Sammendrag Flashcards
Demand
When price goes up, people buy less.
When price goes down, people buy more
Change in demand is a shift of the demand curve
Change in quantity demanded is a movement from one point to another point on a fixed demand curve.
Is downward sloping because:
1. Subsitution effect
2. Income effect
3. Law of diminishing returns
Supply
When price goes up people produce more/quanitity increases.
When price goes down people produce less/quanity decreases.
Change in supply is a shift in the supply curve.
Change in the quantity supplied represents a movement along a supply curve. Notice that price does not shift the curve, it only moves along the curve.
Single and double shifts for supply and demand
For double shifts: Either price or quanitty will be intermediate (ambiguous)
How do changes in price of related goods affect demand? (substitute and complement)
Substitutes - increase in price of one good, increases the demand for its substitute. Decrease in the price of one good, decreases the demand for its subsitute.
Some examples: Pepsi and Coke; beef and chicken.
Complements - increases in price of one good, decreases demand for the other good. Decrease in price of one good increases demand for the other good
Some examples: cars and gasoline; cars and tires; DVD players and DVDs.
How does the changing of income affect demand of normal and inferior goods?
Normal goods - As income increases, demand increases
Inferior goods - As income increases, demand decreases
Elastic and inelastic demand
Elastic demand - Quantity is sensitive to changes in price
Characteristics:
- Many substitutes
- Luxuries
- Easticity coefficient more than 1
Perfectly elastic demand is a horizontal curve while inelastic is vertical.
Inelastic demand - Quanitty is insensitive to a change in price
Characteristics
- Few substitutes
- Necessities
- Elasticity coeffiecient less than 1
Elasticity coefficient
% change in quantity / % change in price
Cross-price elasticity of demand
Income elasticity of demand
Cross-price elasticity
Shows how sensitive a product is to a change in price of another good. It shows if two goods are substitutes or complements.
%change in quantitiy of product b / % change in price of product a
Income elasticity
Shows how sensitive a product is to a change in income. It shows if goods are normal or inferior
%change in quantity / %change in income
Consumer and producer surplus
Consumer surplus is the difference between what you want to pay and what you do pay.
Producer surplus is the difference between the price and what someone is willing to sell for.
Competetive efficient markets maximized CS and PS
Price control - ceilings and floors
Price control is when the government comes in and sets prices when it is not at equilibrium.
A ceiling always goes below equilibrium if its binding. If it is above, nothing is going to change. Price and equantity will not change.
A floor always goes above equilibrium.
Dead weight loss
Efficiency losses (or deadweight losses) are reductions of combined consumer surplus and producer surplus. Quantity levels that are either less than or greater than the efficient quantity, Q1, create efficiency losses. Triangle dbe shows the efficiency loss associated with underproduction at output Q2.
Externalities
A cost or benefit accruing to a third party external to the transaction.
Positive externalities occur when a third person, or persons, is affected by the transaction in a positive way. The good is underproduced when positive externalities are present. The equilibrium output will be smaller than the efficient output because the consumer is willing to pay a price equal to the consumer’s individual marginal benefit, but no more.
Negative externalities occur when a third person, or persons, external to the transaction is affected from the transaction in a negative way. The good is overproduced and the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than the efficient level, which would exist if true costs were reflected in the production decision.
Correcting externalities
Kinked demand
The kinked-demand model is used for noncollusive oligopolies to explain their behaviors and pricing strategies. Since the firms do not collude, none of the firms know with certainty what their rivals are going to do. However, the firms assume that their rivals will match any price reductions in an effort to maintain their customers. On the other hand, it is reasonable to assume that if a firm raises its price, its rivals will ignore the price change in an effort to steal customers from the firm raising its price.
- Noncollusive Oligopoly.
- Uncertainty about rivals reactions, rivals match any price change or ignore it
- Assume combined strategy, match price reductions, ignore price increases.
Productive efficiency
Production of a good in the least costly way. Graphically where price equals minimum ATC.
Allocative efficiency
Production of the right mix of goods and services. Graphically where price equals MC
Long run cost curve
In the long run, all resources are variable. Law of diminishing marginal reutrns does not apply.
Economies of scale: Mass production means AC goes down
Constant returns to scale: Can’t use more mass production tech and costs level.
Diseconomies of scale: Costs go back up in the long run.
Short run cost of production
ATC hits the MC at ATC minimum
MC goes down and up because of as you hire more workers, they specialize. Additional costs are gonna fall. But as you hire more people they will produce less and less stuff.
Price discrimination
Price discrimination is defined as charging different buyers’ different prices when such price differences are not justified by cost differences.
Conditions:
- Monopoly power means that the firm must have some pricing power. Pricing power is the ability of a firm to set its own price. Therefore, we find price discrimination in all types of markets except perfect competition.
- Market segregation means that you have identified your different buyers and can separate your market based on their willingness to pay.
- No resale means that a low-price buyer is prevented from buying at the low price and reselling the good to a high-price buyer. Otherwise, your price discrimination scheme would break down.
Characteristics of oligopoly
- A few large producers
- Homogeneous or differentiated products: There may be homogeneous or standardized oligopolies like the steel and oil markets. There may also be differentiated oligopolies like the markets for breakfast cereal, beverages, and automobiles.
- Limited control over price: because there are just a few sellers in the market and rivals may respond in a way that would be detrimental to the firm that just changed the price.
- Entry barriers: more substantial than in monopolistic competition, which is why there are just a few producers in the market. Although some firms have become dominant as a result of internal growth, others have gained dominance through mergers.
Game theory
- Strategic pricing behavior refers to how a firm’s decisions are based on the actions and reactions of rivals.
- Mutual interdependence: each firm’s profit depends on its own pricing strategy and that of its rivals.
- Collusion: cooperation with rivals can benefit the firm.
- Incentive to cheat: cheating can result in more revenues for the cheater.
Circular flow model
Law of diminishing marginal returns
The principle that as successive units of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decline.
Monopsomy labour market
A market structure in which only a single buyer of a good, service or resource is present.
The workers who provide the type of labor needed have few employment options other than working for the monopsony, maybe because they are geographically immobile or their skills are not transferable to other jobs. This makes the firm a “wage maker,” meaning that the wage rate it must pay varies directly with the number of workers available. In this case, the firm’s labor supply curve will be upward-sloping and the MRC will be higher than the wage rate. To maximize profit, the monopsonist will employ the quantity of labor at which MRC and MRP are equal.
Long run production cost
Pure competition characteristics
- Large numbers of sellers
- Standardized/Substitute product The consequence of this is that buyers are indifferent as to whom they buy from.
- “Price takers” firms have no pricing power, they accept the price given.
- Free entry and exit.
- Perfectly elastic demand means that the firm has no power to influence price so the firm merely chooses to produce a certain level of output at the price that is given. Note that this perfectly elastic demand curve is a horizontal line at the price.
Long run equilibrium. The box shows the idea of profit
Tax and wages picture
The wage received by laborers will fall to $4.90 and the labor cost to employers will rise to
$5.40.
What is a natural monopoly and how can it be regulated?
