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Investment Practice > Micro-economics > Flashcards

Micro-economics Flashcards

1
Q

What does the Production Possibility Frontier represent?

A

The range of possibilities from employing the resources of the economy.

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2
Q

Demand

A

The quantity that individuals will buy at a given price.

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3
Q

What would cause a movement along an existing demand curve?

A

A change in the price of a good.

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4
Q

What would cause the demand curve to shift?

A
  • Change in the price of another substitute/complimentary good.
  • Changes in consumer taste.
  • Changes in income.
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5
Q

What is a normal good?

A

Income rises, Demand rises

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6
Q

What is an inferior good?

A

Income rises, Demand falls

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7
Q

Supply

A

The amount of a good that producers are prepared to supply to the market at a given price.
It is determined by the costs of the company.

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8
Q

What would cause the supply curve to shift?

A
  • Changes in technology.

- Changes in the acquisition of natural resources.

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9
Q

Price Elasticity of Demand (PED)

A

The sensitivity of demand after a change in the price of a good.
PED = % change in QD / % change in P

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10
Q

What would the PED always be if there is an inverse relationship between P and QD (i.e. when P rises, QD falls)?

A

Negative

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11
Q

If the PED is between -1 and -infinity, demand is said to be…

A

Elastic

Perfect elasticity = -infinity

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12
Q

If the PED is between -1 and 0, demand is said to be…

A

Inelastic

Perfect inelasticity = 0

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13
Q

What is unit elasticity (when PED = -1)?

A

The point where a fall in price is matched by a proportionate rise in QD e.g. if P increases by 1%, QD falls by 1%.

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14
Q

What is important to remember about PED?

A

It is not a constant along the demand curve. It is a relative value, not an absolute value. PED ranges from -infinity at the top end of the demand curve, to 0 as the demand curve hits the X-axis.

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15
Q

Cross Elasticity of Demand (XED)

A

Measures the relationship between QD and the change in price of another good.
XED = % change in QD / % change in P of another good

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16
Q

What does it mean if XED is +ve?

A

The increase in price of the other good, causes an increase in QD of the original good.
This suggests the goods are substitutes e.g. if the P of tea increases, the QD of coffee increases.

17
Q

What does it mean if XED is -ve?

A

The increase in the price of another good, causes a fall in QD of the original good.
This suggests the goods are complimentary to each other.

18
Q

Income Elasticity of Demand (YED)

A

The responsiveness of QD, to a change in income (Y).

YED = % change in QD / % change in Y

19
Q

What would the YED be for a normal good?

A

Between 0 and 1. So that when Y increases, QD increases.

20
Q

What would the YED be for a luxury good?

A

YED > 1

21
Q

What would the YED be for an inferior good?

A

YED < 1. So when Y increases, QD falls.

22
Q

Elasticity of Supply

A

The sensitivity of supply to changing prices.
Elasticity of supply = % change in QS / % change in P
It is always positive, as the S curve is upward sloping.

23
Q

What are normal profits?

A

Sufficient profits to cover fixed costs and keep business afloat.

24
Q

What is defined as the SR?

A

The period in which business operations are constrained.

In this period, the behaviour of costs is determined by the law of increasing then decreasing returns to a factor.

25
Q

How do you calculate average revenue (i.e. the price)?

A

Total revenue (QP) / Q

26
Q

When is total revenue maximised?

A

When MR = 0.

27
Q

What is the point of profit maximisation?

A

MR = MC

28
Q

What a firms known as in perfectly competitive conditions?

A

“price-takers”

29
Q

What are Porter’s five competitive forces that make an industry more or less attractive and affect the ability of a company to create value?

A
  1. New entrants
  2. Competitors
  3. Substitutes
  4. Suppliers
  5. Buyers
30
Q

What are the four P’s of product research?

A
  • Product
  • Place
  • Promotion
  • Price
31
Q

What is the minimum efficient scale?

A

The minimum pooint on the LR average total cost curve

Investment Practice (12 decks)

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