Unit 2 Flashcards
What is a market? (multiple definitions)
- a physical place where a product is bought and sold
- all the buyers and sellers ofa particular good or service
- the. demand that exists for a particular products or service
- process by which a buyer and seller arrive at a mutually acceptable price and quantity
What is a competitive market?
a market in which there are many buyers and sellers so that each has a negligible impact on the market price
What is demand?
the range of quantities that buyers are willing and able to buy at a range of demand prices. It is ALL points that make up. a. demand curve
What does quantity demanded depend on?
the price
What is the law of demand?
the quantity demanded varies inversely with the price, as lon as other things to do change
What is a demand shedule?
table that shows the quantity demanded at each price.
What is a demand curve?
the line that slopes down to tthe right on a price and quantity graph
the demand curve slopes down tto the right to show the inverse relationship between price and quantity
What is the quantity demand?
a specific quantity that buyers are willing and able to buy at a specific demand price. It is but ONE point. on a demand curve.
What is a change in demand?
a change in the entire demand relationship
- a shift in the entire demand curve, entire set of pricces and quantities is changing
What is a change in demand caused by?
a change in the five demand determinants.
How does an increase in demand impact the demand curve?
the demand curve will shift to the right. At every price, the quantity demanded is greater than before.
What is a change in quantity demanded?
change from one prive quantity pair on an existing demandd curve to a new price-quantity pair on the SAME demand ccurve.
movement along the demand curve.
What causes a change in quantity demanded?
a change in price
Why is the demand curve sloping downward?
- as the good becomes more expensive, people. switcch to substitutes.
- as the good becomes more expensive, people can’t to buy as much of it
- as an individual consumes more of a good, at some point his or her marginal benefit from consuming an additional unit will decline
What are the 5 demand determinants?
- buyer’s income
- buyer’s preferenecs / consumer taste
- buyer’s expectations
- other prices
- number of buyers
What is buyer’s income?
when a change in income changes the demand for a good
When is a good said to be normal?
when a rise in inccome increases the demand for a good
When is a good said to be inferior?
when a rise in income decreases the demand for a good
What is buyer’s preferencec or consumer taste?
a change in consumers tastes andd preferences also affects demand.
What is buyer’s expectations?
expectation of future price changes will alter current demand
e.g. gas prices increase in the immeddiaet future will cause consumer to fill their tanks earlier.
When are two good complementary?
Two goods are complements if a fall in the price of one good makes people more willing to buy the other good.
When are two goods substitutes?
two goods are substitutes if a fall in the pricce of one goods makes consumers less willing to buy the other good.
How is the number of buyers a demand determinant?
more buyers, means there is more deamd.
fewer buyers, means there is less demand
What is supply?
the quantity sellers will offer for sale at various prices during a given period of time.
the entire set of price-quantity pairs that reflect sellers willingness and ability to sell a good. It is the entire supply curve
What is the law of supply?
the quantity supplied will increase if price increases and fall if price falls, as long as other things do not change.
What is the supply curve?
the curve that slopes up to the right to show the corresponding relationship between price and quantity.
What is the quantity supplied?
this is the specific amount that sellers are willing and able to sell at a specific price. It is indicated at a single point on the supply curve.
What is a change in quantity supplied?
A change in the specific amount of the good that sellers are willing and able to sell. It is caused by a change in the supply price and is indicated by a movement along the supply ccurve from one point to another.
What is a change in supply?
a change in the overall supply relation, a change in all price-quantity pairs. It is caused by a change in one of the five supply determinants and is. indiccated by a shift of the supply curve.
Why does the supply curve slope upward?
as the production of any goods is expanded, those resources with the lowest opportunity costs are used first. The higher the price, the more likely it is that more inefficient resources will be used.
the marginal cost of producing a good oftten rises as more is produced
What are tthe 4 supply determinants?
- cost of factors of production
- technology
- prices/profits of other goods
- seller’s expectations
- number of sellers
What are the cost of factors of production?
cost in natural, ccapital or labour resources increase (or decrease), supply decreases (or increases)
What is technology as a supply determinant?
new technoology often reduces suppliers’ costs resulting in increasedd supply.
What are prices/profits of other goods as a supply determinant?
if producer expects to fain more (or less) profit from another item, then supply decreases (or increases)
What are seller’s expectations?
If producer expects pricecs to increase (or decrease) in the future, they will increase (or decrease) future supply.
What is the number of sellers as a supply determinant?
more producers increases supply
fewer producers decrease supply
What is market equillibrium?
refers to a situation in which the price has reached the level where quantity suppliedd equals quantity demanded.
What is equillibrium price?
aka, market clearing price, is the pricce set by the interaction of supply and demand in which the absence of surpluses or shortages in the market means there is no tendency for the price to change.
What is a shortage?
the price is too low, resulting in a lack of goods.
the consumers demand more than suppliers willproduce, the supplier will increase prices until the equillibrium price is reached.
What is a surplus?
the price is too high resulting in. excess goods
suppliers produce more than customers demand. The supplier will decrease prices until the equilibrium price is reached.
What does a change in a demand determinant do?
will shift the demand curve and change the quantity supplied.
What does a change in a supply determinant do?
if will shift the supply curbe and change the quantity demanded
What is elasticity?
the responsiveness of quantities demanded and supplied to changes in price.
How do you calculated the coefficient of elasticity of demand?
% change in quantity demand ÷ % change in price.
What is effect of change in the price elasticity of demand?
the numerator of the equation - whether people are buying more or less
What is cause in the price elasticity of demand?
the denominator, the change in price that affects people’s buying decisions
What is the formula for calculating elasticity?
(Q1+Q2)/2
——————
P2-P1
————–
(P1+P2)/2
Q1 = initial quantity
Q2 = final quantity
P1 = initial price
P2 = final price
If the elasticity of demand is less than one the demand is ____________
inelastic
When does inelastic demand happen?
when the percentage change in quantity demand is less than percentage change in price.
What is inelastic demand?
the demand that exists when price changes do not result in significant changes in the quantity of a product demanded - quantity is less responsive to changes in price.
What does the demand curve look like when demand is inelastic?
usually a relatively steep line.
When is demand elastic?
if the elasticity of demand is greater than one
when the percentage change is quantity demanded is greater than percentages change in price
What is elastic demand?
demand for a product that changes substantially in response to small changes in price.
quantity is responsive to changes in price.
What does the demand curve look like when demand is elastic?
it looks like a less steep, more horizontal line .
What is unitary elasticity?
when the % change in the quantity is the same as the % change in price
the elasticity of demand = 1
It is unit elastic
What is the result of unitary elasticity?
a change in price will result in an identical change in demand
What does unitary elasticity look like on a graph?
The demand curve will have a slop of 1.
What is the price effect?
after a price increase, each unit sold sells at a higher price which tends to raise revenue.
What is the quantity effect?
after a price increase, fewer units are sols, which tends to lower revenue.
What are the two countervailing effects when a seller raises the price of good?
a price effect and a quantity effect
How do price changes impact inelastic goods?
when price rises, revenue rise, when price falls, total revenue falls
How do price changes impact elastic goods?
when price rises, total revenue falls, when price falls total revenue increases.
How do price changes impact unitary goods?
when a price rises or falls, total revenues stay the same.
What are the factors affecting demand elasticity?
- availability of substitutes
- nature of the item
- fraction of income spent on the item
- amount of time available
What is availability of substitues as a factor affecting demand elasticity?
goods that have substitues are generally more elastic than goods that don’t have substitutes
What is nature of the item as a factor affecting demand elasticity?
goods that are necessities tend to be more inelastic than goods that are considered to be luxuries
What is fraction of income spent on the item as a factor affecting demand elasticity?
goods that are expensive, or take up a larger part of income are elastic. Goods that take up a small percentage of income are inelastic.
What is the amount of time available as a factor affecting demand elasticity?
goods, ocer time become more elastic as consumers find substitutes for them.
When is demand perfectly inelastic?
when the quantity demanded does not repond at all to changes in the price.
What does the demand curve look like when a good is perfectly inelastic?
the demand curve is a vertical line
When is demand perfectly elastic?
when any price increase will cause the quantity demanded to drop to zero.
What does the demand curve look like when demand is perfectly elastic?
the demand curve is a horizontal line.
What is the elasticity of supply?
measures how responsive the quantity supplied by a seller is to a rise or fall in price.
When the coefficient is greater than one than it is ______________ supply.
elastic
When the coefficient is less than one than it is ______________ supply.
inelastic
When the coefficient is one than it is ______________ supply.
unitary elastic
What does elastic supply?
when price increases, the manufacturer is able to increase quantity supplied at an even greater rate.
What does it mean where there is inelastic supply?
the seller cannot increase the quantity supplied by a greater percentage than the percentage increase in price.
What does it mean when there is unitary elasticity of supply?
when price increases, the seller can hust match the percentage increase in price with a percentage increase in quantity supplied.
What are the factors affecting supply elasticity?
- time
- ease of storage
- cost factors
What is time as a factor affecting supply elasticity?
the longer the time period a seller has to increase supply, the more elastic the supply will be
what is ease of storage as a factor affecting supply elasticity?
products that are easier to store have a high elasticity than the products that are difficulat to store.
What are cost factors as a factor affecting supply elasticity?
the less it costs to increase production, the more elasic the supply is.
What is total utility?
the full satsfaction of a consumer’s wants or needs through the consumption of specific goods. or services.
What is marginal utility?
marginal utility is the additional satisfaction or amount of utility, gained from each extra unit of consumption.
What is utility measured in?
utils, which are units of satisfaction
Although total utility usually increases as more of a good is consumed, marginal utility usually decreases with each additional increase in the consumption of a good.
What is the utility maximizing rule?
the consumer’s money income should be allocated so that the last dollar spent on each product yeilds the same amount of extra marginal utility.
What is the substition effect of a change in the price of a good?
the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has becoe relatively more expensive.
What is accounting profit?
excess of revenues over costs (common idea of profit)
What is economic profit?
the difference betwen the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for economic value added (EVA).
How is economic profit calculated?
opportunity costs are deducted from revenue eared.
Can have a significant accounting profit with little to no economic profit.
What are explicit costs?
input costs that require direct outlay of money by the firm
like wages and payments to the suppliers of factors of productions.
What are implicit costs?
are input costs that do not reuire an outlay of money by the firm
does include the profit necessary to continue the business
What are sunk costs?
costs that have been incured and cannot be reversed
What is total revenue?
the money a firm receives from its sales
revenue = price x quantity sold
What are total costs?
depends on the cost of production.
the money a firm spends to purchase the productive resources it needs to prodduce its good or serive
fixed costs + variable costs
What are fixed costs?
costs that remain the same at all levels of output
must be paid regardless of whether or not the firm produces
can also be referred to as overhead
What are variable costs?
as production increases more resourcces are neccessary
What is short run?
period over which the firm’s maximum capaccity becomes fixed because of a shortage of one resource
What is the long run?
period when all costs become variable
What is marginal revenue?
additional revenue gained from selling one more unit
What is marginal cost?
the cost of producing one more unit
- measures. the increase in total cost that arises from an extra. unit of production
What question does marginal cost help answer?
how much does it cost to produce an additional unit of output?
Where is there maximum profit?
produe up to the point where there is no added benefit of producing anymore
where marginal cost = margival revenue
What is the shape of the average total-cost curve?
U-shaped
WHy is the average cost high at very low levels of output?
because the fixed cost is spread over only a few units.
As output increases, average total cost ___________.
declines
What is the efficient scale of the firm?
where the average total cost is minimized at the bottom of the U-shaped ATC curve
What is the spreading effect?
the larger the output, the greter the quantity over which the fixed cost is spread, leading to lowe the average fixed cost.
What is the diminishing returns effect?
the larger the output, the greater the amount of vaiable input required to producec additional units leading to higher average variable cost
Whenever marginal cost is less than average total ccost, average total cost is _________.
falling
whener marginal cost is greater than average total cost, average total cost is ____________.
rising
When does the marginal-cost curve cross the average-total-cost curve?
at the efficient scale
What is the efficient scale?
the quantity that minimizes average total cost
What are the factors affecting costs?
- returns to scale
- making production choices
- labour vs capital intensive production.
What are returns to scale?
- economies of scale
- constant returns to scale
- diseconomies of scale
What are economies of scale?
the increase in efficiency. of production as the number of goods being produced increases
What are constant returns to scale?
the cost for successive units remains constant
What are disecconomies of scale?
firms see an increse in marginal ccost wehn output is increases
what is productivity?
maximinzing output from the resources used
What is efficiency?
producing at the lowest cost
How is efficiency measured?
in cost per unit and unit labour cost
When is efficiency most efficient?
when average cost per unit. is at its lowest point
Firms are at a disadvantage if their productivity of efficienccy decreases or their ccomptetitors producctivity or efficiency increases
What is labour intensive production?
industries or methods where labour, rather than machinery dominate the producction process.
- good. when labour is plentiful and cheap
- low fixed costs
- variable ccosts adjusted to meet demand
What is capital intensive production?
industries or methods where macchinery, rather than labour, dominates the production procecss
- good for economies of scale. -> larger potential for profit
- high fixed ccosts
- difficult to increase producction in short-run or decrease costs
What is market structure?
identifies how a market is made up in term of
- number of firms in industry
- nature of product produced
- degree of monopoly power each firm has
- the degree to which the firm can indluencec price
- profit levels
- firms’ behaviour - pricing strategies, non-price competition, output levels
- extent of barriers to entry
- impact on efficiency
Describe perfect competition
- large number of firms
- products are homogenous
- easy to enter and exit market
- firms are price takers - have no control over price
- each producer supplies a very small proprtion of total industry output
- consumers and producers have perfect knowledge about the market.
Describe monopolistic or imperfect competition
- large number of firms in the industry
- may have some element of control over the price due to the fact that they are able to differentiate their pdocuts from competitors, products are close but not perfect substitutes
- entry and exit to the market is relatively easy
- consumers and produccers do not have perfect knowledge of the market
Describe an oligopoly
- may be a large number of firms in the industry but the industry is dominated by a small number of very. large. producers
- priec may be relatively stable accoss the industry
- potential for collusion
- behaviour of firms affected by what they believe their rivals. might do - interdependence of firms
- goods can be homogenous or highly differentiated
- high barriers to entry
- non-price competition may be prevalent
Describe a duopoly
- market where the industry. is dominated by two large producers.
- collusion may be possible
- price leadership by the larger of the two firms may exist
- highly interdependent
- high barriers to entry
- in reality, local duopolies may exist
What is concentration ratio?
the proportion of total market sales (shares), held by the top 3,4,5 firms
Describe a monopoly?
- only one producer exists in the industry
- rarely exists in reality
- firms may be investigated for examples of monopoly power when the market share exceeds 25%
- influence prices
- influence output
- erecting barriers to entry
- pricing strategies to prevent or stifle competition
- may not pursue profit maximisation - encourages unwanted entrants to the market
What are the origins of monopoly?
- growth of the firm
- amalgamation, merger or takeover
- acquiring patent or license
- legal means, royal charter, nationalisation, wholly owned pic
