Test Flashcards
(100 cards)
1
Q
What does economic growth do?
A
Increases standard of living, but doesn’t overcome scarcity or avoid opp cost - face trade off when making economy grow
2
Q
How is economic growth gained?
A
From capital accumulation and technological change
3
Q
Define comparative advantage
A
One person can perform the activity at lower opp cost than anyone else.
4
Q
Define absolute advantage
A
A person who is more productive than others
5
Q
What does a shortage do to prices?
A
Forces prices up
6
Q
What does a surplus do to prices?
A
Forces prices down
7
Q
What is a demand schedule?
A
Shows the relationship between price and quantity of good demanded
8
Q
What 2 things causes movement along the demand curve?
A
- Income effect
- Substitution effect
9
Q
What caused a shift in the demand curve?
A
Any change that raises the quantity that buyers wish to purchase at a given price
10
Q
Define a surplus in supply
A
Quantity supplied > quantity demanded at the going market price
11
Q
Define a price ceiling
A
Legal maximum on the price at which a good can be sold
12
Q
What effect does a subsidy have on a market?
A
Decreases costs of production to sellers, and therefore increases consumption of buyers
13
Q
What effect does a price ceiling above a market equilibrium have?
A
No effect. It’s unbinding.
14
Q
What effect does rent controls placed below the market equilibrium have?
A
In the short run, supply and demand are inelastic.
In the long run, supply and demand are elastic.
= either way, there is a shortage of housing. Market failure. #
15
Q
What increases unemployment?
A
The more elastic the demand is for labour
16
Q
Define “willingness to pay”
A
The max amount that a buyer will pay for a good
17
Q
What is the effect of a tax?
A
Market distortion. There is a deadweight loss = the fall in total surplus that results from the tax.
18
Q
When demand or supply is relatively inelastic, what happens?
A
There a small deadweight loss of a tax. Vice versa if its relatively elastic.
19
Q
Formula for ATC?
A
AFC + AVC
20
Q
Formula for AVC?
A
TVC/Q
21
Q
Formula for AFC?
A
TFC/Q
22
Q
Formula for MC?
A
Difference in TC/ Difference in Q
23
Q
For easyjet, where is profit maximised, and what would happen to a decrease in quantity demanded?
A
At MC = MR. If quantity demanded fell, profit would fall.
24
Q
What is another name for controllable costs?
A
Variable costs
25
If ATC fell, what would happen to profits and why?
Profits would increase, despite MR and Price falling, IF VC or FC is lower (lower ATC) = they can innovate and decrease costs
26
What would be a variable cost for EasyJet?
Fuel costs
27
What would happen with an increase in the price of fuel?
Increase ATC, decrease MR, decrease profits, increase prices of flights
28
What does comparative advantage allow for through specialisation?
Trade
29
Quantity demanded is defined as being what?
The amount consumers plan to buy during a particular time period, at a particular price.
30
What are the 6 main factors of a change in demand? (shift)
1. Price of related goods (substitute or complement)
2. Expected future prices
3. Income
4. Expected future income/credit
5. Population
6. Tastes/preferences
31
What are the 6 main factors of a change in supply? (shift)
1. Prices of productive resources
2. Prices of related goods produced
3. Expected future prices
4. Number of suppliers
5. Tech
6. State of nature (i.e. hurricanes)
32
If the price of a substitute in production falls, what happens to supply?
Increases
33
If the price of a complement in production rises, what happens to supply?
Increases
34
At prices above equilibrium, a surplus forces prices....?
Down
35
At prices below equilibrium, shortage forces prices...?
Up
36
What are common supply shift factors?
1. Changing costs of inputs in production
2. Changing technology leading to lower cost of production
37
What type of good is it when XED is positive?
Substitute
38
What type of good is it when XED is negative?
Complement
39
What type of good is it when YED is <1?
Normal good. Increased income = slight increase in demand of the good
40
What type of good is it when YED is >1?
Luxury good. Increase income = high increase in demand of the good
41
What type of good is it when YED < 0 (-ve)?
Inferior good.
42
Define total utility
Total satisfaction gained from all the units consumed.
43
Define the budget line
The limits to the households' consumption choices.
Expenditure = Income => (Budget Equation)
44
A rotation of the budget line shows what?
A change in relative price of the good
45
What does a shift of the budget line show?
A change in income
46
Define an indifference curve
A line that shows combinations of goods among which a consumer is indifferent
47
What do points outside the indifference curve represent?
Preferred points.
48
What do points inside the indifference curve represent?
Not preferred points
49
Define MRS?
Marginal Rate of Substitution. It's the rate at which a person is willing to give up good Y, to get an extra unit of good X and at the same time remain indifferent.
50
What is consumer surplus?
(willing to pay - actually pay).
MB > Price
51
What is producer surplus?
(price of good - min price at which producer is willing to sell).
Measured by the area below the market price and above the supply curve, divided by quantity sold.
52
Supply curve is also called what?
The minimum supply price curve.
S = MC
53
In the short run, what is fixed for most firms?
Their capital aka the firms' plant.
54
In the short run, give an example of technological constraint a firm might face.
Increased MR comes from increased specialisation and d. of. labour.
Diminishing MR comes from too much employed labour.
55
Features of monopolistic competition?
1. Many buyers/sellers
2. No barriers to entry
3. Branding
4. Price leadership
56
Economic profit is a measurement of what?
Opportunity cost.
57
In efficient markets, what does:
demand equal?
supply equal?
and then equilibrium point?
D = MB
S = MC
MC = MB
58
In an efficient market, what is maximised?
Producer and Consumer surpluses
59
Define allocative efficiency
Represents the utility derived from the consumption of a good/service with respect to a certain level of price. Because both consumers and producers benefit, markets can hence maximise value.
60
In a free market, what good is notoriously under consumed?
Merit goods, as the market ignores societical benefits.
61
What effects do externalities have?
Surplus value is not maximised.
Markets lead to over/under production
Market for the externality is missing and isn't priced. (hence D and S doesn't account the true MC or MB)
62
What does market inefficiency of rent controls lead to?
Shortage/ under production in rented sector
Poor quality housing
Higher search costs
Illegal activity
63
What is another name for the price floor?
Minimum wage legislation
64
What can min wages lead to?
Unemployment (an excess supply of labour)
65
What is the firm's 3 environmental constraints on its profit?
1. Tech constraints
2. Info constraints
3. Market constraints
66
What does the short-run cost model assume?
- Firms maximise profits
- Markets determine input prices
- Firms use an efficient technology (a mix of inputs)
- Some inputs, i.e. capital, are fixed, whilst others are variable i.e. labour
67
To produce more output in the short run, what must a firm do?
Employ more labour, thus inadvertently increasing its costs.
68
What is the long-run cost model?
- All inputs are variable
- A firm must depend on both a level of output and the best input to produce that output i.e. nature and amount of plant and equipment, as well as the size of their labour force.
- Profit maximisation leads to COST MINIMISATION = can be best shown on the LRAC. The LRAC is made up from the lowest ATC for each output level.
69
What does the LRAC show?
The lowest cost technology for all output levels
70
Define the MES?
The lowest possible point of the LRAC. It's the quantity of output at which the LRAC reaches its lowest level.
71
What does falling LRAC signify?
What does rising LRAC signify?
Economies of scale.
Diseconomies of scale
72
As costs decrease due to E.of.S, profits rise... why?
Technological progress
73
Define 2 examples of e. of. scale
1. Cut price deals for bulk buying in larger organisations
2. Specialisation
74
Give 2 examples of diseconomies of scale
1. Rising costs of dealing with different cultures after merging 2 similar organisations
2. Rising costs of communication in large-scale organisations
75
Each firm's output is a perfect substitute in perfect competition, so what type of demand curve do they have?
Perfectly elastic
76
In the short run, what is the strategy of perfectly competitive firms?
They need to choose an output level that maximises profit. Profit is maximised using marginal analysis (economic profit) = hence, where MC = MR, or by producing nothing if AC > Price, then PROFIT IS MAXIMISED
77
In perfect comp, what point is profit maximised?
MC= MR
78
A perfectly competitive firm is a quantity-what?
Adjuster
79
What are the two firm strategies in perfect competition regarding profit maximisation?
Short run:
- How much to produce with given capital, including temporary shutdown
Long run:
- Whether to expand or contract capital to change scale
- Whether to leave the industry (permanent closure)
80
Short run has a shut down point of what? (perfectly competitive)
MR = Minimum point on the AVC curve.
The firm will suffer the loss of the fixed cost only at this point. Shutdown point is the start of the firm's supply curve.
81
Long run decisions: how to maximise profit in perfect competition?
Firms can create economic profit by increasing their scale (expanding capital).
Price > ATC, = economic profit exists
But economic profits attract new entrants and price eventually falls so that Price = ATC
82
In the short run, what do managers do to maximise profits (or minimise costs)
Shift the ATC curves as far as possible in the short run
83
What do economic profits do in the long run?
They attract new entrants and forces prices down. Falling prices force managers in the long run to look for economies of scale, which in turn can force ATC down and economic profits down to 0.
84
If there is a fall in demand for a single firm, what will happen?
Their MR curve (demand curve) will shift down, whilst industry demand curve will shift leftward, decreasing MR and decreasing Price.
85
zero economic profit means what?
Just enough account profit is made to stay in the sector
86
Name the 5 features of monopolistic competition
1. Many sellers
2. No barriers to entry/exit
3. Branding
4. Slightly differentiated goods
5. Price leadership
87
What is the short-run equilibrium for a monopolistic competitive firm?
Demand curve is rather elastic due to similar products being sold by other firms, hence providing many close substitutes
88
What is the long-run equilibrium for a monopolistic competitive firm?
Freedom of entry/exit forces profits to 0 in long run.
If existing firms in the industry are earning profits, new firms will enter.
Therefore, demand for each firm's product decreases = demand curves all shift leftwards = entry of firms continue until profits fall to 0.
89
How can a monopolistic competitive firm earn profits in long run?
-- Produce innovation/development
-Marketing, branding/advertising etc
90
Define 5 features of an oligopoly
1. Industries with a few competing firms
2. Each firm has enough market power to set price
3. Each firm must consider the strategy of its rivals (interdependence)
4. Price wars
5. Collusion (illegal to collude)
91
Define a duopoly
Just two firms in a market, competing.
92
What are some factors of why a few large firms dominate the market?
- Fixed costs
- E. of . scale
- E. of. scope
93
What are the features of a 2-firm oligiopoly strategy interdependence?
- Game theory
- Firms can choose to collude (act like a monopoly) on a price/product development
- Monopoly collusion increases profits (shared)
94
What happens if both firms might renege on collusion agreement to take profit from the other?
The profits fall for both firms
95
What market structures have strategic rivalry?
Monopolistic and oligiopoly market structures
96
Define strategic rivalry
Considering what competitors will do after you do something, and the overall effect on the total market share once the competitor acts etc.
97
In the long run, what incentive do firms have?
Incentive to avoid strategic rivalry to gain monopoly profit. By growing their market share, gaining monopoly power = i.e. through mergers, under-cutting of prices (setting price below ATC) etc = MONOPOLY STRATEGY
98
Why is oligiopolies important in modern economies?
As there are many industries in which the MES is too large to support many competing firms. = public policies therefore need to keep oligiopolies COMPETING, rather than COLLUDIING, in order to keep costs low and improve products etc.
99
List the 7 features of a monopoly
1. One seller - arises when there is no substitute for a good/service
2. Full barriers to entry/exit
3. Branding
4. Price discrimination
5. Firms have considerable control over price, so therefore demand curve of firm is more inelastic than the rest
6. Unique product
7. Very low competition.
100
What point acheives allocative effiency?
MC = AR
