Week 3 - Supply + Demand Flashcards
What are economies of scale?
Cost advantages that a business obtains due to expansion
Factors of economies of scale
1) Factors that cause a producers ACPU to fall as production is increased
2) Portion on LRAC that is decreasing
3) Given by increasing returns to scale
What do economies of scale arise from?
1) Labour specialisation - increase workers = increase specialisations
2) Managerial specialisation - improving management structure
3) Efficient Capital - Most efficient machines + equipment
4) Bulk-buying products - greater buying power = discounted prices
Impact on ATC during constant returns to scale
ATC is constant as plant size increases
What are diseconomies of scale?
Occurs when a firm increases scale of output and LRAC increase
What is the force that causes larger firms to produce goods and services at increased per-unit costs
Diseconomies of Scale
What do diseconomies of scale arise from?
1) Duplication of effort - inevitable that someone’s takes on occupied project
2) Top heavy companies - more employees = larger% of management, reducing productivity
3) Inertia - Unwillingness to change
4) Cannibalisation - large firms often compete with others
5) Inelasticity of Supply - Heavily dependent on resource supply
What are the direct relationships between RTS and EOS?
1) Increasing returns to scale = economies of scale (falling ACP)
2) Decreasing returns to scale = diseconomies of scale (increasing ACP)
3) Constant returns to scale = neither economy/diseconomy (constant ACP)
What is the Minimum Efficient Scale (MES)?
Smallest level of output at which a firm can minimise LRAC
What is a natural monopoly?
Situation where unit costs are minimised by having a single firm produce the particular good/service (expect LRAC for EOS to be extensive and DOS rare)
What can we use a firm’s costs to derive
An individual’s firm supply function and market supply function
What is a competitive market?
Where there are many buyers + sellers - no buyer or seller has the power to materially affect the market price (we focus on this)
What is Supply?
The number of units of a good/service firms are willing and able to produce and sell during a period at a particular price
A firm should sell until
P = MC or MR = MC in a competitive market
What is marginal revenue (MR)?
The additional revenue gained for producing one more product
Equation for MR
Change in TR/ Change in Q
Economic profit (pi) equation including price
Pi = P x q - TC
Why is a competitive firm a price taker
Because they cannot affect market price
TVC can be expressed as
The sum of MC (assuming TFC = 0)
As prices increase, MR ___
Increases,, until P = MC for last unit produced
A firms supply curve is given by
It’s MC curve, curving upwards due to DMP
What is the Law of Supply
States there is a positive relationship between the price of goods and quantity of good supplied, with all else constant
Effects of Law of Supply state that if prices increase:
1) It is more profitable to divert resources to producing more
2) Relatively higher price will compensate for increase OC of producing more
3) We must keep producing as long as P/MR >= MC, additional units will lower profits
The supply of goods depends on
1) Price (P)
2) Price of other goods:
- Substitutes in supply (pss)
- Complements in supply (pcs)
3) Intermediate inputs (pi)
4) Prices of factors of production:
- Labour (w)
- Capital + Land (r)
- Technology (t)
5) Expected Future prices (pe)
6) Number of Suppliers (no)
If good prices changes then there is
1) Movement along supply curve
2) Change in quantity supply
Supply increases if the following increase
1) Complements in Supply (pcs)
2) Technology (t)
3) Number of Suppliers (ns)
Supply increases if the following decrease:
1) Substitutes in supply (Pss)
2) Intermediate inputs (pi)
3) Labour (w)
4) Capital + Land (r)
5) Expected future prices (pe)
What is the market supply curve
A curve that shows the quantity supplied in a market at different prices but everything else constant
How is the MSC given
By the horizontal summation of individual supply curves
What if we have 2 producers with equations of a supply curve (and we want to get the complete market supply function)
1) Rearrange to make q the subject of both, then add
2) Domain, look for gap against y value and associate with smaller value
3) when p is larger than that domain function is sum of 2 producers
What is consumer behaviour
The demand for goods and services
How do we examine consumer behaviour
Assess how consumers try to maximise their well-being or benefit they get from consuming goods/services, subject to their budget constraints
In a competitive market why are consumers price takers
Because they do not affect market price
What is a consumers WTP
The max price a customer will pay for a good = benefit they anticipate getting from the item
What happens when a customer buys multiple unit goods
Expect MB to decline with each additional unit consumer - diminishing
What is individual demand
The quantity of a good/service that a consumer is willing and able to buy @ a certain price
A consumer will purchase units of a good until
P = MB
P and MB analysis for individual demand
1) If P < MB - consumer buys because WTP > price
2) If P > MB - consumer should not buy
3) If MB is diminishing and continuous, consumer should continue buying until P = MB
4) Thus, a consumer’s individual demand curve = MB curve
What does an individual’s MB curve show
1) Shows how much a consumer is willing and able to buy at different market prices
2) MB is usually diminishing, individual demand is usually downward sloping
What is the Law of Demand
The negative relationship between price + quantity
What are goods that violate the law of demand known as
Giffen goods (rare)
Downward slop of a demand curve means
Consumer consumes fewer units when prices are higher
How is the demand curve derived
By assuming that only price and quantity can change
If there is a change in price/quantity only, movement along demand curve can be described as
1) Movement downwards along demand curve called ‘increase in quantity demanded’
2) Movement upwards along demand curve is called ‘decrease in quantity demanded’
What is assumed when drawing demand curve
Other factors are held constant - ceteris paribus
A shift in the demand curve is called
A change in demand:
1) Shifts right = increase in demand
2) Shifts left = decrease in demand
An individual’s consumers demand curve is given by
The MB curve
The market demand curve traces out combinations of
(A) market price and (B) quantities that all consumers in a market are together willing and able to buy @ that price
How can we derive demand at the market level
Adding together quantity demanded by each individual at each price (need to consider WTP at different prices)
Graphically the market demand curve is
The horizontal summation of individual demand curves along the x-axis (q-axis)
If the ____ holds for individual demand curves, it will hold for market demand (their horizontal summation)
The law of Demand
What is a change in quantity demanded
Refers to movements along the market demand curve
What are changes in demand
Refers to a shift of the demand curve itself
