HL topics demand and supply - profit Flashcards
Demand and supply, elasticities, supply and the law of supply, PES and markets, market failure, rational producer behaviour, revenue, profit
Explanations for the law of demand (2)
- income effect (price decreases, real income increases –> spent on the product), 2. Substitution effect (price of alternative goods have increased, switching to a cheaper alternative increases satisfaction)
Key assumptions behind theory of demand
- consumers behave rationally and seek to maximise utility. 2. Consumers act in self-interest. 3. Consumers have access to all information and make logical decisions
Dual system model of thinking
Fast and slow, subconscious and deliberate
Behavioural biases
- Availability (recent information – salmonella somewhere means you’ll get sick) 2. Anchoring bias (we have a set value for something in our mind) 3. Framing bias (response depends on how something is presented)
Short run
At least one FoP is fixed. Where all production takes place.
Long run
All FoPs are variable, but state of tech is fixed. Planning takes place in LR.
Fixed costs
costs not linked to Qt produced (rent, labour, advertising etc.)
Variable costs
Costs linked to qt produced -> more output, higher costs (materials, occasionally labour)
Total product TP
Qt of output produced by given number of inputs over a period of time (TP of 1,000 workers is 30,000 cars, AP is 30, MP is additional production with one more input)
How is the law of supply explained
- SR (impossible to increase supply immediately), 2. diminishing returns (adding one more will eventually cause output to fall) 3. increasing marginal costs
Difference in the PED of primary and manufactured goods
Demand for commodities tend to be inelastic (no choice), manufactured goods are more elastic due to substitutes
PED
% change in Qd / % change in P
YED
% change in Qd / % change in Y
Why is knowledge of YED important?
- Firms will know what to sell at which markets (e.g. producing more luxury goods when salaries rise), 2. Explaining sectorial changes in economy (proportions of sectors change as countries grow and living standards improve)
Sectors of the economy
Primary (agricultural) Secondary (manufacturing) Tertiary (service)
PES of commodities and manufactured goods
Supply for commodities cannot be easily changed (inelastic), Manufactured goods have more elastic supply
Calculating producer and consumer surplus
From equilibrium price: 1/2 base x height
Asymmetric information types as market failure
Adverse selection (one party has more information e.g. selling car with defects), Moral hazard (changing behaviour to worse when getting away with it e.g. after getting car insurance)
Different types of costs classified by economists
Opportunity cost, explicit costs (direct payment, e.g. rent), implicit costs (earnings if FoPs used differently)
Calculating average costs AFC, AVC, ATC
Total _ cost divided by q
Calculating MC
cost of producing one extra unit
Shut down price
P=AVC (will stop producing in the short run, making heavy losses. If P>AVC, firm can continue producing even when making a loss)
Revenue definition
Income that a firm receives from selling its products over a period of time
Measurements of revenue
TR (total amount, p x q), AR (from one product, TR/q), MR (one additional unit, change in TR / change in q)
PED and maximising revenue
Elastic PED -> decrease price for more revenue, Inelastic price -> increase price for more revenue. PED=1 revenue max (also MR=0)
Total profit
TR - economic costs
Objectives for businesses besides profit maximisation
- CSR (corporate social responsibility, responsibility for impact of actions), 2. Satisficing (performing satisfactorily in order to pursue other goals), 3. Growth maximisation (increasing market share), 4. Revenue maximisation
