Post Course Flashcards
Five Forces of Framework
Threat to entry: patents, trademarks, copyrights
Buyer bargaining power: can lower prices
Supplier bargaining power: is there only one supplier?
Substitution: more substitutes, more elastic
Rivalry among competitors: price wars
Accounting cost
explicit costs
Economic cost
opportunity (implicit) costs + explicit costs
Normal good
If income increase, demand for that good will increase
Inferior good
If income increases, demand for that good will decrease
Subsitutes
If the price of good x increases, demand for good y increases
Complements
If the price of good x increase, demand for good y decreases
Excise tax
collected from supplier that decreases supply of a good, based on a per unit
increases equilibrium prices
EX: gasoline tax
Ad Valorem tax
rotates supply curve, based on a percentage
increases equilibrium prices
EX: sales tax
Price ceilings
market can’t go above set price, which is set below the equilibrium
This is in response to a surplus in the market, and unfair scarcity exists
creates a shortage
EX: rent controls
Price floors
market can’t go below set price, which is set above the equilibrium
In response to shortage, and creates a surplus
EX: minimum wage
If demand increases and supply stays constant?
Price and quantity increase
If demand decreases and supply stays constant?
Price and quantity decrease
If supply increases and demand stays constant?
price decreases and quantity increases
If supply decreases and demand stays constant?
price increases and quantity decreases
Simultaneous shifts in demand and supply
demand increases, supply increases: quantity increase
demand increases, supply decreases: price increases
demand decreases, supply increases: price decreases
demand decreases, supply decreases: quantity decrease
linear demand curve vs. log linear demand curve
linear: constant slope, not elasticity
log linear: constant elasticity, not slope
Inelastic and total revenue
when prices increase, total revenue increases
Elastic and total revenue
when prices increase, total revenue decreases
Consumer equilibrium
marginal rate of substitution (slope of indifference curve) = market rate of substitution (slope of budget line)
Economies of scale
in the LRAC decreases as output increases
Economies of scope
the cost of producing two types of output together is less than the cost of producing each one separately
Cost complementary
the marginal cost of one good decreases as output of another good increases
EX: donut holes
Spot exchange
firm has one time deal
no protection against opportunism and hold-ups
pro: firm gets to specialize
con: no protection
Contract
agreed upon pricing and amount purchased
pro: firm gets to specialize
con: not complete protection, and can not count for all contingencies possible
Vertical Integration
Firms start to produce their own inputs
pro: don’t have to deal with suppliers
con: no more specialization and much incur input costs
Principal agent problem
Solutions:
profit sharing: based on profitability, like shares
revenue sharing: based on revenue, like commission
piece rates: based on how much output
time clocks and spot checks:
Site specificity
Physical assets specificity
dedicated assets
human capital
Firms locate near suppliers
firms good only works in specific model
new segments created for specific buyers: government
trained skills only usable for current job
Factors affecting own price elasiticity
available substitutes: the more substitutes, the more elastic
time: the more time, the more elastic
expenditure share: smaller the share, the more inelastic
Demand shifters
change in income: M change in other good: Py change in # of consumers change in price of good: Px consumer tastes and preferences expected price of good in future
Quantity demand shifter
change in price, moves along the demand curve
Own price of elasticity for linear demand curves
%change in quantity / %change in price or
beta(Px/Qx)
Own price of elasticity for log linear demand curves
the coefficient of Px in the equation
Income elasticity for linear demand curves
%change in quantity / %change in income or
beta(M/Qx)
Income elasticity for log linear demand curves
the coefficient for M in the equation
Cross-price elasticity for linear demand curves
%change in quantity of x / %change in price of y or
beta(Py/Qx)
Cross-price elasticity for log linear demand curves
the coefficient for the other good
