topic 2 Flashcards
Definition: Consumption/Savings Function
is a mathematical function used to express dynamic consumer spending/saving.
it is used to calculate the economies total amount of consumption/savings
Definition: Autonomous Consumption (Co)
represent consumption when Income (Y) = 0 and there is the survival cost. this cost eats into savings and contributes to dissaving.
Definition: Induced Consumption (Ci)
spending increased by an increase in income (Y)
Consumption Formula (C)
C = Co + Y(mpc)
When drawing a Consumption Function _____
the scales on the X (income) and Y (consumption) axis must be the same
The point C=Y on a Consumption Function is the ____
break even point where savings = 0 and everything is consumed
Definition: Average Propensity to Consume/Save
broad measure of the economy’s consumption/saving behaviour in a single point in time
APC and APS Formula
APC = C/Y
APS = S/Y
APS + APC = 1
Savings Function Formula (S)
S = -Co + Y(mps)
negative Co because the autonomous consumption is dissaving
What influences what we WANT to buy?
- tastes/preferences
- trends
- advertising
what influences what we CAN buy?
- income
- price (of G&S itself, substitutes and compliments)
Definition: Utility
the satisfaction one gets from consuming a G&S
Goods trends
- normal good (demand increases as income increases)
- inferior good (demand decreases as income increases)
- giffen good (demand increases as price increases) (good such as rice for people in absolute poverty)
Market Equilibrium is set when ____
supply levels intersect with possible demand levels
Definition: Income
a flow concept. the flow of funds or money from nonmarket sources
Definition: Wealth
a stock concept. the total value of real and financial assets of an individual at a particular point in time.
How does the Government redistribute income?
- Tax brackets
- provide welfare payments
- provide social wages (a safety net for education, health, etc.)
Definition: Firm
business organisation using factors of production to produce G&S to satisfy consumer needs and wants in return for PROFIT
What are the goals of a firm?
- maximising profit
- maximising sales
- maximising growth
- maximising market share
- maximising shareholder value
- for managers own satisfaction (small companies)
What are the different parts of a Unit sale price?
- Fixed cost (e.g rented room to produce the G&S) –> can not change
- Variable cost (e.g materials, labour, etc) –> variable cost can be cut down
- Profit –> positive difference between the total cost of producing and the selling cost
Profit Maximisation Formula
profit (per unit) = revenue - cost (fixed and variable)
- firms raise prices
- firms increase number of units sold
- firms cut costs of each unit produced
Definition: Economies of Scale
refers to the reduction of costs per unit of output as output increases (technical efficiency). this is measured on the LRAC curve.
INTERNAL: the cost savings that the firm acquire because it becomes more efficient in allocating internal resources. (point moves along the left side of the curve)
EXTERNAL: the reduction in average cost at every output level due to outside factors (whole curve shifts up)
Definition: Technical Optimum
the lowest point on the LRAC. Also known as the point of technical efficiency. as a firm moves past this point it experiences diseconomies of scale.
Definition: Long run average cost curve
a concaved up curve that plots the average cost of producing a certain output of a certain G&S.
Definition: Diseconomies of scale
when a company or business grows so large that the costs per unit increases
INTERNAL: increase in production costs per unit as output increases beyond the technical optimum (movement along the right side of the curve)
EXTERNAL: increases in average cost at every level of output due to outside factors (shift of the whole curve down)
Reasons for EOS
INTERNAL:
- increase in specialisation (capital and labour)
- input costs reduced (wastage reduced)
- research and development
EXTERNAL:
- new resources found, resource costs/ interest rates decrease
- improvement of infrastructure
reasons for DEOS
INTERNAL:
- skill shortages (hiring structurally unemployed)
- congestion
- useless management roles
EXTERNAL:
- increase of resource costs/interest rates/labour rates
Definition: Returns to Scale
relationship between inputs and outputs
- increase in ROS –> FOP increases and output increases
- decrease in ROS –> FOP decreases and output decreases
- ROS –> output increases the same amount input increases
