Week 1, 2, 3, 4, 5 Lectures Flashcards
(76 cards)
1
Q
What does elasticity measure in economics
A
Elasticity measures how responsive one variable is to changes in another. For example how the demand changes in response to price
2
Q
What is the general formula for elasticity
A
Elasticity = %change in Q/ %change in P
3
Q
What is price elaticity of demand PED
A
PED measures the responsiveness of quantity demanded to price changes.
4
Q
What is the PED formula
A
PED = %Change in Q/ %Change in Price
= change in Q/change in P * P/Q
5
Q
What do PED values represent
A
If PED > 1 = Elastic
If PED < 1 = Inelastic
If PED = 1 = Unit elastic
6
Q
What characterises elastic demand
A
When quantity demanded changes more than price change - for example cofee
7
Q
Is demand inelastic or elastic when the buyer is insensitive to price
A
demand is inelastic
8
Q
What does unit elastic mean
A
when quantity demanded changes proportionally to price change for example phones - considered necessary products and will see a proportionate change in demand and supply due to price change
9
Q
How does substitutability affect PED
A
The more substitutes a product has the higher elasticity it is likely to have
10
Q
Why does PED differ for necessities vs luxuries - between the both which has higher elasticity
A
Luxuries generally have higher elasticity than necessities e.g - petrol vs foreign travel
11
Q
How is total revenue (TR) calculated
A
TR = Price x Quantity
12
Q
What happens to TR if demand is elastic and price decreases
A
TR increases
13
Q
What happens to TR revenue if demand is inelastic and price decreases
A
TR decreases
14
Q
What does cross price elasticity of demand (XED) measure
A
it measures demand responsiveness of one good to price change in another
15
Q
What is the formula for XED
A
XED = %change in Q of good X/ %change in price of good Y
16
Q
What do positve and negative XED values indicate
A
+ve XED = Substitues
-ve XED = Complements
17
Q
If XED = 0 then
A
the goods are unrelated
18
Q
What does the PES (price elasticity of supply) measure
A
It measures the responsiveness of quantity supplied to price changes
19
Q
PES formula
A
PES = %change in Q supplied/ %change in Price
20
Q
What factors influence PES
A
production flexibility and time, PES tends to be more elastic in the long run
21
Q
List 3 determinants of PED
A
Tastes and preferences
Availability of sub products
Time
22
Q
what is tax incidence
A
how a tax incidence is divided between buyers and sellers or producers and consumers
23
Q
How does elasticity affect tax incidence
A
Taxes fall more heavily on the side that is less elastic
24
Q
Who bears more tax burden if demand is inelastic
A
Consumers bear more tax
25
Who bears more tax burden if demand is elastic
producers bear more tax
26
where can you find the point of price without tax
Equilibrium
27
Describe graphically where consumer and producer tax incidence fall - respectively
consumer tax incidence is under the demand curve and above the equilibrium price point
producer tax incidence is above the supply curve and below the equilibrium price point
28
Describe graphically and state the PED values of which demand is perfectly elastic and perfectly inelastic
when demand is perfectly inelastic you get a vertical line and PED = 0
when demand is perfectly elastic you get a horizontal line and PED = -infinity
29
If demand is unit elastic what happens when price increases and decreases
TR is unchanged
Qd changes proportionally
30
What is income elasticity of demand
responsiveness of demand in relation to changes in income
31
How is IED or YED important to firm production decision making
if a product has high IED sales will expand as national income rises and the inverse if the economy slows
32
List the IEDs for normal, inferior, luxury and necessities
normal goods have a +ve IED
inferior goods have a -ve IED
luxury goods have a IED > 1
Necessities have an IED < 1
33
What is the IED equation
IED = %change in quantity demanded/ %change in income
34
What do high and low PES indicate
high PES - producers can easily increase supply
Low PES supply is less responsive due to production constraints e.g agricultural goods
35
give 4 brief applications of : PED, PES, IED, XED
PED - helps businesses set prices to maximise revenue and predict tax impacts on demand
XED - helps business determine product placement and promotions, e.g how competitors pricing affect their sales
YED - guide companies in product development and marketing. e.g luxury brands targeting consumers with rising incomes
PES - predicts producer behaviour in response to shifts in demand e.g sudden demand increase can increase prices if PES is low and producers can't scale up production
36
What is a firms primary objective, how is it calculated
profit maximisation, Profit = TR - TC
37
How do demand and input prices influence a firm's costs and revenue
Revenue is reliant on demand, affected by price and competition
Costs are dependant on productivity and input prices such as labour and materials
38
What is the principle agent problem in firms, how can it affect profit maximisation
The principle agent problem occurs when shareholder (principle) cannot effectively control managers (agent) potentially leading to decisions that do not maximise profit due to misaligned incentives
39
How might giving managers company shares help mitigate the principle agent problem -does this have potential draw backs
Giving managers shares aligns their incentives with shareholders. on the other hand it may lead to managers only prioritising short term stock performance over long term firm health
40
What is the decision rule for firms seeking to maximise profit
a profit-maximising firm produces until MR = MC as any additional production beyond this point will not increase profit
41
Why does marginal revenue typically decrease as a firm sells more units
MR decreases because selling additional units requires lowering price, this reduces revenue from existing units due to the downward sloping nature of the demand curve
42
What distinguishes revenue maximisation from profit maximisation
revenue maximisation occurs when MR is 0. focusing only on sales revenue while profit maximisation considers both revenue and cost stopping where MR = MC
43
What is a production function and what are examples of factors of production
A production function shows how input quantities produce output. Inputs include labour, capital, natural resources and entrepreneurship
44
How do the short and long run differ in terms of input flexibility
In the short run at least one input e.g capital is fixed whereas in the long run all inputs are variable allowing firms to adjust production capacity fully
45
Define total product, average product and marginal product in production
TP - total product is total output
AP - average product is output per unit of input
MP - marginal product is the additional output from one more unit of a variable input
46
What is diminishing marginal product, why does it occur
Diminishing marginal product occurs when increasing one input without increasing others decreases output. for example capital leads to lower additional output, this presides the subsequent effect of increasing marginal costs. e.g ball lecture example, more people around means they get in each others way subsequently decreasing output
47
Describe constant, increasing and decreasing returns to scale
constant RTS - constant returns to scale mean output doubles with doubled inputs. Increasing RTS means more output than doubles, decreasing RTS means output less than doubles with doubled input
48
How does a production function relate to a cost function
The production function translates input quantities into output, determining the cost function when input prices are fixed. Production efficiency directly influences cost
49
What are total cost, marginal cost and average cost in cost-analysis
Total TC, is the min cost to produce a specific output. Marginal cost MC is the cost of one additional unit. AC average cost is the per unit cost (TC/Q)
50
Why is the long run average cost (LAC) curve u-shaped
LAC curve is U-shaped due to economies of scale which reduces cost as output increase and diseconomies of scale which increases cost as output continues to rise
51
What causes economies of scale in production
Economies of scale arise form efficiencies such as spreading fixed costs over more output, improved labour specialisation and effective division of labour
52
What leads to diseconomies of scale and how does it affect long run costs.
Diseconomies of scale, caused by factors like decrease RTS, managerial inefficiencies and resource limitations, increase long-run costs as output expands
53
What is the income effect
When the price of a good rises, a consumer’s purchasing power decreases because their nominal income buys less than before. This decrease in purchasing power, known as the income effect, may lead to buying less of the good if it feels more expensive relative to their budget.
54
What is the substitution effect
When the price of a good rises, it becomes more expensive relative to other goods. As a result, consumers are incentivised to buy less of the now more expensive good and switch to cheaper alternatives. This response is called the substitution effect, and it always reduces the quantity demanded of the good when its price increases
55
What is a giffen good
A Giffen good is a rare type of inferior good where an increase in its price leads to an increase in its quantity demanded. This happens because the income effect—caused by the consumer's reduced real purchasing power—results in greater consumption of the good, and this effect is stronger than the typical negative substitution effect, which would usually lead to less consumption as the good becomes more expensive.
56
For the demand curve to shift what must happen at every price level
- give examples of things things that cause said change
Demand must shift at every level along the demand curve
This can be caused by changes -
income
tastes and trends
expectations
sub and related goods
57
For the supply curve to shift what must happen at every level
- List potential reasons for this change
Supply must shift at every level for it to shift
Potential reasons -
Tech innovation
production prices
expectations
competitors
sub and complementary goods
58
Briefly list the process of determining the total, substitution and income effect
mark point A the intersection with the original budget line
plot the change in the budget line and plot a new indifference curve, intersection labelled as B
then plot a hypothetical budget line by moving to the original utility curve and label the point C
from here
A to B is the total effect
A to C is the substitution effect
C to B is the income effect
Total effect = sub + income effect
59
3 rational assumptions to make about preferences
transitive - if a>b, b>c then a>c
complete - a>b or b>a or indifferent
more > less
60
Utility function
the amount of satisfaction gained from an amount or combination of good/goods combined
61
the slope of an indifference curve is the
Marginal rate of substitution
62
describe two extreme indifference cases and then describe general indifference curve graphological features
- perfect substitutes are straight lines
- perfect complements are a right angle
- on a graph the higher an indifference curve is the more utility is gained
63
what does the term marginal generally imply
the effect when the input of a variable is increased by one. for example marginal utility refers to utility gained when increasing the consumption of one good
64
how is marginal utility calculated
change in utility/change in units consumed
65
the optimal consumption point considering budget
mu1/mu2 = p1/p2 = MRS
this point is where the budget line is tangent to the indifference curve
66
what do consumers and firms respectively maximise
consumers maximise utility in opposition to firms who maximise profit
67
what are positive and normative economics
normative economics refers to an ethical, - right thing to do -, approach. made of subjective value judgement
positive however is concerned with what is, why does society make the decisions it makes, what are these based on.
68
3 types of economic data
time series - variables against time
cross section - different variables against each other
panel data - variables in different groups and over time
69
What are the short and long run decisions using the profit maximising LAC graph
produce if P > AVC(average variable cost) shut down otherwise
produce if P > LAC(long run average cost) exit market otherwise
70
key characteristics of a perfectly competitive market
-high volume of buyers and sellers
-identical goods, homogeneous products
-free market exit and entry
-transparency and perfect info
-firms do not strategically interact
-firms have minimal price setting power
71
profit maximisation for firms in perfectly competitive markets is
mr=mc
72
differentiate between firm demand and market demand in perfectly competitive markets
firm demand is perfectly elastic (a straight line)
market demand is less elastic (a downwards sloping line)
73
how is market price determined in perfect competition
the sum of aggregate supply and aggregate demand
(sum of individual demands)
(sum of individual supplies)
74
how does firm behaviour in the short run change when demand increases (in a competitive market)
firms expand production along their smc (short run marginal cost curves) leading to higher prices and quantities
75
how do markets in the long run adjust after an increase in demand
new firms exploit super-normal profits expanding supply and driving prices back to the equilibrium where profits normalise
76
