Post Course Assessment Flashcards
What causes the demand curve to shift to the left (down)?
- Decrease in price of a substitute
- Increase in price of a complement
- Decrease in consumer income if the good is a normal good
- Increase in consumer income if the good is an inferior good
What causes the demand curve to shift to the right (up)?
- rise in income
- A rise in the price of a substitute
- a fall in the price of a complement
What causes movement along a demand curve?
Change in the price of a good or service
What causes a supply curve to shift left
- a rise in the cost of relevant inputs
- Expectations: if sellers expect prices to increase, they may decrease the quantity currently supplied at a given price in order to be able to supply more when the price increases, resulting in a supply curve shift to the left
What causes a supply curve to shift right?
- A decrease in cost
- More sellers = More Supply
- Technological advances in which increase production efficiency
What causes movement a long a supply curve?
When the price of the good changes and the quantity supplied changes in accordance to the original supply relationship
Law of Demand
If all other factors remain equal, the higher the price of a good, the less people will demand the good. The higher the price, the lower the quantity demanded.
Elastic Goods
If the change in demand for a given product corresponds closely to the change in price for that product, the demand is considered to be elastic.
Inelastic Goods
If the change in demand for a given product does not correspond closely to a change in the price for that product, the demand is considered to be inelastic.
Average Variable Cost Curve
- Average variable cost curve will at first slope down from left to right then reach a minimum point then rise again
is ‘u’ shaped
Average Total Cost Curve
- Can be found by adding average fixed costs and average variable costs
- is ‘u’ shaped
- takes its shape from AVC curve, with the upturn reflecting the onset of diminishing returns to variable factor
Shutdown Point
A shutdown point is a point of operations where a company experiences no benefit for continuing operations or from shutting down temporarily; it is the combination of output and price where the company ears just enough revenue to cover its total variable costs
Effects of Price Caps and Ceilings
- Quantity demanded exceeds quantity supplied; price ceilings lead to shortages (bidding occurs)
Side Effects of Price Floor set Above Market Equilibrium Price
- Higher price for same product
- Consumers reduce their purchases or drop out of market
- Suppliers find they are guaranteed a new higher price than they were charging before
- Suppliers increase production
Profit Maximization for Perfect Competition and Monopoly
- Monopolistic competition works like monopoly, price makers but with more than one company in the market. Price taker (perfect competition; no power over price) vs price makers (some influence over price charged)
Short Run Profit Maximization
P = MC
In a perfectly competitive market, firms
do not incur cost to either enter or exit a market.
Free entry means
that new firms (either those operating in other industries or start-up firms) can easily enter the market, thereby increasing market supply and reducing profit margins. Similarly, free exist means firms can easily exit the industry, thereby reducing market supply and increasing profit margins. Firms do not face barrier-to-exit because of governmental regulation. Free entry and exit will have important implications for the profit margins of firms operating in a perfectly competitive industry.
Barriers to entry
- government regulations, licensing
- Cost advatanges due to economies of scale
- Price cuts by existing firms to inflict losses on new firms
Monopoly
Clear defined heterogeneous product with no substitute
- a single seller
- prohibitive barriers to entry and exit
Price & Quantity Demanded have an
inverse relationship
Why Price and Quantity have an inverse relationship
- Law of Diminishing Marginal Utility
- The Income Effect
- The Substitution Effect
Supply Curves up to the right
The volume suppliers in an industry are willing to produce increases as the price the market pays increases. Under typical circumstances, the revenue and profit derived by a supplier increases as the market price rises.
Perfectly elastic demand
the responsiveness of demand to a change in price or the price elasdticity is infinite, thereby resulting in a flat demand curve, consumer will not buy a good or service if price moves at all
perfectly inelastic demand
Perfectly inelastic demand means that a consumer will buy a good or service regardless of the movement of price. In order for perfectly inelastic demand to exist, there can be no substitutes available. Set price at high level to maintain current level. Curve will be STEEP.
Elasticity of supply
elasticity of supply is the ability of the supply to change when other market forces, such as price and demand change.
Average Fixed Costs
Fixed costs of production (FC) divided by the quantity (Q) of output produced. Fixed costs are those that must be incurred in fixed quantity regardless of the level of output produced.
Average Total Costs:
Average cost (AC) and/or unit cost is equal to total cost divided by the number of goods produced (the output quantity Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q)
Average Variable Cost
AVC is a firm’s variable costs (Labor, electricity, etc.) divided by the quantity of output produced. Variable costs are those that vary with output.
Cartels:
An agreement between competing firms to control prices or exclude entry of a new competitor in the market. It is a form organization of sellers or buyers that agree to fix selling prices, purchase prices or reduce production using a variety of tactics.
Complements:
A good with a negative cross elasticity of demand in contrast to a substitute good. This means a good’s demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.
Demand curve
Graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at any given price.
Demand:
describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease demand and vice versa.
Diseconomies of scale:
When economies of scale no longer functions for a firm; Rather than experience continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased. // Cost disadvantages that firms accrue due to increase in firm size or output, resulting in production of goods and services at increased per-unit costs. Follows the law of diminishing returns, where further increase in size of output will result in even greater increase in average cost.
Economic Profits:
Difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. Calculated (Revenue - Opportunity Cost = EP)
Economies of Scale
Cost advantages that enterprises obtain due to size, output or scale of operation with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.
Economies of Scope
Efficiencies formed by variety, not volume.
Effects of Price Caps (Price Ceilings)
will create a surplus of supply and will lead to a decrease in economic surplus.
a. Has economic impact only if it is less than free-market equilibrium price. b. An effective price ceiling will lower the price of a good, which decreases the producer surplus. The effective price ceiling will also decrease the price for consumers, but any benefit gained from that will be minimized by the decreased sales due to the drop in supply caused by the lower price ceiling. c. If a ceiling is to be imposed for a long period of time, a government may need to ration the good to ensure availability for the greatest number of consumers.
Elasticity of Demand:
Shows responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, all things remaining equal. Gives the percentage of change in quantity demanded in response to a one percent change in price.
Externalities
Consequence of an economic activity experienced by unrelated third parties; it can either be positive or negative. Occur in an economy when the production of consumption of a specific good impacts a third party that is not directly related to the production or consumption. (Example: Pollution)
Fixed costs:
Cost that does not change with an increase or decrease in the amount of goods or services produced or sold.
Long run costs
have no fixed factors of production, while short run costs have fixed factors and variables that impact production.
In the short run there
are both fixed and variable costs. In long run there are no fixed costs.
Efficient long run costs are sustained when
the combination of outputs that a firm produces results in the desired quantity of the goods at the lowest possible cost.
Variable costs change with
the output.
The short run costs
increase or decrease based on variable cost as well as the rate of production. If a firm manages its short run costs well over time, it will be more likely to succeed in reaching the desired long run costs and goals.
Marginal Cost
The change in total cost that comes from making or producing one additional item.
Marginal Product
hange in output resulting from employing one more unit of a particular input.
Marginal Revenue
The additional revenue that will be generated by increasing product sales by one unit. Can also be described as the unit revenue the last item sold has generated for the firm.
Monopoly
Market structure in which there is only one producer/seller for a product. The single business in the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political.
Oligopoly
Market structure in which a small number of firms has the large majority of market share. Similar to monopoly, except that rather than one firm, two or more firms dominate the market. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly impact and influence the others.
Opportunity Costs
The choice of a best alternative lost while making a decision. A choice needs to be made between several mutually exclusive alternatives. “Cost” incurred by not enjoying the benefit that would have been had by taking the second best available choice.
Perfect Competition:
Market structure in which the following five criteria are met:
a. All firms sell an identical product b. All firms are price takers - they cannot control the market price of their product c. All firms have a relatively small market share d. Buyers have compete information about the product being sold and the prices charged by each firm e. The industry is characterize by freedom of entry and exit.
Price discrimination
Where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.
Substitutes
Goods that can be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise. Therefore, substitutes have a positive cross elasticity of demand.
Sunk Costs
Cost that has already been incurred and cannot be recovered.
Supply Curve
Relationship between the price of a good or service that the quantity supplied for a given period of time.
Supply
Amount of something that firms, consumers, laborers, providers of financial assets or other economic agents are willing to provide to the marketplace.
Variable Costs:
Cost that vary with levels of output.
Normal Good
normal goods are any goods for which demand increases when income increases, and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand.
Inferior Good
an inferior good is a good whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases), unlike normal goods, for which the opposite is observed.