Microeconomics Flashcards
Demand definition
The quantity of goods and services that consumers are able and willing to buy at any given price point.
What 2 reasons mean that as prices go up demand falls?
Income effect- Purchasing power of income goes down so able to consume less products
Substitution effect:
What are the determinants of demand?
Population- more demand , Advertising , Substitute price, income, Fashion/tastes, Interest rates, complements price.
what is the law of supply?
As price increases quantity supplied increases. This is because of the profit motive.
Determinants of supply?
Determined by increases or decreases in cost of production Productivity, Indirect Tax, No. of firms, Technology, subsidy, Weather, Costs of production.
where does equilibrium occur?
Where demand= supply
What are the 4 functions of the self correcting mechanism?
ARSI- allocates scarce resources, rations excess supply/ demand,
Why is supply more inelastic in the short-run and more elastic in the long run?
Because in the short run, at least one factor of production is fixed usually capital as firms can employ more labour and buy more materials but not more facilities as takes time.
In the long run, all factors of production are variable so able to increase its capacity so able to react to changes in price and demand.
What are the 3 functions of the price mechanism?
Acts as an incentive for firms-hugher prices encoirage more production
signalling device changes in price show chanes in demand and supply signalling to frims and idiuviduals eg. if demand is high it signals for firms to produced more.
Acts to ration scarce resources- if there’s high demand for a good or service and its supply is limited than then the price will restrict buyers to only those who can afford it.
What are the advantages of the price mechanism?
> Resources are efficiently allocated to satisfy consumer wants and needs.
> Price mechanism can operate without the cost of employing people to regulate it.
> Consumers decide production by producers
> Prices are kept to min as resources are used as efficiently as possible
What are the disadvantages of the price mechanism?
> Income & wealth inequality more likely
> Underprovision of merit goods and over-provision of demerit goods
> People with low mrp will suffer from unemployment and receive low wages
> Public goods aren’t produced
What is consumer surplus?
> Difference between the price that a consumer is willing to pay for a good with the price they actually pay.
what is producer surplus?
> difference between the price a producer is willing to supply at versus the price they actually receive for it.
What factor effect the demand for oil?
The demand for crude oil as oil is in derived demand. The strength of the US ER, oil sold in dollar so lower dollar means speculators with more currency can buy more of it, the attractiveness of buy oil substitutes
What factor effect the demand for oil?
The demand for crude oil as oil is in derived demand. The strength of the US ER, oil sold in dollar so lower dollar means speculators with more currency can buy more of it, the attractiveness of buy oil substitutes, cold conditions mean more oil is needed and as middle class increases demand for oil increases.
what factors affect the supply for oil?
OPEC if they choose to restrict supply then prices will increase and if there are supply side shocks such as war of natural disaster.
What affects the price of houses?
The number of houses built and supplied, the demand for houses this depends on cost of taking out a mortgage, the level in the economic cycle (high consumer confidence in a boom), cost of renting as it is a substitute but also reduces supply, area of the UK in south east houses are more desirable and demanded.
What is production?
Production involves turning an input into an output. An input can be any of the 4 factors of production and involves turning it into a product with an exchangeable value.
What is productivity?
A way of measuring how efficiently a companies is producing its output, output per unit of input employed, improving output from one input/ factor of production should increase total productivity as its calculated from total output from all inputs.
What are the advantages to specialization?
> People can specialize in the things they are best at this can lead to improvement in quality and higher quantity of goods for the same amount of effort.
> specialization is one way in which firms can achieve economies of scale. i.e.. a production line.
> specialization leads to more efficient production- helping tackled scarcity problem as resources are being used more efficiently.
> training costs reduced as less training, only needed for one skill.
What are the disadvantages of specialisation?
> Workers doing repetitive tasks can create boredom
> country’s can become less self sufficient as they may specialise to only one sector and become import reliant on fuel leaving them susceptible to aa supply shock affecting the economy.
> can also lead to a lack of flexibility where companies struggle to adapt and leave the UK
What are the 3 functions of money?
> measure of value - value given to a good ie oil
> a store of value - ie. individual who receives wage may wait before buying something if they know money will be of similar value in the future.
> a standard of deferred payment- money can be payed later for something that is consumed now . uni loans
How is economic cost measured?
Takes into account the monetary cost as well as the op cost.
What is the marginal cost?
The cost of producing one more unit of output.
Where is productive efficiency?
At lowest point of AC where MC intersects it at MC=AC, this is the pint in which costs are minimized as the additional cost of each unit is equal to the gain in average cost.
What is the law of diminishing returns?
If one variable factor of production increases while the other stay fixed the marginal returns from a factor begin to decrease.
the steps of diminishing returns?
> initially as you add more factors of production the MP increases, this may be because of more specialization occurring however as you keep adding factors of production eventually MP starts to decrease as other fixed factors limit production i.e. 5 sewing machines may allow for MP TO INCREASE UP TO THE 5TH LABOURER BUT AS THE 6TH aND 7TH LABOURER IS ADDED THE MP gained begins to fall this is the point of diminishing marginal returns which increases the marginal cost.
What are the 6 aspects of internal economies of scale?
Really Fun Moms Try to Make Pies
R-Risk-bearing- larger firms can diversify into more markets and take more risks as well as afford to take more risks in quirky products as the can more easily absorb the costs of failure.
F-financial-larger firms can borrow more money at a lower rate of interest as are seen as less risky.
M-Managerial - large firms will be able to employ specialist managers to take care of different areas of the business with specific expertise leading to better decision making in certain areas.
T-Technical- production line methods reducing costs and specialization of labor with more specialised equipment and workers can specialize. Also, law of increasing dimensions where pound spend to increase a warehouse by 1 m leads to a greater than proportional increase.
M-Marketing- Advertising is a fixed cost spread over more units for a large firm so the cost of advertising is lower as can advertise Mutiple products at once, they also benefit from increase brand awareness so have to advertise less in order to make sales.
P-purchasing- bulk buying as can negotiate discounts as firm will be most important costumer to supplier so can drive a hard bargain.
What are some examples of external economies of scale?
> local colleges offering qualifications needed by big employees.
Large companies locating in an area may lead to improvement in road networks or local public transport.
lots of firms doing similar things may be able to share resources and suppliers may also locate near them reducing transport costs.
What are some examples of internal diseconomies of scale?
> wastage and loss can increase, as materials seem plentiful in supply with things being lost.
> communication becomes more difficult disrupting employee’s morale.
> managers have less control over the production process.
> Difficult to coordinate activities between divisions and departments.
> Them and us attitude can develop between workers in one part of the firm and the other side leading to less cooperation and thus efficiency.
Examples of external diseconomies of scale?
As whole industry becomes bigger the price of raw materials may increase.
>buying large amounts of materials may not make them less expensive per unit if local supplies are insufficient larger travel costs may have to be incurred in order to gain the right amnopubt of raw materials .
Examples of external economies of scale?
As whole industry becomes bigger the price of raw materials may increase.
>buying large amounts of materials may not make them less expensive per unit if local supplies are insufficient larger travel costs may have to be incurred in order to gain the right amnopubt of raw materials .
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What are increasing returns to scale, constant returns to scale and decreasing returns to scale?
Increasing returns to scale- are when an increase in factor inputs leads to a more than proportionate increase in output.
Constant returns to scale are when an increase in all factor inputs lead to a proportional increase in output.
Decreasing returns to scale is when an increase all factors of production lead to a less than proportionate increase in output.
What is the minimum efficient scale?
MES is the lowest level of output at which the minimum possible average cost can be achieved, there is likely to be range of output levels where LRAC are minimized.
Why does a price taker have a perfectly elastic demand curve?
Has to accept the market price, demand is perfectly elastic as if fir increases price demand drops to zero and if it lowers the price they’ll sell the good at the same quantity will a lower price point.
Why does AR= MR in a perfectly elastic demand curve?
Because with each extra unit sold brings in the same revenue as all the others.
What is normal profit?
Where total economic costs =total revenue, if revenue left over after equal to opportunity cost then its the min profit to carry on operating in with resources in the long term.
What is supernormal profit?
A firm makes supernormal profit when TR is greater than total costs.
Why is profit maximised at point MR=MC ?
MR=MC, this is because its the point where each additional unit of output equals the cost to produce that unit of output.
Where is revenue maximised ?
At the point where MR equals zero as they will keep adding to the output past the point profit is maximised to a point where revenue is no longer gained.
where are sales maximised ?
Where AR=AC as this is the highest level of output that a firm can sustain in the long run any lower and a loss would be made.
Why might profit maximising only be an objective for the long run?
Means sacrificing profit in the short run, a firm may try and to maximise sales or revenue in the short run to increase market share/ gain monopoly power in order to earn supernormal profits in the long run. some firms may expect to make a loss until they able to have output at higher production levels and experience economies of scale or they may be aiming to survive in the market and focusing on maximising profits if they survive in the long term.
What alternate objectives do some firms have?
Some firms aims aren’t motivated solely due to profit, some are not for profit organisations which main aim is to do good for the public other firms will aim to of producing high quality products at expense of maximising profits in the short term to gain loyal consumers in the short term.
Many firm’s aim for CSR corporate social responsibility acting in way to bring benefit to society i.e. by using sustainable resources, supporting local businesses using local suppliers and paying employees above the standard market wage.
What is the divorce of ownership and control?
Idea of directors having differing objectives to the owners of the firm with all stakeholders potentially having differing objectives. Divorce of ownership and control can lead to the principle agent problem
> where principle (shareholders) ay for agent (managing director) to act in their interests by agent acts in self interest. i.e. if firm shareholders want to maximise profit but managing director pay is linked to revenue or sales than they may want to maximise those things instead.
> Directors also may want to see the firm grow and flourish as they enjoy running organisation and it will help further them in their career, employees are also likely to aim for wage increases instead of bettering the firm.
