HCM 402- Section 1 Flashcards
Law of Demand
States that if all else is equal (ceteris paribus), as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. These is a negative or inverse relationship between the price and the quantity demanded (downward slope of the demand curve). The lower the price the greater the quantity demanded. The law of demand is consistent with common sense. People typically buy more of a product at a low price than at a high price. If the price changes, causing a change in the quantity demanded, the demand curve does not shift. It simply moves up or down the original demand curve placement.
Law of Supply
reflects a positive or direct relationship that prevails between price and quantity supplied. As price rises, the quantity supplied rises; as price falls, the quantity of supplied falls.
Market equilibrium
the equilibrium price (market- clearing price) is the price where quantity demanded equals quantity supplied. At equilibrium there is neither a shortage not a surplus, the market is cleared and everyone is satisfied (buyers and sellers)
Factors that affect supply and demand
consumers willingness to buy, number of consumers in market, expectations of future prices, income, quality changes, etc. The supply of a good or service is positively related to the price paid for that service.
Opportunity Cost
- When a consumer makes a particular choice, the value they would have received from the next best choice is the opportunity cost of the choice they made.
- Opportunity cost includes both explicit (i.e. out-of-pocket cost) or implicit (i.e., use of one’s time)
- Given a scarcity of resources, including time, the real cost of making a choice includes the opportunity cost of that decision too.
Define Substitute
goods used in the place of another good. When the price increase leads to an increase in demand for another service, these two are substitutes.
Define Compliment
Goods used in conjunction with another good or to enhance another. When the price of a service increases and it leads to a decrease in demand for another service, these two services are complements.
Define Inferior Goods
A good for which all else equal an increase in income leads to a decrease in quantity demanded. An increase in income leads to a decrease in consumption of that good or service.
Product A raises the price of their product by 4% and sales decline by 4%. Sales of product B also decreases by 3%. Are products A and B complements or substitutes?
A) Complements
B) Perfect Substitutes
C) Substitutes, but imperfect (3% vs 4% decline in sales)
D) Imperfect complements
A) Complements
What happens to inferior goods as incomes rise and price remains constant? A) Demand falls B) Supply falls C) Incomes fall D) Prices fall
A) Demand Falls
Define “elasticity”
the percentage in one variable associated with percent change in another
Market elasticity is estimated to be -0.2. My organization enjoys a 10% share of the market. What is my firm (organizational) elasticity? A) -0.02 B) -0.2 C) -2.0 D) -20.0
C) -2.0
If I increase the price of my product ten percent (10%) and sales decrease by five percent (5%), the product is: A) Elastic, e=-0,05 B) Inelastic, e=-0.05 C) Elastic, e=-2.0 D) Inelastic, e=-2.0
B) Inelastic, e= -0.05
Know how supply, demand and elasticity behave in the short-run and long-run.
- In the short run demand is inelastic. Such as if a price on an item increases in the short run a consumer might be willing to continue purchasing the good.
- In the long run demand is more elastic. In the long run the previously aforementioned price change you would then begin looking at other options are the price remained increased.
- In the short run supply is completely inelastic
- In the long run supply is more elastic
Define scarcity
Means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) prevent us from doing and having all that we might like. When resources are limited because of scarcity, economic decisions must be made to allocate resources efficiently. Scarcity requires a choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied.
Define choice
When choosing between options one must make judgments about the quality of each option’s attributes.
Define marginal analysis
(optimization techniques) understand the allocation process used by consumers when selecting among various goods and services and also to be able to predict changes in consumer allocation. This tool underlies all optimization problems. Optimization techniques (basis of) specifies the appropriate criteria to be used when allocating scarce resources so as to minimize cost of producing a given output of similarly maximize output subject to a budget constraint
Define Supply and Demand Analysis
(second economic tool) (predicting new equilibrium situations) is necessary for predicting new equilibrium situations. For example, predicting the effect of that service. Supply and demand analysis makes it possible to understand the reasons for the rapid increases in medical care prices and expenditures
Define Diminishing returns (also called diminishing marginal returns)
the decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant
