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35 Cards in this Set
- Front
- Back
Price elasticity of demand
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Measures responsiveness of the quanitity demanded to a change in price. Ratio of percentage changes (always negative)
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Elastic Demand
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Change of more than 1% of quantity in response to 1% price change. Revenue goes down when price goes up.
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Unelastic Demand
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Change of less than 1% of quantity when price changes 1%. Change in same direction, ie. Prices rise and total revenue rises
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Unitary Elastic Demand
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Changes are direct, 1% change in price = 1% change in quantity. Revenue remains unchanged as price changes.
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Perfectly Elastic Demand
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Decline in quantity demand to ZERO as response to any price increase
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Perfectly Inelastic Demand
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No change in quantity demanded in response to price changes
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Determinants of Price Elasticity of Demand
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1. Availability of substitutes
2. Proportion budget spent 3. Time allowed for adjustment |
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Income Elasticity of Demand
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Measure of responsiveness of quantity demanded to change in income. Shown as %age change.
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Cross-elasticity of Demand
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Measure of responsiveness of qty demanded to change in related good/service. %age change in one good caused by 1% change in price of another good.
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Price Elasticity of Supply
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The ratio of %age change in quantity supplied to the %age change in price
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Tax Incidence
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Share of a tax paid by buyer and seller.
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Marginal Product
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Change in total output as result of 1 unit change in variable input (ie. labour)
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Law of Diminsihing Returns
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After a level of product in the short run, each additional unit imput will yield smaller outputs.
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Fixed Costs
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Costs that do not vary with the level of output (Insurance, rent...)
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Variable Costs
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Costs that vary with the level of output
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Total Cost
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Is the sum of total fixed cost & total variable cost
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Explicit Costs
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Payments to non-owners of a firm for their resources.
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Implicit Costs
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The opportuntiy costs of using resources owned by a firm.
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Economic Profit
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Equals total revenue - (explicit+implicit costs)
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Short run
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Time period during which a firm has at least one fixed input (ie. a factory)
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Long run
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Time period when all inputs are variable.
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Production function
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Relationship between inputs and outputs.
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Marginal cost
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Change in total cost associated with 1 additional unit at output
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Average Fixed Cost
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Total fixed cost / total output at each level of production
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Marginal average rule
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When marginal cost is less than average cost, the average cost falls. When marginal cost more it rises
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Marginal cost & marginal product are inversely related
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Increasing returns cause marginal cost to fall and diminishing returns cause it to rise
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Economies of Scale
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When costs decrease as output increases
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Diseconomies of Scale
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Long run cost curve increases as output increases
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Constant returns to Scale
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Long run Avg cost curve unchanged as output increases
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Market structure
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Three market characteristics;
1. Number of sellers 2. Nature of the product 3. Ease of entry/exit to market |
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Perfect competition
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Individual firm cannot affect the price if the product it produces. Very open industry with similar products
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Competition policy
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Increasing competition in industry. Regulate business behaviour.
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Price-taker in perfectly elastic market
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Can sell all it produces at market determined price, nothing above that price as there lots of competition.
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Total revenue-Total cost method
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Profit reaches maximum when vertical diff. between revenue & cost at maximum.
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Marginal revenue = marginal cost method
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Firm maximises profit by producing the outout where marginal revenue = marginal cost
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