Study Unit 2 Flashcards
Law of Demand
price and quantity are inversely related
downward sloping curve
changes in price & quantity cause movement along the curve
Factors other than price
changes in determinants of demand cause the entire demand curve to shift left or right
Determinants of demand
consumer income consumer taste & preference Prices of related goods consumer expectations number of consumers since demand curve is based on customer changes that affect consumer behavior affect the demand curve
Consumer incomes
wealthier population shifts curve to right
normal goods- positively related to income (shift right as income rise)
inferiror goods - demand is negatively related to income (shift to left as income rises)
consumer taste & preference
popular products produce shifts to right
Price of related goods
price increase in A increases demand for B (substitutes)
price increase in A results in decrease in demand for B (complements)
Consumer expectations
expectations of events (hurricanes) increased demand of items shifts to right
Supply
schedule of goods producers willing to offer @ various prices
positive (upward sloping)
Law of supply
price positively related to quantity supplied
Determinants of supply
Costs of inputs
Change in efficiency of the production process (newer tech)
expectations about price changes
Taxes & subsidies
Costs of inputs
increase of inputs (wages, RM) shift curve to left
decreases shift curve to right
Change in efficiency
improves production process shift supply curve to right
Expectations about price changes
expect products price to decrease, increase supply to sell as much as possible and decrease production when prices fall
curve shifts to right
Taxes & Subsidies
increase in taxes or decrease in subsidies shift curve to left
decrease in taxes or increase in subsidies shift curve to right
Surplus
market price exceeds equilibrium price
quantity > demand
competition to eliminate excess causes price cuts & lower production
price lowers, more buyers enter market. price settles
govt intervention can create
Shortage
market price lower than equilibrium
consumers compete for scare goods, prices increase
prices rise, new suppliers enter, price settle, shortage eliminates
govt intervention- price ceiling (price set low allows high demand w/o many suppliers @ price)
Elasticity of Demand
Sensitivity of quantity demanded of product to a change in its price
Point Method
price elasticity of demand for a specific change
Change in Q/Change in P
Midpoint Method
change in Q= (Q1-Q2)/(Q1+Q2)
change in P= (P1-P2)/(P1+P2)
E(D)=change in Q/change in P
relatively elastic
E(D) or E(S)>1
change in Q> change in P
unitary elastic
E(D) or E(S)=1
change in Q=change in P
relatively inelastic
E(D) or E(S)
perfectly elastic
infinite demand or supply
horizontal line (price constant, quant changes)
pure competition lots of firms means 1 firms can’t impact market
perfectly inelastic
E(D)=0
vertical line
need for product means pay any price
# consumers limited, ant desired is constant
substitutes affect on Price elasticity
more subs, demand more elastic, small price increase cause decrease in quant demanded
fewer subs, demand becomes more inelastic
Price Ceiling
price set @ less than market equilibrium, creates shortage b/c market won’t meet artificial price
Price floor
price set above equilibrium, surplus created b/c artificial price generates more than market will buy
Explicit vs implicit costs
explicit- cash pmts
implicit- opportunity costs (economic/normal/total costs)
Short run vs long run
short- time pd so brief cannot vary its fixed costs
long- pd long enough that all inputs, including FC, can be varied
Marginal analysis
total vs marginal product
marginal analysis- econ decisions based on projections on various levels of resource consumption & output production
total- entire production of good/service over pd of time
marginal-addtl output by adding 1 extra unit of input
Law of diminishing returns
pt at which increase of input creates decrease in output
efficiency compromised
Marginal revenue
adtl (incremental) revenue produced from 1 adtl unit of output
- if sold in competitive market, seller cuts price to sell
- total rev increases, but increases at smaller amnt
Marginal Cost
adtl cost assoc w/ generating 1 adtl unit of output
(diff in total cost at each level of output)
-unit cost decreases due to efficiency; at certain pt become less efficient & unit cost increases
Profit Maximization
marginal rev data must be compared with marginal cost to find profit max pt (MR=MC)
beyond this pt, increased production causes total profit to decreases
Total Cost (TC) equals
MCost curve
TC= FC+VC
ATC=AFC+AVC
AFC=FC/Q
AVC=VC/Q
MC intersects ATC & AVC @ minimum
LRATC
extrapolated from all its possible SRATC curves
represents lowest ATC for any level of output can be produced
derives shape from eos & dos
economies of scale
increasing returns to scale
production increases, avg costs of production decline bc of
- specialization & division of labor
- better use & mgt specialization
- more efficient machinery & eqt
Constant returns to scale
increase in production results in no change in avg costs
dis economies of scale
decreasing returns to scale
expand output, costs increase
Pure competition
large # of buyers and sellers act independently
homogeneous product, substitution occurs, price competition
no firm dominates, no power to influence market price
no barriers to entry/exit
every firm has perfect info
Pure competition
Industry Demand vs Firm Demand
for normal good, demand curve for industry is downward, but each seller has a horizontal line (perfectly elastic)
each seller can satisfy small part, must accept market price
firms= price takers
MR for pure competition is constant (pure elastic)
Short run profit in pure comp
continue to operate when earn profit or loss
Long run equilibrium in pure comp
firms earn normal profit attracting new entrants
entry pushes supply curve to right b/c consumers won’t buy unless price is low
if have high cost structure, lower price makes firms leave, shifting supply curve to left reestablishing equilibrium
surviving firms have lowest ATC. Price; quantity settle when MR=MC
Monopoly
1 firm
no close subs
firm influences price b/c only supplier
entry by firms blocked
LTAC of meeting demand minimized w/ 1 firm when eos is great (large ops needed to get low price & costs)
Monopoly pricing power
price maker- sets price as high b/c lack of competition
price search- doesn’t set prices high, seeks price to max its profits
Industry Demand
Monopoly
Industry Demand= Firm demand
demand curve is downward b/c sell more by price decrease
price cut affects all units, not adtl units sold b/c of price cut; MR is below demand curve
monopolistic firm’s demand curve= industry demand curve
MR decreases wrt increased output, when MR=0 total revenue decrease
Profit maximization
power to set output @ level= profit max MR=MC
economic profit in long run
MR
Monopolistic competition
many firms, less than in pure comp, great enough firms can’t act together to restrict output & fix price product differentiated (quality, brand, style, etc.); advertising important few barriers to entry/exit great eos don’t exist (firms not too large), cost of product differentiation is biggest barrier to entry profit max MR=MC, price equals this point profit max price > minimum ATC, earns economic proft in short run progit max price
Oligopoly
few firms, mutually aware & independent
price, advertising decisions depend on actions of other firms
differentiate or std products
each firm set price & production level after consideration of interdependence w/ other industry firms
barriers to entry
price rigidity – kinked demand curve (firms follow price decrease not increase)
increase prices move firm into elastic part of demand curve (decline in quantity, lose market share)
cut price, incease sales (inelastic partion)
discontinuous MR means MR decreases w/ small price cut, competitors follow to not lose market share
Cartel
group of oligopoly firms agree to set prices (illegal except internationally)
- economic effects similar ot monopoly, firm restrics output, increses price, earns max profit
- each firm becomes monopoly, b/c of collusion
- cohesion maintained if members follow agreed upon price/production; fails when 1 member cuts price
resource planning
resource markets
derived demand
resource planning- profit max requires optimal ouput at least cost; resources in production process are acquired in markets
resource markets- pure comp, monopoly, mono comp, oligopoly
derived demand- demand for inputs (factors)to production process derived from the demand for output of process (finished goods)
factors affecting demand for resources
demand for final produt- change results in new product price (affects demand)
productivity of resource- productivity of input increases, demand increases b/c
-proportion of come of resource w/ other resources shift
-tech improvement made in combining resources
-tech improvements made in resource itself
price of resouces than can sub for another resource falls, demand for second resource falls (substitution effect)
(price decrease of pens affects pencils demand curve shifts left)
complements, decrease in price of one causes increase in demand for the other
elasticity of resource demand
movements along curve
directly related to –elasticity of demand for final product (chocolate more elastic, cocoa more elastic), availability of subs, proportion of total production cost represente by the resource (sugar is large prop of TPC for choc, increase in sugar price spikes mfg TC, demand for sugar more elastic)
Wages
nominal wages- amnt paid/rec’d
real wages- actual purchasing power (goods/services) of nominal wages
level of wages determined by productivity of labor (output/hours worked)
-increased productivity increases demnd for labor
Labor supply & demand in competitive market
firms compet for skilled workers; neigher firms nor workers can affect market rate for labor (both are price takers)
market demand fo labor= total of indiv firms demand curves (marginal revenue product curves)
mkt supply curve has positive slope (little unemployment, firms must raise wages to hire, match opp costs)
wage rate & employment level determined by intersection of mkt labor demand curve & suppy curve
each firm accepts mkt wage rate as determined by pt of labor mkt equilibrium
-suppy curve (labor) is perfectly elastic, MRC same for all labor hired
labor supply demand in monopsony
workers have option of single employer (i.e. town)
all sellers sell to single buyer
MRC> current rate for resource; given upwd supply curve, get adtl units of resource from paying more
-firm in perfect comp pays constant amnt per unit b/c can’t influence rate
1st worker =10/hr 2nd 2=$11, MRC is 11+1=12
max profits, buyer of resources uses resources unti MRP=MRC (determines equilibrium)
MRP determines equil quant
-pay lower price, buy less, produce less than pure comp, results in higher resource rate and greater quantity demanded
