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BEC > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

Economics Definition

A

The study of how we allocate scarce resources to satisfy unlimited wants

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2
Q

Demand Curve

A

Shows the inverse relationship between the price and quantity of a product or service that a group of consumers are willing and able to buy at a particular time

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3
Q

Y Axis of Demand Curve

A

Price

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4
Q

X Axis of Demand Curve

A

Quantity Demanded

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5
Q

Demand vs Quantity Demanded

A

Demand - refers to the demand curve that can be plotted on a graph

Quantity Demanded - X Axis of the demand curve

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6
Q

Price and Quantity Demanded have a _____ Relationship

A

Inverse

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7
Q

Demand Curve Shifts

A

Change in the precise placement of the demand curve on the graph, occurs if there are changes in relevant factors other than price

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8
Q

2 Types of Demand Curve Shifts

A

(1) Upward/ Outward/ Right/ Increased

(2) Downward/Inward/Left/ Decreased

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9
Q

Upward Demand Curve Shift

A

Quantity demanded becomes higher for each and every price

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10
Q

Downward Demand Curve Shift

A

Quantity demanded becomes smaller for each and every price

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11
Q

Factors that Exhibit a Direct Relationship With Demand Curve

A

(1) Price of a substitute good
(2) Expectations of price changes
(3) Income (for normal goods)
(4) Extent of the market

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12
Q

Chance in price of a substitute good

A

When product A ay be an acceptable alternative to product B, an increase in the price of product A will make product B more attractive

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13
Q

Expectations of Price Changes

A

Consumers are more likely to buy now if they think prices will increase in the future

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14
Q

Change in Income for Normal Goods

A

For many goods when income increases, demand increases

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15
Q

Change in the Extent of the Market

A

New consumers may increase demand, therefore increasing the size of the market

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16
Q

Factors that Exhibit an Inverse Relationship with the Demand Curve

A

(1) Price of a complement good
(2) Income for inferior goods
(3) Consumer boycotts

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17
Q

Change in the Price of a Complement Good

A

When products are normally used together an increase in the price of one of the goods decreases demand for the other

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18
Q

Change in Income (for inferior goods)

A

For some goods when wealth increases, demand decreases as consumers shift their spending to other goods

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19
Q

Consumer Boycotts

A

An organized boycott will, if effective, temporarily decrease the demand for a product

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20
Q

Changes in Consumer Taste

A

May affect demand but have an indeterminate relationship

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21
Q

Elasticity Definition

A

Measures the sensitivity or something to changes in something else

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22
Q

Price Elasticity of Demand Formula

A

% Change in Quantity Demanded / % Change in Price

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23
Q

Price Elasticity of Demand Definition

A

Measures how responsive the quantity demanded is to a change in price

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24
Q

Arc Method Price Elasticity of Demand Formula

A

(Change in quantity demanded/ average quantity demanded)/ (change in price/ average price)

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25
Q

If Ed is > 1

A

Demand is elastic

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26
Q

Demand is Elastic if

A

Ed is > 1

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27
Q

If Ed is < 1

A

Demand is inelastic

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28
Q

Demand is inelastic if

A

Ed < 1

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29
Q

If Ed = 1

A

Demand is unit elastic

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30
Q

Unit Elastic

A

Total revenue isn’t sensitive to changes in price

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31
Q

If Price Elasticity of Demand is Elastic, Revenue will _______ if Price is Increased

A

Decline

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32
Q

If Price Elasticity of Demand is Inelastic, Revenue will _______ if Price is Increased

A

Increase

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33
Q

Demand is Unit Elastic If

A

Ed = 1

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34
Q

Income Elasticity of Demand Definition

A

Measures the effect of changes in consumer income on changes in the quantity demanded of a product

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35
Q

Income Elasticity of Demand Formula

A

% Change in Quantity Demanded / % Change in Income

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36
Q

Normal Good

A

As consumer income increases, quantity demanded increases

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37
Q

Inferior Good

A

As income increases, quantity demanded decreases

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38
Q

Positive Income Elasticity of Demand Indicates

A

Normal Good

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39
Q

Negative Income Elasticity of Demand Indicates

A

Inferior Good

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40
Q

Cross Elasticity of Demand Definition

A

Measures the change in quantity demanded of a good to a change in the price of another good and determines of they are complements or substitutes

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41
Q

Cross Elasticity of Demand Formula

A

% change in quantity demanded for product x / % change in price of product y

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42
Q

Positive Cross Elasticity of Demand

A

Substitutes

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43
Q

Negative Cross Elasticity of Demand

A

Complements

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44
Q

Zero Cross Elasticity of Demand

A

Products unrelated

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45
Q

Supply Curve

A

Shows direct relationship between the price of a product or service and the quantity that a group of producers and/or sellers are willing to supply at a particular time

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46
Q

Types of Supply Curve Shifts

A

(1) Supply curve shifted outward/ to the right/ supply increased
(2) Supply curve shifted inward/ to the left/ supply decreased

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47
Q

Supply Curve Shifted Outward

A

Quantity supplied becomes larger for each and every price

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48
Q

Supply Curve Shifted Inward

A

Quantity supplied becomes smaller for each and every price

49
Q

Factors that Exhibit a Direct Relationship with the Supply Curve

A

(1) Number of producers
(2) Government Subsidies
(3) Price expectations
(4) Technological advances

50
Q

Factors that Exhibit an Inverse Relationship with the Supply Curve

A

(1) Increase in production costs

(2) Prices of other products

51
Q

Price Elasticity of Supply Definition

A

Measure of how sensitive quantity supplied of a good or service is to a change in price; how change in price will affect quantity supplied by firms

52
Q

Price Elasticity of Supply Formula

A

Percentage change in quantity supplied/ % change in price

53
Q

Opportunity Cost

A

Benefit given up from not using the resource for another purpose

54
Q

Economic Profit

A

Excess of the profits received over the normal profit rate in the economy

55
Q

Market Equilibrium

A

Price where quantity demanded = quantity supplied; all goods offered for sale will be sold

56
Q

Price Ceiling

A

Government imposed maximum legal price at which a product or service may be sold

57
Q

Price Floor

A

Government imposed minimum legal price at which a product or service may be sold

58
Q

Demand Curve Increase

Supply Curve No Change

Equilibrium Price ______

Quantity Purchased ______

A

Increase, Increase

59
Q

Demand Curve Decrease

Supply Curve No Change

Equilibrium Price ______

Quantity Purchased ______

A

Decrease, Decrease

60
Q

Demand Curve No Change

Supply Curve Increase

Equilibrium Price ______

Quantity Purchased ______

A

Decrease, Increase

61
Q

Demand Curve No Change

Supply Curve Decrease

Equilibrium Price ______

Quantity Purchased ______

A

Increase, Decrease

62
Q

Demand Curve Increase

Supply Curve Increase

Equilibrium Price ______

Quantity Purchased ______

A

Uncertain, Increase

63
Q

Demand Curve Decrease

Supply Curve Decrease

Equilibrium Price ______

Quantity Purchased ______

A

Uncertain, Decrease

64
Q

Demand Curve Increase

Supply Curve Decrease

Equilibrium Price ______

Quantity Purchased ______

A

Increase, Uncertain

65
Q

Demand Curve Decrease

Supply Curve Increase

Equilibrium Price ______

Quantity Purchased ______

A

Decrease, Uncertain

66
Q

Utility Economic Definition

A

Satisfaction derived by consumer

67
Q

Marginal Utility

A

Additional satisfaction obtained by consuming each additional unit

68
Q

Law of Diminishing Marginal Utility

A

The more a consumer consumes of a particular product, the less satisfying will be the next unity of product

69
Q

Consumer Maximizes Total Satisfaction When

A

The last dollar spent on each product generates the same amount of marginal utility

70
Q

Indifference Curve (IC)

A

(1) Illustrates the allocation of quantities of each product that yield a certain total utility
(2) Represents the combination of quantities of each product that yield a certain total utility

71
Q

Personal Disposable Income

A

Available income of a consumer after subtracting mandatory payment of taxes

72
Q

Consumer Choices with Each Dollar of Personal Disposable Income

A

(1) Spend (consume)

(2) Save

73
Q

Marginal Propensity to Consume (MPC) Definition

A

Percentage of the next dollar of income that the consumer would be expected to spend

74
Q

Marginal Propensity to Consume (MPC) Formula

A

Change in consumption / Change in disposable income

75
Q

Marginal Propensity to Save (MPS) Definition

A

Percentage of the next dollar of income that the consumer would be expected to save

76
Q

Marginal Propensity to Save (MPS) Formula

A

Change in savings / Change in disposable income

77
Q

MPS + MPC Must Equal

78
Q

Fixed Costs

A

Costs that won’t change even when there is a change in the level of production

79
Q

Average Fixed Costs (AFC)

A

Total Fixed Costs / Number of Units Produced

80
Q

Variable Costs (VC)

A

Costs that rise as production rises

81
Q

Average Variable Costs (AVC)

A

Total Variable Costs / Number of units produced

82
Q

Total Costs

A

Sum of fixed and variable costs (TC = FC + VC)

83
Q

Marginal Costs

A

Increase in cost resulting from producing one extra unit

84
Q

Marginal Revenue (MR)

A

Change in total revenue associated with the sale of one more unit of output

85
Q

Marginal Revenue Product

A

Increase in total revenue received by the addition of one additional unit of an input or resource

86
Q

Returns to Scale Definition

A

Increases in units produced that result from increases in production costs

87
Q

Returns to Scale Formula

A

% increase in output/ % increase in input

88
Q

Economies of Scale

A

Increased efficiencies from producing more units of a product

89
Q

Factors that Contribute to Economies of Scale

A

(1) Spreading fixed costs over larger numbers of units
(2) Being able to save on transaction and transportation costs by buying in larger quantities
(3) Having employees specialize in different tasks and improve abilities
(4) Automatic procedures that are performed repetitively

90
Q

Economic Rents

A

Excess of the payments for factors of production when used most productively over their best alternative use

91
Q

To Maximize Profits

A

Level of production where marginal revenue = marginal cost

92
Q

Diseconomies of Scale

A

Increased inefficiences

93
Q

Factors that Contribute to Diseconomies of Scale

A

(1) Increased volume of inventory making retrieval difficult
(2) Hiring lower skilled workers leading to higher error rate
(3) More employees causing less effective supervision

94
Q

Increasing Returns to Scale

A

Output increases by proportion greater than 1

95
Q

Decreasing Returns to Scale

A

Output increases by proportion less than 1

96
Q

Constant Returns to Scale

A

Output increases by proportion of 1

97
Q

Industry

A

Group of firms that produce products or services that consumers would identify as similar

98
Q

Perfect Competition

A

AKA Pure Competition

(1) Includes a large number of sellers
(2) No non-price competition (ie: advertising)
(3) Firms enter and exit the market very easily
(4) Each individual firm faces a demand curve that is perfectly elastic

99
Q

Pure Monopoly

A

(1) Only one firm that sells a product or service for which there are no close substitutes
(2) Exist as a result of public policy or “technical” conditions (barriers to entry)
(3) Demand curve is substantially downward sloping, almost vertical

100
Q

Natural Monopolies

A

May exist when economies of scale permit the largest firm to underprice and eliminate all others

101
Q

Predatory Pricing

A

Charging temporarily low prices to drive competitors out of business only to increase prices once they’ve eliminated their competitors

102
Q

Laws Passed to Reduce Anti-Competitive Market Practices

A

(1) The Sherman Act (1890)
(2) The Clayton Act (1914)
(3) The Robinson-Patman Act (1936)
(4) The Celler-Kefauver Act (1950)

103
Q

The Sherman Act (1890)

A

Prohibited price fixing, boycotts, market division, and restricted resale agreements among suppliers

104
Q

The Clayton Act (1914)

A

Prohibited stock mergers that reduce competition, price discrimination, and common directorships among competing firms

105
Q

The Robinson-Patman Act (1936)

A

Prohibited discounts to large purchasers not based on cost differentials

106
Q

The Celler-Kerfauver Act (1950)

A

Prohibits acquisition of the assets of a competitor if it would reduce competition

107
Q

Monopolistic Competition

A

(1) Large numbers of firms produce heterogenous products
(2) Lots of non-price competition
(3) Relatively easy exit and entry
(4) Products offered are close substitutes but not identical
(5) Demand curve slightly or somewhat downward sloping

108
Q

Oligopoly

A

AKA Oligopolistic Competition

(1) Small number of large sellers
(2) Barriers to entry (cost or patents)
(3) Non-price competition exists
(4) Rival actions are observed
(5) Firms demand curve is kinked
(6) Products may be homogeneous or heterogenous
(7) Game theory applies
(8) Government seeks to regulate by forbidding formal quantity agreements among competitors and price fixing

109
Q

Game Theory

A

The actions by one firm are likely to affect the decisions of other firms

110
Q

Competitor Analysis

A

Used to understand and predict the behavior of a major competitor

111
Q

Components of Competitor Analysis

A

(1) Collecting information

(2) Using information to understand, predict, and respond to that competitor

112
Q

Strategic Planning

A

Organizations efforts to identify their long term goals and to determine how to best reach those goals

113
Q

Formal Strategic Planning Steps

A

(1) Creating/ updating mission statement
(2) Set goals and objectives
(3) Determine what actions should be taken to meet their goals and objectives and establish mechanisms to collect data and engage in assessment of whether goals and objectives were met
(4) Restart cycle using data and assessment results to develop new action plans

114
Q

Types of Business Strategies

A

(1) Product differentiation

(2) Cost leadership strategy

115
Q

Product Differentiation Strategy

A

Involves developing a range of slightly different products that are more attractive to ones target market or simply to ensure they differ substantially from competitors offerings

116
Q

Product Differentiation Strategy will

A

(1) Make firms sales less responsive to changes in price charged by other competitors
(2) Allow the firm to charge different prices for different products
(3) Ultimately allow the firm to charge higher prices than otherwise (and potentially higher than competitors)

117
Q

Types of Product Differentiation

A

(1) Physical differences
(2) Perceived differences
(3) Customer support differences

118
Q

Cost Leadership Strategies

A

Concentrate on cutting costs of producing, selling, and distributing a firms range of products

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