Micro-economics Flashcards
What does the Production Possibility Frontier represent?
The range of possibilities from employing the resources of the economy.
Demand
The quantity that individuals will buy at a given price.
What would cause a movement along an existing demand curve?
A change in the price of a good.
What would cause the demand curve to shift?
- Change in the price of another substitute/complimentary good.
- Changes in consumer taste.
- Changes in income.
What is a normal good?
Income rises, Demand rises
What is an inferior good?
Income rises, Demand falls
Supply
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.
What would cause the supply curve to shift?
- Changes in technology.
- Changes in the acquisition of natural resources.
Price Elasticity of Demand (PED)
The sensitivity of demand after a change in the price of a good.
PED = % change in QD / % change in P
What would the PED always be if there is an inverse relationship between P and QD (i.e. when P rises, QD falls)?
Negative
If the PED is between -1 and -infinity, demand is said to be…
Elastic
Perfect elasticity = -infinity
If the PED is between -1 and 0, demand is said to be…
Inelastic
Perfect inelasticity = 0
What is unit elasticity (when PED = -1)?
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%.
What is important to remember about PED?
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.
Cross Elasticity of Demand (XED)
Measures the relationship between QD and the change in price of another good.
XED = % change in QD / % change in P of another good
What does it mean if XED is +ve?
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.
What does it mean if XED is -ve?
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.
Income Elasticity of Demand (YED)
The responsiveness of QD, to a change in income (Y).
YED = % change in QD / % change in Y
What would the YED be for a normal good?
Between 0 and 1. So that when Y increases, QD increases.
What would the YED be for a luxury good?
YED > 1
What would the YED be for an inferior good?
YED < 1. So when Y increases, QD falls.
Elasticity of Supply
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.
What are normal profits?
Sufficient profits to cover fixed costs and keep business afloat.
What is defined as the SR?
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.
How do you calculate average revenue (i.e. the price)?
Total revenue (QP) / Q
When is total revenue maximised?
When MR = 0.
What is the point of profit maximisation?
MR = MC
What a firms known as in perfectly competitive conditions?
“price-takers”
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?
- New entrants
- Competitors
- Substitutes
- Suppliers
- Buyers
What are the four P’s of product research?
- Product
- Place
- Promotion
- Price
What is the minimum efficient scale?
The minimum pooint on the LR average total cost curve
