively inexpensive to enter/exit the market
What are the four types of markets
Output markets - goods and services
Input markets - factors of production
Financial markets - credit markets
foreign exchange markets
illegal markets
What is “market definition”?
Who is included and excluded from a particular market. How broad or narrow a market is?
ex. automobiles, new auto mobiles, new cars, new sedans, entry level luxury sedans, etc…
How do markets find equilibrium
They find their way through surpluses and shortages
who pushes price toward equilibrium
naturally, through forces
which side of the market has the most power over the price?
.. that depends
What drives sales demand?
Price. but also income, change in taste, change in complimentary goods, changes in substitutes
What drives sales supply
Price. but also price of inputs, technology of production, worker productivity
What are explicit costs?
Costs the require an actual outlay of money
what are implicit costs
costs that do not require an actual money outlay (Opportunity costs)
What are accounting costs
explicit costs
what are economic costs
explicit costs + implicit costs
What is “Production Function”
a relationship between the quantity of inputs and the quantity of outputs
What are the parts of the production function?
Q - Af(L,K)
Quantity of output
Current level of Technology (A)
Amount of Labor
Amount of physical Capitol (K)
What is a short run
The amount of time such that at least one input is held fixed (usually easier to change Labor)
what is long run
the amount of time such that all inputs are free to vary (no inputs fixed)
What is the marginal production function
shows the additional amount of output generated from increasing 1 input by 1 unit and holding the other inputs fixed
What is the marginal produce of labor
the short run relationship between output and labor, holding other inputs fixed.
one increase in output if labor is increased by 1 unit, holding other inputs fixed
What are diminishing returns?
the inputs stay the same, but the output gets less
What are the short run costs?
Fixed costs - costs that don’t change with output changes
Variable costs - costs that do change with output changes
Total Costs - fixed plus variable costs
What is marginal cost?
the additional cost from producing 1 more unit of output
MC = (change TC) / (change Quantity)
What is the short run “big idea”
to increase production, you have to hire more workers. eventually those workers becomes less productive. That causes each unit progressively more expensive and it costs you more over time
What are long run costs?
all inputs are variables - none are fixed
One total cost
One Average Cost
what is Long Run Average Cost
Traces of the lowest possible short run cost curves
What is Increasing returns to scale (IRS)
if you double output, total costs are declining
what is constant returns of scale (CRS)
if you double output, total casts are constant
What is decreasing returns of scale (DRS)
if you double output, total costs are increasing
