Ceteris paribus
all else being equal
implies that the value of some independent variable affecting the dependent variable is held constant.
Economics
the study of allocation of scarce economic resources among alternative uses
market shortage
occurs when the actual price is less than the equilibrium price
Market surpluses
occur when the actual price is more than the equilibrium price.
therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).
Market equilibrium
price at which the quantity supplied is equal to the quantity demanded
(intersection of supply curve and demand curve)
Elasticity
measures the percentage change in a market factor (demand) seen as a result of a given percentage change in another market factor (price)
Elasticity of demand
measures the percentage change in quantity of a commodity demanded as a result of a given percentage change in the price of the commodity.
Formula for elasticity of demand
% change in demand / % change in price
expanded:
(change in quantity demanded/ quantity demanded) / (change in price/price)
what does the coefficient of elasticity thats greater than 1 mean?
the demand is elastic - meaning - the % change in quantity demanded is greater than the % change in price
what does the coefficient of elasticity thats less than 1 mean?
the demand is inelastic - meaning - the % change in quantity demanded is less than the % change in price
what does the coefficient of elasticity thats equal to 1 mean?
Unitary - meaning - the % change in quantity demanded is equal to the % change in price
Elasticity of Supply
measures the percentage change in the quantity of a commodity supplied as a result of a given percentage change in the price of the commodity
Elasticity of supply formula
% change in quantity supplied / % change in price
Expanded:
(Change in quantity supplied / Prechange quantity supplied) / (Change in price / Prechange price)
Cross elasticity of demand
measures the percentage change in the quantity of a commodity demanded as a result of a given percentage change in the price of another commodity
Cross elasticity of demand coefficients - greater than 0
goods are substitutes for each other
Cross elasticity of demand coefficients - less than 0
goods are complements of each other
Cross elasticity of demand coefficients - equal to 0
good are independent of each other
Income elasticity of demand
Measures the percentage change in quantity of a commodity demanded as a result of a given percentage change in income.
Calc of income elasticity of demand
% change in quantity demanded / % change in consumer income
what kinds of items are inelastic
items with very few substitutes - people are going to purchase them no matter the cost - ie. insulin for diabetes
What kinds of items are highly elastic?
luxury items - there are many substitutes for luxury items
Indifference curve
various quantities of two commodities that give an individual the same utility as plotted on a graph
Diminishing marginal utility
decreasing satisfaction is derived from each additional (marginal) unit of a commodity acquired.
when is utility maximized?
when the marginal utility derived from the last dollar spent on each commodity is equal.
Marginal cost
the dollar output of producing one additional unit of physical output
short run analysis
period during which at least one input to the production process cannot be varied
ex. size/capacity of a production line
long run analysis
period during which all inputs to the production process can be varied
ex. size/number of plants can be changed
Law of diminishing returns (cost)
in a system with both fixed and variable cost inputs, adding more variable inputs will eventually result in less and less output per unit of input
Economies of scale
The long-run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment; a long-run concept
which short run average cost curves have a U shape?
average variable cost, average total cost, marginal cost.
average fixed cost has a continuously downward sloped curve
where does the marginal cost curve cross the average variable and average total cost curves
at their lowest points
marginal revenue
The change in total revenue associated with producing and selling one more unit.
how do you calculate the marginal revenue product?
The marginal revenue product is the increase in total revenue received by the addition of one worker. The total revenue from adding one additional worker to a team of 11 is equal to the difference between total revenue at 12 workers and total revenue at 11 workers, or $105 [(25 × $49) − (28 × $47.50)].
In the long run, a firm may experience increasing returns due to
economies of scale.
In the long run, firms may experience increasing returns because they operate more efficiently. With growth comes specialization of labor and related production efficiencies. This phenomenon is called economies of scale.
how do you calculate the marginal revenue PER UNIT
The total revenue of adding one additional worker to a team of 11 is equal to the difference between total revenue at 12 workers and total revenue at 11 workers, or [(25 × $49) − (28 × $47.50)]/28 − 25 units = $105/3 units = $35 (marginal revenue per unit).
what are the types of market structures (competition)?
Perfect Monopoly
Perfect Competition
Monopolistic Competition
Oligopoly
Characteristics of Perfect Competition
A large number of independent buyers and sellers, each of which is too small to separately, affect the price of a commodity
All firms sell homogeneous products or services.
Firms can enter or leave the market easily.
Resources are completely mobile.
Buyers and sellers have perfect information.
Government does not set prices.
Describe the point of short-run profit maximization for a firm in perfect competition.
Short-run profit is maximized when marginal revenue is equal to rising marginal cost (MR = MC); total revenue will exceed total costs by the greatest amount at that point.
when will a monopolistic firm maximize profits?
by producing the quantity where marginal revenue is equal to (rising) marginal cost
What are the two basic reasons a monopoly exists?
Economies of scale - a single producer can produce at a lower cost than multiple producers - “natural monopoly”
legal authority or control - a single producer has sole legal authority or sole control of resources - “patent”
List the characteristics of monopolistic competition
A large number of sellers exist.
Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes.
Firms can enter or leave the market easily.
Under monopolistic competition, what determines whether or not a firm makes a profit?
The relationship between the price (P) that can be charged and the firm’s average total cost (ATC). If ATC < P, the firm will make a profit. Otherwise, it will either break even (ATC = P) or have a loss (ATC > P).
How are long-run profits determined for a firm in monopolistic competition?
There are no long-run profits possible in a monopolistic competition. If profits are made in the short run, more firms will enter the market and lower the demand for each firm until each just breaks even in the long run.
What is the shape of the demand curve for a firm in monopolistic competition?
Downward-sloping and highly elastic (because there are close substitutes for the good or service offered)
Oligopoly
A few sellers
Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly).
Restricted entry into the market
Do prices change often for oligopolies?
prices tend not to change because could result in a price war.
Firms tend to compete on other factors including
-advertising/promotion
-packaging
-service
Oligopoly firms may seek to cooperate with each other to benefit all firms in the market
Overt collusion
conspiring to set outputs, prices, or profits among firms is illegal in the US
Tacit collusion
firms following prices set by the market leader is not illegal
ie. airline industry
How are long-run profits determined for a firm in an oligopoly industry?
A firm in an oligopoly industry will make profits in the long run if average total cost is less than market price. The firm can continue to make profits because entry into the market is restricted.
An oligopolist faces a “kinked” demand curve. This terminology indicates that
When an oligopolist lowers its price, the other firms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.
Leakages
the amount of individual income not spent on domestic consumption
ie. taxes, savings, imports
Injections
the amount of expenditures not for domestic consumption added to the domestic production.
These injections consist of government spending/subsidies, investment expenditures and exports.
Identify the five major sectors (or elements) of a macroeconomic free market flow model.
Individuals Business entities Governmental entities Financial entities Foreign entities