Microeconomics Flashcards
(118 cards)
1
Q
Economics Definition
A
The study of how we allocate scarce resources to satisfy unlimited wants
2
Q
Demand Curve
A
Shows the inverse relationship between the price and quantity of a product or service that a group of consumers are willing and able to buy at a particular time
3
Q
Y Axis of Demand Curve
A
Price
4
Q
X Axis of Demand Curve
A
Quantity Demanded
5
Q
Demand vs Quantity Demanded
A
Demand - refers to the demand curve that can be plotted on a graph
Quantity Demanded - X Axis of the demand curve
6
Q
Price and Quantity Demanded have a _____ Relationship
A
Inverse
7
Q
Demand Curve Shifts
A
Change in the precise placement of the demand curve on the graph, occurs if there are changes in relevant factors other than price
8
Q
2 Types of Demand Curve Shifts
A
(1) Upward/ Outward/ Right/ Increased
(2) Downward/Inward/Left/ Decreased
9
Q
Upward Demand Curve Shift
A
Quantity demanded becomes higher for each and every price
10
Q
Downward Demand Curve Shift
A
Quantity demanded becomes smaller for each and every price
11
Q
Factors that Exhibit a Direct Relationship With Demand Curve
A
(1) Price of a substitute good
(2) Expectations of price changes
(3) Income (for normal goods)
(4) Extent of the market
12
Q
Chance in price of a substitute good
A
When product A ay be an acceptable alternative to product B, an increase in the price of product A will make product B more attractive
13
Q
Expectations of Price Changes
A
Consumers are more likely to buy now if they think prices will increase in the future
14
Q
Change in Income for Normal Goods
A
For many goods when income increases, demand increases
15
Q
Change in the Extent of the Market
A
New consumers may increase demand, therefore increasing the size of the market
16
Q
Factors that Exhibit an Inverse Relationship with the Demand Curve
A
(1) Price of a complement good
(2) Income for inferior goods
(3) Consumer boycotts
17
Q
Change in the Price of a Complement Good
A
When products are normally used together an increase in the price of one of the goods decreases demand for the other
18
Q
Change in Income (for inferior goods)
A
For some goods when wealth increases, demand decreases as consumers shift their spending to other goods
19
Q
Consumer Boycotts
A
An organized boycott will, if effective, temporarily decrease the demand for a product
20
Q
Changes in Consumer Taste
A
May affect demand but have an indeterminate relationship
21
Q
Elasticity Definition
A
Measures the sensitivity or something to changes in something else
22
Q
Price Elasticity of Demand Formula
A
% Change in Quantity Demanded / % Change in Price
23
Q
Price Elasticity of Demand Definition
A
Measures how responsive the quantity demanded is to a change in price
24
Q
Arc Method Price Elasticity of Demand Formula
A
(Change in quantity demanded/ average quantity demanded)/ (change in price/ average price)
25
If Ed is > 1
Demand is elastic
26
Demand is Elastic if
Ed is > 1
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If Ed is < 1
Demand is inelastic
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Demand is inelastic if
Ed < 1
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If Ed = 1
Demand is unit elastic
30
Unit Elastic
Total revenue isn't sensitive to changes in price
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If Price Elasticity of Demand is Elastic, Revenue will _______ if Price is Increased
Decline
32
If Price Elasticity of Demand is Inelastic, Revenue will _______ if Price is Increased
Increase
33
Demand is Unit Elastic If
Ed = 1
34
Income Elasticity of Demand Definition
Measures the effect of changes in consumer income on changes in the quantity demanded of a product
35
Income Elasticity of Demand Formula
% Change in Quantity Demanded / % Change in Income
36
Normal Good
As consumer income increases, quantity demanded increases
37
Inferior Good
As income increases, quantity demanded decreases
38
Positive Income Elasticity of Demand Indicates
Normal Good
39
Negative Income Elasticity of Demand Indicates
Inferior Good
40
Cross Elasticity of Demand Definition
Measures the change in quantity demanded of a good to a change in the price of another good and determines of they are complements or substitutes
41
Cross Elasticity of Demand Formula
% change in quantity demanded for product x / % change in price of product y
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Positive Cross Elasticity of Demand
Substitutes
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Negative Cross Elasticity of Demand
Complements
44
Zero Cross Elasticity of Demand
Products unrelated
45
Supply Curve
Shows direct relationship between the price of a product or service and the quantity that a group of producers and/or sellers are willing to supply at a particular time
46
Types of Supply Curve Shifts
(1) Supply curve shifted outward/ to the right/ supply increased
(2) Supply curve shifted inward/ to the left/ supply decreased
47
Supply Curve Shifted Outward
Quantity supplied becomes larger for each and every price
48
Supply Curve Shifted Inward
Quantity supplied becomes smaller for each and every price
49
Factors that Exhibit a Direct Relationship with the Supply Curve
(1) Number of producers
(2) Government Subsidies
(3) Price expectations
(4) Technological advances
50
Factors that Exhibit an Inverse Relationship with the Supply Curve
(1) Increase in production costs
| (2) Prices of other products
51
Price Elasticity of Supply Definition
Measure of how sensitive quantity supplied of a good or service is to a change in price; how change in price will affect quantity supplied by firms
52
Price Elasticity of Supply Formula
Percentage change in quantity supplied/ % change in price
53
Opportunity Cost
Benefit given up from not using the resource for another purpose
54
Economic Profit
Excess of the profits received over the normal profit rate in the economy
55
Market Equilibrium
Price where quantity demanded = quantity supplied; all goods offered for sale will be sold
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Price Ceiling
Government imposed maximum legal price at which a product or service may be sold
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Price Floor
Government imposed minimum legal price at which a product or service may be sold
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Demand Curve Increase
Supply Curve No Change
Equilibrium Price ______
Quantity Purchased ______
Increase, Increase
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Demand Curve Decrease
Supply Curve No Change
Equilibrium Price ______
Quantity Purchased ______
Decrease, Decrease
60
Demand Curve No Change
Supply Curve Increase
Equilibrium Price ______
Quantity Purchased ______
Decrease, Increase
61
Demand Curve No Change
Supply Curve Decrease
Equilibrium Price ______
Quantity Purchased ______
Increase, Decrease
62
Demand Curve Increase
Supply Curve Increase
Equilibrium Price ______
Quantity Purchased ______
Uncertain, Increase
63
Demand Curve Decrease
Supply Curve Decrease
Equilibrium Price ______
Quantity Purchased ______
Uncertain, Decrease
64
Demand Curve Increase
Supply Curve Decrease
Equilibrium Price ______
Quantity Purchased ______
Increase, Uncertain
65
Demand Curve Decrease
Supply Curve Increase
Equilibrium Price ______
Quantity Purchased ______
Decrease, Uncertain
66
Utility Economic Definition
Satisfaction derived by consumer
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Marginal Utility
Additional satisfaction obtained by consuming each additional unit
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Law of Diminishing Marginal Utility
The more a consumer consumes of a particular product, the less satisfying will be the next unity of product
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Consumer Maximizes Total Satisfaction When
The last dollar spent on each product generates the same amount of marginal utility
70
Indifference Curve (IC)
(1) Illustrates the allocation of quantities of each product that yield a certain total utility
(2) Represents the combination of quantities of each product that yield a certain total utility
71
Personal Disposable Income
Available income of a consumer after subtracting mandatory payment of taxes
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Consumer Choices with Each Dollar of Personal Disposable Income
(1) Spend (consume)
| (2) Save
73
Marginal Propensity to Consume (MPC) Definition
Percentage of the next dollar of income that the consumer would be expected to spend
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Marginal Propensity to Consume (MPC) Formula
Change in consumption / Change in disposable income
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Marginal Propensity to Save (MPS) Definition
Percentage of the next dollar of income that the consumer would be expected to save
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Marginal Propensity to Save (MPS) Formula
Change in savings / Change in disposable income
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MPS + MPC Must Equal
1
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Fixed Costs
Costs that won't change even when there is a change in the level of production
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Average Fixed Costs (AFC)
Total Fixed Costs / Number of Units Produced
80
Variable Costs (VC)
Costs that rise as production rises
81
Average Variable Costs (AVC)
Total Variable Costs / Number of units produced
82
Total Costs
Sum of fixed and variable costs (TC = FC + VC)
83
Marginal Costs
Increase in cost resulting from producing one extra unit
84
Marginal Revenue (MR)
Change in total revenue associated with the sale of one more unit of output
85
Marginal Revenue Product
Increase in total revenue received by the addition of one additional unit of an input or resource
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Returns to Scale Definition
Increases in units produced that result from increases in production costs
87
Returns to Scale Formula
% increase in output/ % increase in input
88
Economies of Scale
Increased efficiencies from producing more units of a product
89
Factors that Contribute to Economies of Scale
(1) Spreading fixed costs over larger numbers of units
(2) Being able to save on transaction and transportation costs by buying in larger quantities
(3) Having employees specialize in different tasks and improve abilities
(4) Automatic procedures that are performed repetitively
90
Economic Rents
Excess of the payments for factors of production when used most productively over their best alternative use
91
To Maximize Profits
Level of production where marginal revenue = marginal cost
92
Diseconomies of Scale
Increased inefficiences
93
Factors that Contribute to Diseconomies of Scale
(1) Increased volume of inventory making retrieval difficult
(2) Hiring lower skilled workers leading to higher error rate
(3) More employees causing less effective supervision
94
Increasing Returns to Scale
Output increases by proportion greater than 1
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Decreasing Returns to Scale
Output increases by proportion less than 1
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Constant Returns to Scale
Output increases by proportion of 1
97
Industry
Group of firms that produce products or services that consumers would identify as similar
98
Perfect Competition
AKA Pure Competition
(1) Includes a large number of sellers
(2) No non-price competition (ie: advertising)
(3) Firms enter and exit the market very easily
(4) Each individual firm faces a demand curve that is perfectly elastic
99
Pure Monopoly
(1) Only one firm that sells a product or service for which there are no close substitutes
(2) Exist as a result of public policy or "technical" conditions (barriers to entry)
(3) Demand curve is substantially downward sloping, almost vertical
100
Natural Monopolies
May exist when economies of scale permit the largest firm to underprice and eliminate all others
101
Predatory Pricing
Charging temporarily low prices to drive competitors out of business only to increase prices once they've eliminated their competitors
102
Laws Passed to Reduce Anti-Competitive Market Practices
(1) The Sherman Act (1890)
(2) The Clayton Act (1914)
(3) The Robinson-Patman Act (1936)
(4) The Celler-Kefauver Act (1950)
103
The Sherman Act (1890)
Prohibited price fixing, boycotts, market division, and restricted resale agreements among suppliers
104
The Clayton Act (1914)
Prohibited stock mergers that reduce competition, price discrimination, and common directorships among competing firms
105
The Robinson-Patman Act (1936)
Prohibited discounts to large purchasers not based on cost differentials
106
The Celler-Kerfauver Act (1950)
Prohibits acquisition of the assets of a competitor if it would reduce competition
107
Monopolistic Competition
(1) Large numbers of firms produce heterogenous products
(2) Lots of non-price competition
(3) Relatively easy exit and entry
(4) Products offered are close substitutes but not identical
(5) Demand curve slightly or somewhat downward sloping
108
Oligopoly
AKA Oligopolistic Competition
(1) Small number of large sellers
(2) Barriers to entry (cost or patents)
(3) Non-price competition exists
(4) Rival actions are observed
(5) Firms demand curve is kinked
(6) Products may be homogeneous or heterogenous
(7) Game theory applies
(8) Government seeks to regulate by forbidding formal quantity agreements among competitors and price fixing
109
Game Theory
The actions by one firm are likely to affect the decisions of other firms
110
Competitor Analysis
Used to understand and predict the behavior of a major competitor
111
Components of Competitor Analysis
(1) Collecting information
| (2) Using information to understand, predict, and respond to that competitor
112
Strategic Planning
Organizations efforts to identify their long term goals and to determine how to best reach those goals
113
Formal Strategic Planning Steps
(1) Creating/ updating mission statement
(2) Set goals and objectives
(3) Determine what actions should be taken to meet their goals and objectives and establish mechanisms to collect data and engage in assessment of whether goals and objectives were met
(4) Restart cycle using data and assessment results to develop new action plans
114
Types of Business Strategies
(1) Product differentiation
| (2) Cost leadership strategy
115
Product Differentiation Strategy
Involves developing a range of slightly different products that are more attractive to ones target market or simply to ensure they differ substantially from competitors offerings
116
Product Differentiation Strategy will
(1) Make firms sales less responsive to changes in price charged by other competitors
(2) Allow the firm to charge different prices for different products
(3) Ultimately allow the firm to charge higher prices than otherwise (and potentially higher than competitors)
117
Types of Product Differentiation
(1) Physical differences
(2) Perceived differences
(3) Customer support differences
118
Cost Leadership Strategies
Concentrate on cutting costs of producing, selling, and distributing a firms range of products
