UNIT 2 Flashcards
CHAPTER 6 START
describe the price of elasticity of demand
measures buyers’ responsiveness to price changes
describe elastic demand
- sensitive to price changes
- a large change in quantity demanded
- ex: soft drinks, cereal, clothing, electronics, cars
describe inelastic demand
- insensitive to price changes
- a small change in quantity demanded
- ex: medication, gas, electricity, cigarettes, post-secondary education
what are the different interpretations of elasticity of demand?
- if Ed > 1 demand is elastic
- if Ed = 1 demand is unit elastic
- if Ed < 1 demand is inelastic
EXTREME CASES - if Ed = 0 demand is perfectly inelastic
- if Ed = infinity demand is perfectly elastic
what is the formula for total revenue
price x quantity = total revenue
how do you calculate the total revenue test
- if inelastic: Price and Total Revenue move in the same direction
- if elastic: P and TR move in the opposite direction
how is supply elasticity different than demand
time is the primary determinant of the elasticity of the supply
- immediate market period
- short run
- long run
immediate market run
ex. toilet paper crisis in 2020 XD
short run
Demand tends to be more price inelastic in the short run as consumers don’t have time to find alternatives.
what is the cross elasticity of demand
measures responsiveness of purchases of one good to change in the price of another good
income elasticity of demand
- normal goods if elasticity is positive
- inferior goods if elasticity is negative
CHAPTER 7 START
know the law of diminishing marginal utility: as consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases
utility
- not the same as usefulness
- subjective
- difficult to quantify
what is the difference between total utility and marginal utility
total utility is the total amount of satisfaction while marginal utility is the extra satisfaction from an additional unit of the good
what does consumer equilibrium mean
a consumer is in equilibrium when utility is “balanced (per dollar) at the margin
consumer allocates his or her income so that the last dollar spent on each product yields the same amount of extra (marginal) utility
what is the income effect?
the impact a price change has on a consumer’s real income
what is the substitution effect
the impact a price change has on a product’s relative expensiveness
explain the diamond-water paradox
the marginal utility of the last unit of water consumed is small because we consume a lot of water while the marginal utility of the last diamond is large because we consume few diamonds
CH.9 START
what is an economic cost
the payment that must be made to obtain and retain the services of a resource
what is the difference between explicit and implicit costs
- explicit costs are out-of-pocket costs for a firm, examples being payments for wages and salaries, rent, or materials
- implicit costs are the opportunity costs of resources already owned by the firm and used in business, an example being expanding a factory onto land already owned, includes normal profit
differentiate short and long-run production costs
short run
- some variable inputs
- fixed plant
long run
- all inputs are variable
- firms can adjust plant size as well as enter and exit the industry
explain the law of diminishing returns
- resources are of equal quality
- technology is fixed
- variable resources are added to fixed resources
- at some point, the marginal product will fall
what is the difference between fixed costs and variable costs?
fixed costs are costs that do NOT vary with output
- examples include rental payments, insurance premiums, interest payments
variable costs are costs that DO vary with output
- examples include payments for materials, fuel, power, transportation services, labor
describe the average costs curves
AVC initially falls because of increasing marginal returns but then rises because of diminishing marginal returns.
describe economies of scale
refers to the idea that, larger plant sizes will lead to lower unit costs. An increase in inputs where there are economies of scale will lead to a more than proportionate increase in input. Labor specialization leads to economies of scale because it uses special skills; proficiency is gained as the worker concentrates on one task and time is saved. Managerial specialization leads to economies of scale because managers can manage more workers with no increased cost, and managers can specialize in their respective areas of expertise. Efficient capital leads to economies of scale because high-volume production warrants expensive large-scale equipment. Other factors lead to economies of scale because costs such as design, development, and advertising are spread out over larger quantities
what are the constant returns to scale?
will occur when ATC is constant over a variety of plant sizes. When there are constant returns to scale, an increase in inputs will result in a proportionate increase in output
when do diseconomies of scale occur?
may occur if a firm becomes too large; the expansion may lead to higher average total costs.
With diseconomies of scale, an increase in inputs will cause a less-than-proportionate increase in output.
Reasons that diseconomies of scale occur include the difficulty in controlling and coordinating large-scale operations; large bureaucracies lead to communication problems; workers may feel alienated and therefore may not work efficiently; and shirking, or work avoidance, may be easier in a larger firm.
what is the minimum efficient scale?
- the lowest level of output at which long-run average costs are minimized
- can determine the structure of the industry
what is natural monopoly
long-run costs are minimized when only one firm produces the product
what is the difference between economies of scale and returns to scale
Economies of scale depend on the relationship between cost and output—i.e., how does cost change when output is doubled? Returns to scale depend on what happens to output when all inputs are doubled. The difference is that economies of scale reflect input proportions that change optimally as output is increased, while returns to scale are based on fixed input proportions (such as two units of labor for every unit of capital) as output increases.
CH. 10 START
what does market structure refer to
refers to the characteristics of an industry that define the likely behavior and performance of its firms.
- pure competition
what are the characteristics of pure competition
- very large number of sellers
- standardized product: a product for which all other products in the market are identical and thus are perfect substitutes
- “price takers”: sellers that have no pricing power
- free entry and exit: there are no obstacles to enter or exit the industry
what is perfectly elastic demand
means that a firm has no power to influence price so the firm merely chooses to produce a certain level of output at the price that is given
the firm faces a perfectly elastic demand because each individual firm makes up such a small part of the total market and the goods are perfect substitutes
what does the break-even point mean
the competitive producer will wish to produce at the output level where total revenue exceeds total cost by the greatest amount, think of MC = MR
- should the firm produce?
- if so, what amount?
- what economic profit (loss) will be realized?
describe the loss-minimizing case
-losses at a minimum where MR = MC
- producing adds more to revenue than to costs
- either produce or shut-down
describe the short-run supply curve
as long as Price exceeds minimum AVC, the firm continues to produce using the rule
MR (=P) = MC
CH. 11 START
what occurs in a long-run
- firms have sufficient time to either expand or contract their capacities
- As firms exit the industry in the long run, market price rises and the losses for the remaining firms begin to subside. Firms will continue to exit until which of the following happens?
what happens in the short run of pure competition?
the industry is fixed on both the number of sellers and the plant size of existing sellers
describe the long-run supply curve
a curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run when all inputs are variable
describe the constant-cost industry
the exit and entry of firms do not affect resource prices (long-run ATC)
- in the profit maximization model, we assume all firms have identical costs, therefore they will make the same production decisions, the goal is to make profits and avoid losses
what happens when a firm enters a market
since a firm is seeking to make a profit, entering the market will cause the supply curve to shift to the right creating downward pressure on the price. As the price falls, economic profits diminish and eventually are reduced to zero. At this point, only a normal profit is realized for the firm, and the product price equals the minimum ATC.
what happens to a firm if the industry is experiencing economic losses?
If the industry is experiencing economic losses, firms will leave causing the supply curve to shift to the left. As supply falls, the product price rises until the economic losses are eliminated and the price equals the minimum ATC.
describe long-run equilibrium
industry has completed long-run adjustments (slides 41-42)
ENTRY ELIMINATES PROFITS
- firms enter
-supply increases
- price falls
EXIT ELIMINATES LOSSES
- firms leave
- supply decreases
- price rises
increasing-costs industry
- long-run ATC increases with the expansion
- specialized industries
- does affect costs
- long-run supply curve is upsloping
what happens to firms in a decreasing-cost industry
- industry costs change inversely
- if demand for their product falls, firms will leave the industry, causing input costs to rise and vice versa
- the long-run supply curve is downsloping
describe how efficiency is achieved in pure competition
productive efficiency: producing goods in the least costly way: producing where P = minimum ATC
allocative efficiency: producing the mix of goods desired by society: producing where P = MC
triple equality: P = MC = minimum ATC
- consumer surplus and producer surplus are maximized
when do dynamic adjustments happen
will occur in pure competition when changes in demand, resource supplies, or technology occur
- disequilibrium will cause expansion or contraction of the industry until the new equilibrium at P = MC occurs
what is the “invisible hand”
works in a competitive market system since no explicit orders are given to the industry to achieve the P = MC result
- profit motivation brings about highly desirable economic outcomes
