Economics - Supply and Demand - Supply and Demand Flashcards
when a price of a good falls, what the 2 effects that can happen? Explain what they are
substitution effect
- consumption of the good always increases (that good is now cheaper than others)
income effect (more purchasing power)
- consumption increases for normal good
- consumption decreases for an inferior good (e.g. less buses, more taxis)
what happens to the quantity purchased of an inferior good when price decreases?
quantity purchased increases as the substitution effect (people buying more as cheaper) outweighs the income effect (consumption decreases)
what is a giffen good? (very rare)
an inferior good where for a certain range of prices, the quantity purchased decreases as the price decreases due to the income effect dominating the subtitution effect
what is a veblen good?
a status symbol good for which a decrease in price would lead to a decrease in demand. The high price makes the good desireable.
what is the law of diminishing marginal returns?
when additional units of one factor of production are added, ceteris paribus, the additional output (marginal product) of each additional unit will begin to decrease at some amount of the input. The marginal product may become negative at some point.
what is the short run defined as?
the time period over which some factors of production (costs) are fixed (typically we assume some fixed costs like capital)
what is the long run defined as?
where all factors of production (costs) are variable
what are examples of factors of production? (costs)
land, labour, capital and materials (only capital and labour are often considered in economics)
what is the production function?
the quantity of output as a function of levels of capital and labour employed
what is a firm under perfect competition?
price = marginal revenue = average revenue
- these firms are known as price takers
what is the key difference in imperfect competition?
marginal revenue does no longer = price
- these are price searcher firms
how do you find the breakeven/shutdown point in imperfect competition?
total revenue/total cost approach
what is the minimum efficient scale?
on a economies/diseconomies of scale diagram, it is the point where the LRATC cruve is at it’s minimum. i.e. perfect economies of scale useage
where is the point of profit max in the long run on a LRATC curve in perfect competition ?
at the lowest point. This is the minimum efficient scale
what are the characteristics of perfect competition?
- homogenous product
- all firms are price takers (can’t influence)
- market share has no price influence
- buyers have perfect information
- capital and labour are perfectly mobile
- no entry/exit fees
