Test 1 Flashcards
Five Forces
- Threat of entry
- Supplier bargaining power
- Buyer bargaining power
- Substitutes
- Rivalry among competitors
Buyer power
price power to lower prices
EX: CEMEX
Supplier power
is there a monopoly? EX: microsoft/intel
Substitutes
EX: tax prep services
New entrants
barriers to entry
entry price
incumbent advantages
government policy
Rivalry
higher competition costs
market share battles
“price wars”
Where are net benefits maximized?
When MB=MC
Marginal principle
Increase control variable to point where MB=MC
Accounting costs
explicit costs only
Economic costs
explicit + implicit (opportunity) costs
What happens to PV when the interest rate increases?
PV decreases
PV of a stream of future payments
use when future values are different
NPV
=PV-C
PV of a firm
used if profits are constant
profit growth
Incremental costs
additional costs incurred if project is taken on
Incremental revenues
additional revenues
Demand factors
price of good : Px consumer income: M price of related good: Py consumer tastes: T expected price of good in future: Pe #of consumers in market: N
What affects QD
changes in price
ceteris paribus
other things being equal/held constant
Normal good
If M increases then the D for a normal good increases
Inferior good
If M decreases then the D for an inferior good increases
Substitutes
Increase in price of good x causes increase in demand of good y
complements
increase in price of good x causes decrease in demand of good y
Consumer expectations
if consumers expect prices to increase in the future then demand will increase in current period
Substitution effect
when the price of a good increases, other goods can be used in its place. Opportunity cost has increased
EX: red bull price is less so people will substitute red bull for other energy sources
Income effect
when the price of a good increases, consumers cannot afford everything they used to buy
EX: red bull lowers price so consumers will buy more with, “extra money”
Supply factors
price of good: Px price of inputs: Pi price of related good: Py Technology: T producer expectations: Pe # of firms: F
Substitutes in production
if price of good x increases relative to good y, then supply of good x increases and supply of good y decreases
Complements in production
increase in price of good x causes producers to supply more of good y as well as good x
Excise tax
collected from supplier
decrease supply of good
based on per unit
Ad Valorem tax
rotates supply curve
based on a percentage
price ceiling
market can’t go above the set price
EX: rent controls
price floor
market can’t go below the set price
EX: minimum wage
Subsidy
when there is surplus, government buys up excess and pays for it
qualitative forecasts
just the direction
quantitative forecasts
direction and magnitude
Demand increase, supply is constant
Equilibrium price and quantity increases
demand decreases, supply constant
equilibrium price and quantity decreases
supply increases, demand constant
equilibrium price decreases, quantity increases
supply decreases, demand constant
equilibrium price increases, quantity decreases
Simultaneous shifts
demand increases, supply decreases: price increase
demand increases, supply increases:quantity increase
demand decrease, supply increase: price decrease
demand decrease, supply decrease: quantity decrease
