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59 Cards in this Set

  • Front
  • Back

What is economics?

The necessity to chose how to allocate scare resources to fit unlimited needs

What are the types of economies

Traditional, command, free-market, mixed

What role to governments play in modern mixed economies

Private property, freedom of contract and redistribution of income

PeD formula

% change in Qd / % change in price

When is demand inelastic

E<1

When is demand elastic

E>1

Where is demand most elastic

Long run

How does total expenditure correlate with PeD

If e<1 te is + related with p. If e>1 te is - related with p. If e=1 te is constant

PeS formula

% change in Qs / % change in price

Where is supply more elastic

Long run, because it takes time for producers to adjust output in response to price changes

How to determine who takes the burden of excise tax

Relative elasticities

What is income elasticity of demand?

How quantity demanded changes when income changes

Income elasticity of demand formula

% change in Qd / % change in income

What is normal goods income elasticity

Positive

What is inferior goods income elasticity

Negative

What is cross elasticity of demand

Demand for one product as price of another product changes

Cross elasticity of demand formula

% change in Qd of good x / % change in price of good y

What does cross elasticity of demand define

Substitutes (when +) and complements (when -)

What are government price controls

Attempt to hold price at disequilibrium

Price floor

Above Pe, leads to excess supply

Price ceiling

Below Pe. Leads to excess demand and black marketeers

Rent controls

Price ceilings that lead to shortage of rentals and allocation by sellers preference. Shortage is worsened over time

When is market surplus maximized

At equilibrium (it is efficient)

Government intervention often leads to

Reduction in total economic surplus

Why are demand curves negatively sloped

To restore the ratio of marginal utility to price

Substitution effect of price changes

Increase in purchases of product with new lower price

Income effect of price changes

Decrease in price leads to increase of real income thus increase in purchase of normal goods

Consumer surplus

Consumer values good higher than price

Paradox of value

Utility vs command price (diamonds v water)

Types of firms

Single proprietorship, ordinary partnership, limited partnership, corporations

How do firms finance themselves

Selling shares, using retained earnings, borrowing from lenders

Accounting profit

Revenue - explicit costs (labour, capital, intermediate inputs, depreciation)

A firms profits

Total revenue - total costs

What is a firms goal

Maximize profit

Economic profit

Revenue - total costs, explicit and implicit (opportunity cost)

What attracts resources to an industry

Positive economic profits

What detracts resources from an industry

Negative economic profits

Law of diminishing returns in short run

Mc and ac eventually rise as outputs rise

Why are SRAC u shaped

Average product increases at low levels of output but eventually declines sufficiently to offset advantages of spreading overhead

Mc and mp is sr

Mc is downward when mp is raising and vice versa

Where is a plants capacity

Output that corresponds to the minimum point of a SRATC

Cost minimization formula for long run

(MPk/MPl) = (Pk/Pl)

LRAC and SRATC relation

Each SRATC reps capacity at a specific plant size (optimal output)

Effect of technological improvements

Downward shift of LRAC curve, they are endogenous responses.

Types of technological change

New production techniques, improved inputs and new products

Theory of perfect competition

1. All firms produce homogeneous product


2. Consumers know nature of product and it’s price


3. Each firms min efficient scale is at a level relatively small to industry’s total output


4. Industry displays freedom of entry and exit

Demand and price in perfect competition

Price takers with horizontal demand curve for each firm, downward for the industry

Level of output in perfect competition

If profit maximizing, P >= AVC


MC = MR


MR = P


MC = market price

Perfect competition in the short run

Supply curve = MC curve above the min average variable cost



Each firm is maximizing profits but may be making losses or breaking even

Perfect competition in the long run

Profits and losses lead to entry and exit


Pushes to long run zero profit equilibrium and moved production to min AVC


Older plants are discarded and replaced when P is below AVC


Long run response of declining industry is to continue to satisfy demand by employing existing plants until P>SRAVC

What is monopoly

Entire industry supplied by one firm

Monopolists market demand curve

Market demand curve is a monopolists average revenue curve which lies below its demand curve

When is a monopolist maximizing profits

MR = MC

Where does a monopolist produce to

P > MC

What is the inefficiency of a monopoly

By restricting output below competitive level they impose a DWSL

Monopolists profits in the short run

+,-,0

Monopolies in the long run

There must be effective barriers to entry, it is very difficult to maintain these in the very long run

Cartel

A group of firms agreeing to restrict joint output to the monopoly level. Total profits at this level exceed those in a competitive equilibrium. They are unstable due to strong incentive to cheat

Price discrimination

A firm that discriminates between different market segments will equate MC and ME in each market. The market with less elastic demand will have the higher price. If price discrimination leads the firm to increase outputs, market efficiency is improved.