Flashcards in Microeconomics Deck (64):
What are nominal prices?
The money or absolute price
What is a relative price?
The price of one good expressed in terms of another
How do we make use of relative prices everyday?
How is an alternative a relative price?
when people buy a good or service they will compare the price of that good or service with that of another good or service
How are indexes relative prices?
A price of a good bought is compared with the price of a good that is not bought
The index is a means that we measure prices against
How are percentages relative prices?
We often ignore the nominal prices and compare the percentages by which prices change only
What do changes in relative prices underlie?
They underlie the plans and actions of independent decision-makers such as consumers and producers
What is the basic function of a market?
To ensure the optimal allocation of scarce resources
What is an implication of scarcity?
Choices must be made since more of one good can only be obtained if another good is sacrificed
What is a substitute?
Something that takes the place of another
What does the demand curve show?
A demand curve shows the relationship between the prices of a good and the corresponding quantities of the good demanded over a period of time
What does the first law of demand state?
that all things being the same, an inverse relationship exists between the price of a good and the quantity demanded of that good
What happens if the price of a good increases?
more of another good must be sacrificed to maintain the same level of consumption
What relationship exists between the price of a good and the quantity demanded of a substitute?
A positive and direct relationship, the stronger the degree of substitutability, the flatter RR will become
What forms a complementary relationship?
goods that are jointly demanded
What happens with a change in price of a complementary good?
A change in price of one will cause a change in demand for another
What relationship exists between the price of a good and and the quantity demanded of a complementary good?
A negative and inverse relationship, the stronger the complementary relationship the flatter RR will be
What is the supply curve?
A graph showing the relationship between the prices of a good and the quantities producers are prepared and able to supply over a period of time
What does the law of supply state?
There is a direct relationship between the price of a good and the supply of that good, when the price of a good increases the quantity supplied is likely to increase
Why is the supply curve upward sloping?
When the price of a good increases the quantity supplied is likely to increase
What does a limited amount of resources imply?
Any increase in production of one good implies a decrease in production of another
What must happen in order to produce more of one good?
The production of the substitute good has to be decreased
What does an increase in demand for a good mean?
It is much more profitable to produce
More factors of production will be allocated to it and less toward the less profitable good
What do consumers play an important role in?
In deciding which ends of factors of production would be employed
What happens when goods are jointly supplied?
An increase in demand for one will increase the supply of another, causing its price to decline
What do changes in demand the demand and supply of a good affect?
the market of that good
What do changes in the goods market affect?
the factor market
What do market structures describe?
The different levels and forms of competition
What is the most competitive of the 4 market structures?
The perfect market
What is the least competitive of the 4 market structures?
The monopoly market
What do demand and supply forces interact for when there is perfect competition?
To establish prices and quantities
What are supply and demand manifestations of?
The underlying forces of revenue and cost
What are derivatives?
Abstract things derived from the manifestation of real things
What are the derivatives of perfect and imperfect market structures?
Average revenue (AR)
Marginal revenue (MR)
Average cost (AC)
Marginal cost (MC)
Where are AR, MR, AC and MC derived from?
Total revenue (TR) and total cost (TC)
How is total revenue obtained?
By multiplying the number of units by the price of each unit
What is Average revenue (AR)?
Total Revenue (TR) divided by the number of units
What is MR?
The additions to TR
What expresses demand under perfect competition?
Marginal revenue (MR)
What curve is the MC curve under perfect competition?
What does market structure describe?
different levels and forms of competition
What is a model?
A simplified representation of reality in various forms
What are models used for the sake of comparisons needed for?
to demonstrate similar things
What are the common features of the four models in a market structure?
Number of businesses
How do we create market structure models that are comparable?
We construct derivatives MR and AR, and MC and AC
Why are we forced to create derivatives?
A monopoly does not have a supply curve
What does a supply curve tell us?
The quantity that the businesses choose to supply at any given price
Why is the monopoly business a price maker?
A monopoly business sets the price at the same time it chooses the quantity to supply
Why is the demand curve of a perfect competition facing an individual competitive producer horizontal?
The individual producer cannot raise its price above the going market price without losing all its customers to the numerous other producers in the market or to other producers waiting for an opportunity to enter the market
What is marginal revenue defined as?
The additional revenue acquired from selling one additional unit
Why must the additional or marginal revenue acquired from selling an additional unit be constant at P?
Because each unit can be sold at a constant price of P
Why is it unprofitable to produce beyond point q
an additional cost of producing them is greater than the additional revenue acquired by selling them
Why does normal profit decrease after q units?
Because MR is smaller than MC
Why is the downward sloping market demand curve in the monopoly its individual demand curve?
Because the monopolist is the only producer of a particular good
What is the critical task of the pure monopolist?
to determine the one price-quantity combination of all price-quantity combinations on its demand curve that maximises its profit
why is the extra or marginal revenue a monopoly gets from selling another unit less than the price it charges?
because the monopolist must lower its price to sell more
Why does the MR curve lie below the AR/ demand curve?
The AR curve is more elastic than the MR curve
What are two steps the monopolist follows to determine the quantity and price to sell at?
-The point at which MC=MR is determined
-The price at which q units are sold
Why is it necessary to determine the point at which MC=MR?
Because this means that the business has expanded production to the point where the production cost of the last unit is precisely equal to the revenue that it earns from the sale of the last unit
What does point A on the monopoly market graph indicate?
the profit maximizing production quantity, q on the horizontal axis
How is the price at which q units are sold obtained?
By moving vertically upwards from point A to point B on the demand curve (AR)
What does the AC curve enable us to calculate?
The monopolists' profit
Why does the monopolist make an economic profit?
Total revenue is greater than total costs