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BPP FIN > Module 10 > Flashcards

Module 10 Flashcards

1
Q

Price Elasticity of Demand calculation?

A

% change in quantity demanded / % change in price

(Q2-Q1/Q1 / (P2-P1)/P1

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2
Q

How to calculate the cross-price elasticity of Demand?

A

% change in quantity of A demanded / % change in price of B

Substitute +
Complementary -

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3
Q

How to calculate the income elasticity of Demand?

A

% change in quantity demanded / % change in income

Normal +
Inferior -

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4
Q

How to calculate the price elasticity of supply?

A

% change in quantity supplied / % change in price

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5
Q

Total cost =

A

Variable cost + fixed cost

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6
Q

What factors help explain the law of demand?

A

Law of diminishing marginal utility: Once consumer bought one the extra benefit from having more decreases

Income effect: constrained by available income

Substitute effect: more likely to find and switch to substitute as become cheaper

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7
Q

Demand is?

A

Quantity of goods buyers are willing and able to purchase

Negative gradient £y Quantity x

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8
Q

How to arrive at a market demand curve?

A

Add together individual curves of all the consumers in the market

Individual consumer have own relationship between price and demand for a product

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9
Q

Demand curve shifts

A

Left if demand decreases

Right if demand increases

Price changes causes movement along the curve

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10
Q

What causes the demand curve to shift?

A

Price of other goods

Consumer income

Advertising / tastes

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11
Q

If a substitute price falls

A

Demand curve for original shifts to the left

More substitutes more elastic the demand

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12
Q

Price of complementary falls

A

Demand curve shifts to the right (more demand for original to go with it)

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13
Q

Consumer incomes normal and inferior goods?

A

Demand for Normal goods increases as income rises

For inferior goods decreases as income rises

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14
Q

Other factors on market demand

A 
Age structure 
Income distribution 
Size of population
Expectations of future rises
Legislation
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15
Q

PED results mean? Elastic = sensitive

A

PED > 1 demand is elastic
Revenue increase when price is lowered

PED < 1 is inelastic
Revenue will fall when price is lowered

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16
Q

Perfect elasticity?

A

PED infinity
Horizontal line
Price shift demand falls to 0

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17
Q

Perfect inelasticity?

A

Demand unaffected by price
PED 0
Vertical line

18
Q

Unit elasticity?

A

PED is 1
Curved line is a proportionate change
Revenue unaffected by change in price

19
Q

Factors affecting PED?

A

Substitute products
Advertising and time
Luxury (PED higher) or necessity (PED lower)
Time (short run have less time to adjust spending patterns)
Proportion of income

20
Q

Cross PED for substitute and complementary?

A

Positive for substitute

Negative for complementary

21
Q

Link between income and demand formula IED

A

% change in quantity / % change in income

Normal Good if income rises IED > 0 +
Inferior good IED < 0 -

22
Q

Supply curves

A

Positive gradient

Change is price move along it

23
Q

Factors influences the position of the supply curve

A

Cost of making rise, shift to left
Technology, improvement shift to right
Government regulation, tighter shift to left
Profitability of alternative products, rises shift to left

24
Q

Price elasticity of supply?

A

% change quantity / change price

PES > 1 elastic
PES < 1 inelastic

25
Q

Factors influencing the price elasticity of supply?

A

Time period- short run can’t adjust so inelastic
Cost of changing output- high difficult to switch supply inelastic
Type of good- some fixed perfectly inelastic

26
Q

The market mechanism

A

Cross of supply and demand curves where meeting point is the equilibrium where quantity produced is quantity wanted

Above cross S>D
below cross D>S

27
Q

What are the factors of production?

A

Land
Labour
Capital- man made inputs
Enterprise- organisation of the other three

28
Q

What is short run?

A

Period of time in which not all the factors of production can be varied

29
Q

What is long run?

A

Period of time in which all factors can be varied

30
Q

What are fixed and variable costs?

A

Fixed- don’t change in the short run even though output changes

Variable- do change with output

31
Q

Total cost =

A

Variable + fixed

32
Q

What is marginal cost?

A

Cost of making one additional unit

= Total cost of N - total cost of N-1

33
Q

What is marginal revenue?

A

Increase in total revenue from selling more than one unit

MR > MC makes sense to increase productivity as extra revenue from producing and selling the extra unit more than covers extra cost so profits increase

MC>MR increasing production reduce profit not sensible to do so

34
Q

Profit is maximised when?

A

Marginal cost = marginal revenue

35
Q

What is the normal profit?

A

Minimum amount to keep owners interest in continuing to work

Total costs=total revenue

36
Q

What is supernormal profit?

A

Revenue exceeds total costs

37
Q

What are the four market structures?

A

Perfect competition
Monopoly
Monopolistic competition
Oligopoly

38
Q

Characteristics of perfect competition?

A

Identical products
Each buyer and seller is small
Free entry and exit in the long run
Perfect information- aware of all costs and tech

Each firm is a price taker - small and no power
Demand curve horizontal (perfectly elastic)

39
Q

What is a Monopoly?

A

Arise when no close substitutes and only one firm producing it
No competition and considerable market power
Potential to earn supernormal profits

High barriers to entry:

  • Natural, economies of scale
  • Legal, patent
  • Artificial, brand loyalty

Price maker
Demand curve is industries demand curve
Incentive for efficiency and cost control is eroded
Can drive up prices but economies of scale can keep low

40
Q

What is monopolistic competition?

A

Similar to perfect as still a large number of small suppliers
Free entry and exit

Difference: products differentiated oi

Brand loyalties develop
Degree of market power
Many firms so actions of one firm effectively diluted

Short run supernormal profits
Long run normal profits

41
Q

What is an oligopoly?

A

Small number of firms that each supply a large proportion of the market

Actions of one firm affect actions of other: interdependent

Must take into account rivals and their reactions

Entry difficult due to competing with large well established companies with economies of scale

Collusion may happen illegally

BPP FIN (14 decks)

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