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BUSS1040 > Week 3 - Supply + Demand > Flashcards

Week 3 - Supply + Demand Flashcards

1
Q

What are economies of scale?

A

Cost advantages that a business obtains due to expansion

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2
Q

Factors of economies of scale

A

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

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3
Q

What do economies of scale arise from?

A

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

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4
Q

Impact on ATC during constant returns to scale

A

ATC is constant as plant size increases

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5
Q

What are diseconomies of scale?

A

Occurs when a firm increases scale of output and LRAC increase

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6
Q

What is the force that causes larger firms to produce goods and services at increased per-unit costs

A

Diseconomies of Scale

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7
Q

What do diseconomies of scale arise from?

A

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

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8
Q

What are the direct relationships between RTS and EOS?

A

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)

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9
Q

What is the Minimum Efficient Scale (MES)?

A

Smallest level of output at which a firm can minimise LRAC

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10
Q

What is a natural monopoly?

A

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)

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11
Q

What can we use a firm’s costs to derive

A

An individual’s firm supply function and market supply function

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12
Q

What is a competitive market?

A

Where there are many buyers + sellers - no buyer or seller has the power to materially affect the market price (we focus on this)

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13
Q

What is Supply?

A

The number of units of a good/service firms are willing and able to produce and sell during a period at a particular price

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14
Q

A firm should sell until

A

P = MC or MR = MC in a competitive market

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15
Q

What is marginal revenue (MR)?

A

The additional revenue gained for producing one more product

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16
Q

Equation for MR

A

Change in TR/ Change in Q

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17
Q

Economic profit (pi) equation including price

A

Pi = P x q - TC

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18
Q

Why is a competitive firm a price taker

A

Because they cannot affect market price

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19
Q

TVC can be expressed as

A

The sum of MC (assuming TFC = 0)

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20
Q

As prices increase, MR ___

A

Increases,, until P = MC for last unit produced

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21
Q

A firms supply curve is given by

A

It’s MC curve, curving upwards due to DMP

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22
Q

What is the Law of Supply

A

States there is a positive relationship between the price of goods and quantity of good supplied, with all else constant

23
Q

Effects of Law of Supply state that if prices increase:

A

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

24
Q

The supply of goods depends on

A

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)

25
Q

If good prices changes then there is

A

1) Movement along supply curve
2) Change in quantity supply

26
Q

Supply increases if the following increase

A

1) Complements in Supply (pcs)
2) Technology (t)
3) Number of Suppliers (ns)

27
Q

Supply increases if the following decrease:

A

1) Substitutes in supply (Pss)
2) Intermediate inputs (pi)
3) Labour (w)
4) Capital + Land (r)
5) Expected future prices (pe)

28
Q

What is the market supply curve

A

A curve that shows the quantity supplied in a market at different prices but everything else constant

29
Q

How is the MSC given

A

By the horizontal summation of individual supply curves

30
Q

What if we have 2 producers with equations of a supply curve (and we want to get the complete market supply function)

A

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

31
Q

What is consumer behaviour

A

The demand for goods and services

32
Q

How do we examine consumer behaviour

A

Assess how consumers try to maximise their well-being or benefit they get from consuming goods/services, subject to their budget constraints

33
Q

In a competitive market why are consumers price takers

A

Because they do not affect market price

34
Q

What is a consumers WTP

A

The max price a customer will pay for a good = benefit they anticipate getting from the item

35
Q

What happens when a customer buys multiple unit goods

A

Expect MB to decline with each additional unit consumer - diminishing

36
Q

What is individual demand

A

The quantity of a good/service that a consumer is willing and able to buy @ a certain price

37
Q

A consumer will purchase units of a good until

A

P = MB

38
Q

P and MB analysis for individual demand

A

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

39
Q

What does an individual’s MB curve show

A

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

40
Q

What is the Law of Demand

A

The negative relationship between price + quantity

41
Q

What are goods that violate the law of demand known as

A

Giffen goods (rare)

42
Q

Downward slop of a demand curve means

A

Consumer consumes fewer units when prices are higher

43
Q

How is the demand curve derived

A

By assuming that only price and quantity can change

44
Q

If there is a change in price/quantity only, movement along demand curve can be described as

A

1) Movement downwards along demand curve called ‘increase in quantity demanded’
2) Movement upwards along demand curve is called ‘decrease in quantity demanded’

45
Q

What is assumed when drawing demand curve

A

Other factors are held constant - ceteris paribus

46
Q

A shift in the demand curve is called

A

A change in demand:
1) Shifts right = increase in demand
2) Shifts left = decrease in demand

47
Q

An individual’s consumers demand curve is given by

A

The MB curve

48
Q

The market demand curve traces out combinations of

A

(A) market price and (B) quantities that all consumers in a market are together willing and able to buy @ that price

49
Q

How can we derive demand at the market level

A

Adding together quantity demanded by each individual at each price (need to consider WTP at different prices)

50
Q

Graphically the market demand curve is

A

The horizontal summation of individual demand curves along the x-axis (q-axis)

51
Q

If the ____ holds for individual demand curves, it will hold for market demand (their horizontal summation)

A

The law of Demand

52
Q

What is a change in quantity demanded

A

Refers to movements along the market demand curve

53
Q

What are changes in demand

A

Refers to a shift of the demand curve itself

BUSS1040 (6 decks)

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