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IMC > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What do price income elasticities tell us

A

How a consumer may react to changes in price or income

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2
Q

What does economic theory help us understand 3 things

A

How individuals, firms and markets interact
Investments into securities sectors and firms
How wider economy can effect economic context in which they operate

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3
Q

What are economic analysts used for

A

For forecast and outlook

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4
Q

Economic analysts have well defined assumptions of…

A

Efficient markets - no systematic errors

Ceteris paribus -relationships understood if all else remain unchanged

Max personal utility

Agents well informed and rational

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5
Q

What is market economy

A

Prices vary depending on competition

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6
Q

What is command economy

A

Gov decides what is produced and how it is distributed

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7
Q

What. Is mixed economy

A

Mix of the market and command economy

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8
Q

Details about points inside production possibility frontier

A

Feasible but inefficient

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9
Q

What does moving along production possibility frontier mean

A

There is a trade off

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10
Q

Opportunity cost wrt apples and machines

A

Number of machines given up to increase apples by 1 = opportunity cost

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11
Q

What affects demand

A

Price
Availablility of substitutes
Income
Health

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12
Q

Veblen goods?

A

Higher prices equals higher demand -eg luxury watches

Positive price elasticity

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13
Q

Normal goods

A

Higher income equals increase demand

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14
Q

Inferior goods

A

Higher income equals less demand

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15
Q

Price elasticity of demand meaning and formula

A

Sensitivity of a change in demand when price changes

Change in quantity of change in price

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16
Q

When elasticity is greater than modulus of one, what is it

A

Elastic

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17
Q

What happens to revenue when you decrease price of elastic good

A

Increase revenue

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18
Q

What happens to revenue when you decrease price of Inelastic goods

A

Decrease total revenue

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19
Q

What happened to revenue when you decrease price of unit elastic good

A

No change in revenue

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20
Q

Cross price elasticity ?

A

Change in quantity demanded in response to a proportionate change in price of a other good

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21
Q

Cross price elasticity of demand of biscuits in relation to price of coffee

A

Change in biscuit demand over change in coffee price

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22
Q

What does negative cross elasticity mean

A

Complimentary goods

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23
Q

What does positive cross elasticity mean

A

Substitute goods

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24
Q

What is the elasticity of an easily susbstituted good

A

Elastic

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25
Long term elasticity
Length of time that is necasrassary for all adjustments to be made in response to price change
26
Short term elasticity
Response when price changes and Consumers have not fully adjusted to price change
27
Income elasticity of demand
Measure chnage in demand relative to chnage in income
28
What elasticity do luxury goods have
Elasticity of greater than one
29
What elasticity do necessity goods have
Elasticity of less than 1
30
Budget share meaning and how it’s affected for luxury and necessity goods as income increases
Proportion of income spent on a good Budget share increases for luxury and decreases for necessity as income increases
31
Given goods and example and why does this happen
Demand increases as price increases Potatoes rice Negative income effect out weighs sub effect
32
Opportunity costs
How much production costs would earn in their next best alternative use
33
Supernormal profit is
Accounting profit - oppcosts
34
How variable costs change with output
Low output = high VC due to inefficiency Intermediate output = resources used more efficiently so vc slows down High output = sharp vc increase due to increase rent and increase work space required
35
When do firms produce till
Mc= mr or until mc is greater than mr
36
What are the costs in long run
All varied
37
What are costs in short run
Some costs are fixed
38
What happens when LRAC is decreasing
Increasing returns to scale As resources are used more efficiently
39
What happens when LRAC is increasing
Decreasing returns to scale
40
What is the lowest point on LRAC
Minimum efficient scale, MES
41
What’s happening to ac when mc is less than ac
Ac is falling
42
When can we ensure production in long and short run
Price is greater than LRAC in long run and SRAVC in short run
43
Perfect competition
Neither buyers nor sellers can influence the price
44
Characteristics of perfect competition
Large number of buyers and sellers Homogenous goods No barriers to market
45
What demand does perfect comp face
Horizontal demand curve
46
What determines supply in the long run in perfect comp
MC
47
What happens if all firms have same cost curves
Horizontal industry supply curve
48
What is flatter, long run supply or short run supply
Long run supply due to increased resource efficiency
49
What happens when price is greater than or less than equilibrium price
Price greater then p star then super normal profits occur so new entrants into market compete away the profit Price less than p star then there would be unsustainable losses
50
Pure monopoly ?
One supplier that forces downward demand curve
51
Where do monopolies produce
On the elastic part of the demand curve
52
Natural monopolies occur when …
There is a falling LRAC over a large range of output, ie start up costs are very high
53
Perfect price discrimination
All customers are charged a different price
54
Monopolistic competition
Large numbers of small firms with no barriers to entry but products are differentiated
55
Oligopoly
Have some price power, few firms with significant barriers to entry, products homogenous or differentiated
56
Cartel agreement
Group of firms agree a price and quantity to sell
57
Tacit agreement
No legally binding cartel agreement
58
When do kinked demand curves arrive
If a single firm lowers its pricing then competing firms follow
59
Price leadership model
One firm sets price and others follow
60
What is the market share for price leadership model and what can this lead to
Market demand is shared between firms and so larger firms have incentive to drive smaller ones out of business called predatory pricing which is illegal
61
What is the output of a duopoly
Somewhere between Qpc and Qmonopoly
62
Bull market sequence
Transportation and energy lead market upwards Credit and tech follow Consumer growth and cyclicals Capital goods and financial get strong as market peaks
63
When does bear market take hold
Just before economy tops out
64
What performs relatively well in bear markets
Basic industries and consumer staples, utilities
65
When is good for stock market recovery
Recessions and market recovery
66
Porters 5 competitive forces
Bargaining power of suppliers Bargaining power of customers Threat of new entrants Threats of substitute product Rivalry
67
Product life cycle
Introduction Growth Mature Decline Obsolete
68
Limitation of product life cycle
Assumes customers don’t return to old preferences Nothing done to revive product Firms have many products and not just one Time scale of each phase
69
Swot analysis meaning
Strengths weakness # internal to business Opps and threats - external to business
70
Introduction phase of product life cycle
Sales grow slowly and could attract competition but still low profits
71
Growth phase of product life cycle
Sales increase rapidly and competition is attracted but profits increase
72
Mature phase of product life cycle
Product well known with economies of scale, innovation needed to beat competition
73
Decline phase of product life cycle
Falling market share and profits and increased advertising or relaunch required
74
Product research 4 Ps
Product - it does what it’s supposed to Place - easily accesible to customers Promotion -adverts to target customer Price - good value for money
75
3 Ps for service
People -waiter Process- fast food or relax dininin Physical - element of service is provided like food
76
What needs to be true for firms to produce in the long run
AR greater than AC
77
What do firms care about in the short run
Covering their variable costs and will ignore fixed
78
What is the supply curve in the long run
Long run MC above the average total cost curve
79
What is true with monopolies creating a downward demand curve
MR will always be less than AR
80
What is a short run supply in competitive industry
Short run marginal cost curve above its short run average variable cost curve
81
Is there a supply curve for a pure monopoly
No
82
Where does MR and AR relate in monopoly
MR is less than AR

IMC (12 decks)

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