Microeconomics Flashcards Preview

CFA Investment Foundations Program > Microeconomics > Flashcards

Flashcards in Microeconomics Deck (25)
Loading flashcards...
1
Q

The three key branches of economics

A
  • microeconomics: which focuses on the decisions made by individual consumers and companies.
  • macroeconomics: which focuses on the economy as a whole and considers the effect of such factors as inflation, interest rates, and unemployment on economic activity.
  • international trade: which focuses on the exchange of products, services, and capital across borders.
2
Q

Economics is defined as

A

The study of production, distribution, and consumption or the study of choices in the presence of scarce resources.

3
Q

Law of Demand

A

Quantity demanded and price of a product are usually inversely related.

If the price of a product goes up, consumers will normally buy less of the product.

4
Q

Utility

A

A measure of relative satisfaction received from possession/consumption of goods/services.

Is relative to the individual.

5
Q

Law of diminishing marginal utility

A

The economic principle that the additional satisfaction consumers get from each additional unit of a product decreases as the total amount consumed increases.

6
Q

Major factors that affect the demand curve

A
  1. Effect of Income on Demand
  2. Effect of the Expected Future Price of a Product on Demand (positive relationship)
  3. Effect of Changes in General Tastes and Preferences on Demand (trends)
  4. Effect of Prices of Other Products on Demand
7
Q

Income Effect

A

A change in demand for a product or service as a result of a change in purchasing power.

8
Q

Normal Products

A

Products whose consumption increases as income increases.

9
Q

Inferior Products

A

Products whose consumption decreases as income increases.

10
Q

Substitution Effect

A

Consumers substitute relatively cheaper products for relatively more expensive ones.

So, if the price of a substitute product decreases, demand for this substitute may increase and demand for the original product may decrease.

11
Q

The Law of Supply

A

The economic principle that when the price of a product increases, the quantity supplied increases too.

12
Q

Narrow definition of a good results in

A

More substitutes.

13
Q

Market Equilibrium

A

The situation in which, at a particular price, no buyer or seller has any incentive or desire to change the quantity demanded or supplied, all other factors remaining unchanged.

14
Q

Equilibrium Price

A

Price at which the quantity of a product or service demanded equals the quantity supplied.

Point at which the demand and supply curves intersect.

15
Q

Elasticity

A

How the quantity demanded or supplied changes in response to small changes in a related factor, such as price, income, and the price of a substitute or complementary product.

16
Q

Own Price Elasticity of Demand

A

The percentage change in the quantity demanded of a product or service as a result of the percentage price change in that product or service.

= % change in quantity demanded / % change in price

17
Q

Sign and Magnitude of Own Price Elasticity

A

-> Less than −1: Negatively, highly elastic
For a given percentage increase in price, the quantity demanded will decrease by a greater percentage than the increase in price.

-> −1: Negatively unit elastic
For a given percentage increase in price, the quantity demanded will decrease by the same percentage.

-> Greater than −1 to 0: Inelastic
For a given percentage increase in price, the quantity demanded will decrease by a lesser percentage than the increase in price.

-> Greater than 0 but less than 1: Inelastic
For a given percentage increase in price, the quantity demanded will increase by a lesser percentage than the increase in price.

-> +1: Positively unit elastic:
For a given percentage increase in price, the quantity demanded will increase by the same percentage.

-> Greater than +1: Positively, highly elastic:
For a given percentage increase in price, the quantity demanded will increase by a greater percentage than the increase in price.

18
Q

Cross-Price Elasticity of Demand

A

The percentage change in quantity demanded of a product or service in response to a percentage change in the price of another product.

% change in the quantity demanded of Product1 /
% change in the price of Product2

A negative cross-price elasticity of demand indicates complementary goods

19
Q

Accounting Profit VS. Economic Profit

A

Accounting Profit is the difference between the revenue generated from selling products and services and the explicit costs of producing them.
= Revenue - Cost

Economic profits deduct both explicit and implicit costs (such as opportunity costs) from revenue.
= Accounting Profit - Opportunity Cost

20
Q

Economies of Scale

A

Cost savings arising from a significant increase in output without a simultaneous increase in fixed costs.

21
Q

law of diminishing returns

A

The economic principle that the gain in output from adding variable inputs of one factor, such as labour, will increase at a decreasing rate even if the fixed inputs of production remain unchanged.

22
Q

operating leverage

A

The extent to which fixed costs are used in production. The higher the fixed costs relative to variable costs, the higher the operating leverage.

23
Q

marginal cost & marginal revenue

A

The cost of producing an additional unit of a product or service.

The amount of money from selling an additional unit of a product or service.

24
Q

Operating Leverage

A

refers to the extent to which fixed costs are used in production.

25
Q

Oligopoly

A

A market dominated by a small number of large companies because the barriers to entry are high.