Microeconomics Flashcards
What is economics
It is the study of how we allocate scarce resources to satisfy unlimited wants
What is an inverse relationship with demand curve
As price goes up - the quantity of a product or service that a group of consumer will want will go down - negatively sloping
What does a demand curve show
it shows the inverse relationship between price and quantity
It is the quantity demanded
What is the difference between demand and quantity demanded
demand refers to the demand curve that can be plotted on a graph
quantity demanded is on the x axis -
at higher prices - quantity demanded is lower
at higher prices quantity demanded is lower
What is a demand curve shift
A demand curve shifts when there are changes to relevant factors other than price
What is it called when quantity demanded become larger for each price
Demand shift upwards
What is it called when quantity demanded become smaller for each and every price
Demand shift downward
What are factors that have a direct relationship on a a demand curve ( demand curve shifts upwards)
- price of a substitute good
(Increase in hamburger prices will increase the demand for hotdogs) - Expectations of price changes (you will buy now because you think the price will go up later - stock up today)
- Income (this is for normal goods - when your income goes up -wealth increases- demand increases for normal goods)
Extent of the market - New customers may increase demand increasing the size of the market (remove trade barriers, or a baby boom will increase demand for babyfood)
What are factors that have a inverse relationship with the demand curve - Demand curve shifts downwards
- Price of complement good ( This is when the increase in price of one good will have a decrease in demand of another) example - increase in price of chips will decrease the demand for salsa
- Income ( For inferior goods) As your wealth increases - demand for inferior goods ( like a used car) will decrease and demand for new cars will increase
- Consumer boycott - an organized boycott will decrease demand - union strike
Changes in consumer tastes
these have a indeterminate relationship
What is the theory of derived demand
The demand for the resources used to produce product A is derived from the demand for product A
What is elasticity
It is the sensitivity of something like quantity demanded to changes in something else ( price)
What is the difference between something that is elastic, inelastic, and unity elastic
Elastic - Ed greater than 1 - total revenue will decline f price is increased
Inelastic - ED less than 1 - total revenue will increase if price is increased
Unit elastic - total revenue is not sensitive to price change
What does Inelasticity of Demand measure
the effect of changes in consumer income on changes in the quantity demanded of a product
% chg in quantity demanded / % chg in income
What does a positive income elasticity indicate
normal good - as your income increases demand for the normal good also increases (I make more money so I buy more luxury goods)
What does a negative income elasticity indicate
inferior good - as income increases demand for the inferior good will decrease (income increases so demand for used cars decreases)
What is cross-elasticity of demand
This measures the change in the quantity demanded of a good to the change in the price of another good
Substitutes - margarine for butter - direct relationship(if price of butter goes up demand for margarine ( a substitute) will go up as well
Complements - these are inverse - if the price of chips goes up the demand for salsa will go down.
What is a supply curve
This shows the direct relationship between the prices of a product or service and the quantity that a group of suppliers are willing to supply
As the price a product increases the quantity supplied increases
What is the difference between supply and quantity supplied
Supply is the x axis - it has quantity supplied on the x-axis and price of y axis
Quantity supplied is amount that is supplied -
At higher prices, quantity supplied is higher.
What happens when quantity supplied becomes larger for each and every price
The supply curve shifts outward
What happens when quantity supplied becomes smaller of reach and every price
The supply curve shifts inwards
What factors have a direct relationship with supply curve
Number of producers - more people are making the supply so therefore more supply
Government subsidies - they give money so supplies can produce more supplies
Price Expectations - If producers expect higher prices - they will make more supplies
Technological Advances - this reduces production costs and in crease quantity supplied
What factors have an inverse relationship
Increase in production cost - is costs increase, producers will decrease the quantity they will make
Prices of other products - If make product A and B and product A becomes more profitable - then they will decrease their supply of product B
What is price elasticity of supply
This is how sensitive quantity supplied of a good or service is to a change in price or cost
ES = % chg in quantity supplied / % chg in Price
What are economic rents and surpluses and opportunity costs
The opportunity cost is when the benefit given up from not using the resource for anoretic purpose
Example - you accept a job for $60K instead of a job for $50K
the economic rent is 10K from accepting the higher paying job and the opportunity cot is the 50K from the job given up.
What is an economic profit
this is the excess of the profit the are receiving over the normal profit rate
What is market equilibrium
they is when quantity demanded = quantity supplied
What is a price ceiling
when the government sets a max that you can charge ( rent control
What is a price floor
This is when the government sets a minimum that an item can be charged ( minimum wage
What is equilibrium price
This is the point where the supply meets the demand.
the point where the two curve meet - naturally without the government stepping in
All the goods being offered for sale will be sold
What is utility
This is consumer satisfaction - consumer seek to maximize their satisfaction
What is marginal utility
a consumer chooses to spend their money on one thing (versus other choices) based on the fact that that item has marginal utility - greater than those of the other choices
Laws of diminishing marginal utility
The more you consume roof one thing - the less satisfying the next one will be
first choice chip cookies is awesome - the 25th is not as much
How do you maximize total satisfaction
This is when the last dollar spent on a product generate the same amount of marginal utility
Pure Monopoly
- One firm sells a product
- No close substitutes
- May have a patent
- blocked entry
- demand curve vertical
Monopolistic Competition
- Multiple suppliers
- mom and pop restaurants, groceries, hair dressers
- Large number of sellers
- heterogeneous products (different products)
- Lots of non-price competition - advertising
- easy entry, easy exit
- demand curve is very flat
- marginal revenue is close to marginal cost
- not a lot of economic profit
- Prices are generally higher than perfectly competitive, but lower than a monopoly
- quantities are higher than a pure monopoly
Oligopolistic
Few producers
can be both:
- heterogeneous - airline manufacturers
- homogeneuos - oil industry
- pay attention to others in their
- engage in a lot of non-price competition - ( product differentiaion or providing high levels of service)
- kinked demand curve
- lots of barriers to enter - its very costly, or complex to set up the infrastructure (automobiles are aerospace)
- government licensing can effectively create government oligologies (cell phones companies)
government try to regulate oligopolies - forbidding cartls and price fixing
- prices tend to be higher than under monopolistic competition but are lower than under a pure monopoly
Pure/perfect competition
- Rarely exists
- commodities markets
- large number of buyers and sellers
- same product
- no non price competition
- no price controls
- demand curve elastic - downward sloping
- selling corn or wheat
- The quantity demanded will increase if suppliers come in and drop the price.
- At the same time the demand will decrease if the exit by suppliers increases prices
-
What is deflation
This is GENERAL decline in price level
It is also a negative inflation rate
What is the difference between GDP and GNP
GNP - Gross National Product - total dollar value of goods and services produced by a country’s RESIDENTS
- this is regardless of whether they are produced in the United States
GDP - Gross domestic product - or nominal GDP - This is the total dollar value at current or nominal market prices of all final goods and services produced WITHIN one Country’s borders. Doesn’t matter the citizenship of the people or where the headquarters of the company are
What is the Income Approach to calculating GDP
- sums all income earned in the production of final goods and services
wages, interest, rents, business profits
- plus adjustments for indirect taxes and economic depreciation ( when you need to replace equipment that wears out)
What is the Expenditure Approach to calculating GDP
Sums all of the expenditures to purchase final goods and services by households, business, government, and foreign sector (exports) minus imports
What is real GDP
- This is the total dollar value of all final goods and services produced expressly using a price level that is constant over time
What is potential GDP
This is used to help estimate the degree to which the economy is underutilizing resources or overheating
Example if actual real GDP falls short of potential real GDP = resources being underused. the result is that unemployment rates will be higher
If Actual Real GDP is exceeding potential GDP = the economy is overheating - the economy has unsustainably low unemployment , boom conditions, and price inflation is inevitable
What is non-accelerating inflation rate of unemployment (NAIRU
This is the natural rate of unemployment
If the actual unemployment rate falls below NAIRU -
results in boom conditions higher inflation
CPI
Consumer price index
compare the price of a fixed basket of goods to an earlier base period
dollar value LIFO
PPI
this is at the whole sale cost
GDP deflator
most comprehensive this is used to convert nominal GDP to real GDP
Interest Rate Effect
As interest rates go up - people can’t afford to borrow money so there is a ripple effect - houses don’t sell, building goes down, more unemployment
higher inflation rates increase nominal interest rates
wealth effect
Higher inflation rates reduce the value of most income
What is the difference between capitalism, communism, and mixed economies
Capitalism - free enterprise - this is when private parties own most of the means of production an make most economic decisions
Communism- or socialism - this is when the government makes most of the means of production and economic decisions
Mixed economies - in between systems - both private and governments own substantial fractions the means of production. US is an example of this - Gov may impose taxes on trade that favor or disfavor certain activities or in how they spend their revenues and regulatory policies that can encourage or discourage various activities
When does price discrimination work best
When consumer are split into distinct segments
- coupons for early bird sales ( first 100 through the door)
- selling the same shampoo to people versus horses
What is a natural monopoly
This is when economies of scale permit large firms to underprice and eliminate all others
What is predatory pricing
This is when you charge a competitively lower price to drive out competitors and then later increase them once they have effectively achieved a monopoly
What laws have been passed to reduce anticompetitive market practices
Sherman Act - not price fixing among suppliers
Clayton Act - Prohibit stock mergers that reduce competition, and price discrimination
Robinson Paton Act - prohibit discounts to large purchasers
Celler-Kefauer Act - prohibit acquisition of the assets of a competitor if it would reduce competition
What is personal disposable income, marginal propensity to Consume (MPC), and marginal propensity to save (MPS)
Personal disposable income - this is the availability of income of a consumer after subtracting mandatory payment of taxes
With your personal Disposable Income you have two choices:
- Spend it: MPC - marginal propensity to Consumer - the percentage of the next dollar you will spend 40%
- Save it MPS - the percentage of the next dollar you will save 60%
must equal - 1
Fixed Costs (FC) Variable Costs (VC) Total Costs (TC) Marginal Costs (MC) Marginal Revenue (MR) Marginal Revenue product
Fixed Costs - Rent per month - these wont change if there is a change in the level of production
Variable Costs - payments to hourly workers, materials used in manufacturing These are costs that will rise as production rises
Total Costs - This is the sum of fixed and variable costs TC = FC + VC
Marginal costs - This is the cost of producing one extra unit
Marginal Revenue - The change in total revenue from the sale of 1 more unit of output
Marginal Revenue Product - The increase of total revenue by the addition of additional unit of input or resource
How does a manager maximize revenue (level of production)
They choose a level of production where their marginal revenue (The change in total revenue from the sale of 1 more unit of output) equals marginal costs (This is the cost of producing one extra unit)
What is a returns scale Increase Returns of Scales Decreasing Returns to Scales Economies of Scale Decreasing Returns of Scale
This is the increases in units produced (output) that result from increases in production costs (inputs)
At lower levels of production and the use of inputs - firms can have a return of scales greater than 1 (Increasing Returns of Scale)
Returns of scale that are less than 1 (Decreasing Returns of Scale)
Alternatively they can have greater efficiencies when they produce more units of a product - Economies of Scale
This is when you can spread your fixed costs over a larger number of units
Diseconomies of scale - this sis increase inefficiencies. Example is that when you produce a lot but not you have costs of storing inventory, increased number of workers, or lower skilled workers that can cost you money
What these product differentiation strategies:
- Physical Differences
- Perceived differences
- customer support differences
Physical Differences - individual features, quality or appearance
Perceived Difference - image, brand name advertising
Customer Support Difference - return policies, technical support
Cost Leadership Strategies:
- Process Reengineering -
- Lean Manufacturing
- Supply Chain Management
Process Reegineering - in-depth redesign of firm’s existing processes to improve performance
Lean Manufacturing - Identify and remove the misuse of resources in the firms existing production processes
Supply Chain Management - sharing relevant information in the chain of sales that ranges from the final consumer to the various levels of suppliers
What are the two approaches to calculate GDP:
Income and expenditure
Income earned - sum all income earned in the production of final goods and services
Expenditure approach - sum all expenditures to purchase final goods and services by households
What id the difference between Real GDP and GDP -Nominal
Real GDP is the total value of all final goods and services using a price level that is CONSTANT over time
Nominal GDP - Is the total dollar value of of all final goods at CURRENT or nominal prices
You adjust nominal GDP to get real GDP by removing the effects of increases in rices - inflation
