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A2 - Managerial and Business Economics > Report > Flashcards

Report Flashcards

1
Q

Market Demand Curve

A

Definition:

  • Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant.

Law of Demand:

  • The quantity of a good consumers are willing and able to purchase increases as the price falls and decreases as the price rises.
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2
Q

Changes in Quantity Demanded vs. Changes in Demand

A

Changes in Quantity Demanded:

  • Changes due to price changes, represented by movement along the demand curve, holding other factors that impact demand constant.

Changes in Demand:

  • Changes due to factors other than price, represented by a shift of the entire demand curve.
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3
Q

Demand Shifters

(5/2,2,2,1,1)

A

Income:

Normal Good:

  • Demand increases as consumer income increases.

Inferior Good:

  • Demand decreases as consumer income increases.

Prices of Related Goods:

Substitute Goods:

  • Demand increases as the price of a substitute rises.

Complement Goods:

  • Demand decreases as the price of a complement rises.

Advertising and Consumer Tastes:

Informative Advertising:

  • Provides information about a product, increasing demand.

Persuasive Advertising:

  • Alters consumer tastes, increasing demand.

Population:

  • More consumers increase demand.

Consumer Expectations:

  • Expectations of future prices or income can affect current demand.
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4
Q

Shift of demand curve

A
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5
Q

The Linear Demand Function

A

The demand function for good X is a mathematical representation describing how many units will be purchased at different prices for good X, different prices of a related good Y, different levels of income, and other factors that affect the demand for good X.

alpha x will always be a negative quantity

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6
Q

Understanding the Linear Demand Function (picture)

A
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7
Q

The Linear Demand Function in Action

A
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8
Q

Inverse Demand Function

A
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9
Q

Total expenditure (definition)

A

Total expenditure
The per-unit market price times the number of units consumed

Total consumer value
The sum of the maximum amount a consumer is willing to pay at different quantities

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10
Q

Consumer Surplus

What is the definition?
How to calculate?

A

Definition:

  • The extra value that consumers derive from a good but do not pay for.

Calculation:

  • The difference between what consumers are willing to pay and what they actually pay.
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11
Q

Market Supply Curve

Definition?
What is the law of supply?

A

Definition:

  • Summarizes the relationship between the total quantity all producers are willing and able to produce at alternative prices, holding other factors constant.

Law of Supply:

  • The quantity supplied of a good rises as the price rises
  • and falls as the price falls
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12
Q

Market Equilibrium

Definition?
Characteristic?

A

Definition:

  • The price and quantity at which the market demand and market supply are equal.

Characteristics:

  • No shortage or surplus in the market; forces of demand and supply are balanced.
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13
Q

Changes in Quantity Supplied vs. Changes in Supply

A

Changes in Quantity Supplied:

  • Changes due to price changes, represented by movement along the supply curve.

Change in Supply:

  • Changes due to factors other than price, represented by a shift of the entire supply curve.
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14
Q

Supply Shifters (7)

A

Input Prices:

  • Higher input prices decrease supply.

Technology:

  • Improvements increase supply.

Government Regulation:

  • Can either increase or decrease supply.

Number of Firms:

  • More firms increase supply.

Substitutes in Production:

  • Higher prices of substitutes decrease supply.

Taxes:

  • Higher taxes decrease supply.

External Factors:

  • Events like war, weather, and natural disasters can affect supply.
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15
Q

The Linear Supply Function

A
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16
Q

The Linear Supply Function in Action

A
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17
Q

Producer Surplus

Definition?
Importance?

A

Definition:

  • The amount producers receive in excess of the amount necessary to induce them to produce the good.

Importance:

  • Indicates the benefit producers get from selling at a market price higher than their minimum acceptable price.
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18
Q

Comparative Statics

Definition?
Useful because?

A

Definition:

  • The study of the movement from one equilibrium to another.

Applications:

  • Analyzing the effects of changes in demand, supply, or both on market equilibrium.
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19
Q

Introduction to Demand Analysis

What does an increase in the price of a good lead to in terms of quantity demanded?

A
  • An increase in the price of a good leads to a decline in the quantity demanded for that good.
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20
Q

Elasticity Concept

What does elasticity measure?

.

A

Elasticity measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable

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21
Q

The elasticity between two variables, Q and P, is mathematically expressed as? (picture)

When a functional relationship exists, like Q = f(P), the elasticity is? (picture)

A
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22
Q

Measurement Aspects of Elasticity (2)

A

Pretty much direction of change and magnitude of change

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23
Q

Own Price Elasticity

What does it measure?
What is its equation?
What is the sign?
What are the different terms and what are they based off?

A

Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price.

Sign: negative by law of demand.

Unitary elastic point = highest revenue

24
Q

Linear Demand, Elasticity, and Revenue

A
25
Q

Total Revenue Test

When demand is elastic:
When demand is inelastic:
When demand is unitary elastic:

A

When demand is elastic:

  • A price increase (decrease) leads to a decrease (increase) in total revenue.

When demand is inelastic:

  • A price increase (decrease) leads to an increase (decrease) in total revenue.

When demand is unitary elastic:

  • Total revenue is maximized.
26
Q

Factors Affecting Own Price Elasticity

How does the availability of substitutes affect the own price elasticity of demand?

A

The more substitutes available for a good, the more elastic the demand for it.

27
Q

Time/Duration of Purchase Horizon

How does the time consumers have to react to a price change affect demand elasticity?

A

The more time consumers have to react to a price change, the more elastic the demand for the good as they have more time to seek alternatives

28
Q

Expenditure Share of Consumers’ Budgets

How does the expenditure share of a good in consumers’ budgets affect its price elasticity?

A

Essential goods are generally inelastic, while nonessential goods are generally elastic.

29
Q

Demand and Marginal Revenue

A

The point at which there is unitary elasticity, marginal revenue is 0

30
Q

Income Elasticity

What does income elasticity measure?
3 equations, 3 meanings?

A

It measures the responsiveness of a percent change in demand for a good due to a percent change in income.

31
Q

Cross-Price Elasticity

What does it measure?
3 equations, 3 meanings?

A

Measures responsiveness of a percent change in demand for good X due to a percent change in the price of good Y.

0 = no effect on each other

32
Q

Elasticities for Linear Demand Functions

A
33
Q

Elasticities for Nonlinear Demand Functions

Equation

A

Managers frequently encounter situations where a product’s demand is a non-linear function of prices and money income

px has to be negative

34
Q

Elasticities for Nonlinear Demand Functions

If we…

A

If we take the natural logarithm of this equation, we obtain an expression that is linear in the logarithms of the variables:

35
Q

Regression Analysis

What can regression analysis be used to estimate? (3)

A

Regression analysis can be used to estimate:

  • demand functions,
  • elasticities,
  • other important economic relationships.
36
Q

What is consumer behavior?

A

Consumer behavior examines how individuals make decisions to allocate their resources (time, money, effort) among various goods and services.

37
Q

What are consumer opportunities?

A

Consumer opportunities refer to the set of possible goods and services that consumers can afford to consume given their budget constraints.

38
Q

What are consumer preferences?

A

Consumer preferences determine which set of goods and services will be consumed based on the satisfaction they provide to the consumer.

39
Q

What are the properties of consumer preferences?

A

Completeness:

  • Consumers can compare and rank all possible bundles of goods.

More is better:

  • Consumers prefer more of a good to less.

Diminishing marginal rate of substitution:

  • As a consumer obtains more of one good, they are willing to give up less of another good to get additional units of the first good.

Transitivity:

If a consumer prefers bundle A to B and B to C, then they prefer A to C.

40
Q

What is the budget constraint?

A

The budget constraint is the restriction set by prices and income that limits the bundles of goods affordable to consumers.

41
Q

What is consumer equilibrium?

A

Consumer equilibrium is the consumption bundle that is affordable and yields the greatest satisfaction to the consumer.

42
Q

What happens to the budget constraint when income changes?

A

An increase in income shifts the budget constraint outward, allowing for more consumption, while a decrease in income shifts it inward.

43
Q

How do price changes affect consumer equilibrium?

A

Price changes alter the budget constraint and can lead to a new consumer equilibrium depending on whether the goods are substitutes or complements.

44
Q

What does regression analysis assume?

A

preceding analysis assumes the manager knows the demand for the firm’s product.

It can provide explicit estimates of demand elasticities and functional forms for demand functions.

45
Q

How does one obtain information on the demand function? (3)

A
  • Statistical technique called regression analysis using data on quantity, price, income and other important variables.
  • Published studies.
  • Hire consultant.
46
Q

What is econometrics

A
  • Econometrics is simply the statistical analysis of economic phenomena.
  • The job of the econometrician (this lecture) is to find a smooth curve or line that does a “good” job of approximating the points.
47
Q

Regression Line and Least Squares Regression

What does the econometrician believe?

What is the regression model?

A

The econometrician believes that, on average, there is a linear relation between Y and X, but there is also some random variation in the relationship.

Mathematically, the true (or population) regression model

𝑌=𝑎+𝑏𝑋+𝑒

𝑎 = unknown population intercept parameter.
𝑏 = unknown population slope parameter.
𝑒 = random error term with mean zero and standard deviation 𝜎.

For a demand function = Y = Quantity demanded
X = Own price

48
Q

Regression Line and Least Squares Regression (picture)

A
49
Q

How do you evaluate the statistical significance of estimated coefficients?

A

By using t-statistics and p-values. If the t-statistic is greater than 2 or the p-value is less than 0.05, the coefficient is considered statistically significant.

Means we can be 95% confident; P value and significance level are the sa

50
Q

What is R-Square in regression analysis?

A

R-Square, or the coefficient of determination, measures the proportion of the variation in the dependent variable that is explained by the regression model. It ranges from 0 to 1.

51
Q

What does the F-statistic indicate in regression analysis?

A

The F-statistic assesses whether the regression model has statistically significant explanatory power. If the significance F is less than 0.05, the model is considered significant.

52
Q

What is multiple regression?

A

Multiple regression is a regression technique that involves more than one independent variable. It can be used to model nonlinear relationships and interactions between variables.

53
Q

How do you interpret the regression results?

A

By examining the R-square, F-statistic, and the significance of individual coefficients. For example, a high R-square indicates a good fit, and significant coefficients suggest meaningful relationships between variables.

54
Q

What does a negative coefficient for distance from campus indicate in a regression model for student property demand?

A

It indicates that as the distance from campus increases, the demand for student property units decreases.

55
Q

What is the impact of price on demand according to the regression model?

A

A negative coefficient for price suggests that an increase in price leads to a decrease in the quantity demanded.

56
Q

Picture nonlinear

A
57
Q

Regression for Nonlinear Functions and Multiple Regression

A

A2 - Managerial and Business Economics (8 decks)

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