Lecture 7 Topic 7 Flashcards
macro = ?
aggregate level
firms make choices based on…?
the demand for their goods
micro level - profit maximisation
macro level - production
fiscal policies influence…?
both micro and macroeconomic outcomes
to make pricing & production decisions, managers need to know what?
the costs of production
what shows how total production costs vary with quantity produced?
cost functions
average cost (AC) = ?
average cost per unit produced
marginal cost (MC) = ?
the effect on total cost of producing one additional unit of output
relationship between AC & MC = ?
if AC>MC, AC is decreasing
if AC<MC, AC is increasing
the MC curve always intersects the AC curve at its lowest point on the cost function
managers need to know the demand for the firm’s product to…
to make pricing and production decisions
demand curve = ?
quantity that consumers will buy at each price
downward sloping
profit maximisation can also be described in terms of…
revenue and costs
marginal revenue (MR) = ?
change in revenue from selling an additional unit
net effect of decreasing price and increasing quantity sold
firm maximises profit by choosing…
by choosing where MR = MC
a firm’s pricing decision depends on…?
the slope of the demand curve
price elasticity of demand = ?
degree of responsiveness (of consumers) to a price change
MR is always positive when demand is…
elastic
markup = ?
profit margin as a proportion of the price
a firm’s markup is ____ proportional to price elasticity of demand
inversely
the effect of good-specific taxes depends on…
the elasticity of demand for those goods
governments raise more tax revenue by…?
by levying taxes on price-inelastic goods
a firm’s profit margin depends on the elasticity of demand, which is determined by…?
competition
demand is relatively inelastic if…?
there are few close substitutes
firms with market power have enough bargaining power to…?
set prices without losing customers to competitors
competition policy (limits on market power) can be beneficial to consumers when…?
when firms collude to keep prices high
what are examples of market power?
when a firm’s selling specialised products:
- they face little competition and hence have inelastic demand
- they can set price above marginal cost without losing customers, thus earning monopoly rents
- this is a form of market failure because there’s a deadweight loss
when does a natural monopoly arise?
when one firm can produce at lower average costs than two or more firms
instead of encouraging competition, what can policymakers do to avoid monopolisation/market failure?
put price controls or make the firms publicly owned
firms can increase their market power by doing what?
innovating or advertising
aggregate demand = ?
looks at the demand on a macroeconomic level
who are firms’ products consumed by?
people and the government
consumption depends on what?
basic needs &
income
marginal propensity to consume (MPC) = ?
captures the different effects based on one’s disposable income
what does Y stand for in calculation of GDP?
Y represents GDP
y = c + i + g + (x - m)
increase in Y will lead to…?
increase in all the components including consumption (c)
the level of the increase in c depends on the overall MPC
an increase in c can lead to further increase in Y (multiplier process) which depends on MPC
what does aggregate demand multiplier depend on?
the rate of capacity utilisation and expectations of the private sector
how does the government stabilise economic fluctuations?
- higher tax rate lowers the multiplier
- unemployment insurance helps households smooth consumption
- deliberate intervention via fiscal policy
what are the two automatic economic stabilisers?
the unemployment benefit scheme and proportional tax rates
they automatically offset an expansion or contraction of the economy
the paradox of thrift = ?
the aggregate attempt to increase savings leads to a fall in aggregate income
fallacy of composition = ?
what is true for one part of the economy isn’t true for the whole economy (from one household to another)
