Unit 7&8 Flashcards
How can goods be categorized?
- Homogenous goods
2. Differentiated goods
What can the demand curve be seen as to the firm?
It’s feasible frontier, (feasible prices)
The quantity consumers will buy at a specific price
The price consumers are willing to pay for a given quantity
What does the law of demand state?
That demand has a negative slope, price increase leads to demand decrease
Why does the law of demand hold true?
As consumers purchases more and more of a good, their wtp decreases
If there are substitutes then a price increase leads to them purchasing substitutes
If the product is expensive a price increase will just make it more expensive
If the product is indivisible then a price increase will lead to customers not buying it at all
The consumer optimization model
What is the difference between a change in demand(increase/decrease) and a change in the equilibrium quantity demand?
A change occurs with a non price factor and is indicated by a shift, whereas the change in equilibrium quantity occur with the change in price factors and is represented by a movement
What are the factors that affect demand?
Consumer preferences
Consumer incomes
Competitors prices
Perceived quality of good changes
What are the cost functions?
TC = TC(Q) ATC = TC(Q)/Q MC = dTC(Q)/dQ TR = P * Q MR = dTR/dQ
Why does the ATC curve have it’s shape?
In the short run at low quantities there is insufficient use of the fixed quantities therefore a higher AC
As production starts to increase, the fixed costs are distributed over a greater number of units
At higher output there is overutilization of the fixed quantities.
What two things happen with marginal revenue?
- Gain in the amount of the extra item
2. Loss of the q-1 items sold at the old price
What is the quantity firms choose to produce and why?
Where MR = MC, because at any quantity lower, the MR will be greater therefore production would have to increase, and at any point greater, MR will be less than MC and so production will have to decrease, therefore where MR=0 is the profit maximising output
What are some economies of scale
- Technological Advantages
- Cost Advantages
- Network economies
What are some barriers to entry?
- Exclusive ownership of a resource
- Legal forms
- Cost of production
What is the profit markup?
P-MC
Why is the monopoly market inefficient?
The point at which it produces does not maximise all of the gains of the potential surplus and there is a deadweight loss
How does the market adjust to increases in demand or supply at the market price?
In the event of a shortage, buyers and sellers agree to price increasing and so price increases to market clearing.
In the event of a surplus, buyers and sellers agree to lower prices allowing the price to decrease to market clearing
When does supply increase?
Price of inputs decrease
Technology reduces MC
More firms in the market
State of nature
When does demand increase?
Preferences change
Fall in the price of a complement
Increase in substitute price
Higher average income of buyers
What does elastic demand mean?
The quantity demanded will increase more than the price increase.
The MR is positive if price decreases
As Price increases TR decreases
As price decreases TR increases
Firm has small markup and small deadweight loss
What does inelastic demand mean?
The quantity demanded will increase by less than the price increase.
The MR is negative if price increases
As price increase, TR increases
As price decreases, TR decreases
Firm has larger markup and larger deadweight loss
How can firms improve market power?
Innovating
Making new products
Advertising
What is a cartel?
These are firms that collude in order to keep supply low and prices high.
What’s a natural monoploy?
This occurs where one firm is able to produce at lower average costs than other firms
What are some public policies toward market failure?
Making industries more competitive
Regulation monopoly behaviour
Turning private monopolies into public enterprises
By doing nothing at all
What kind of taxes are used to raise revenue?
Ad Valorem
