Term
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Definition
| Economics is the study of how individuals choose to use scarce resources that nature and previous generations have provided |
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Term
| Three fundamental concepts of economics? |
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Definition
| Opportunity cost, Marginalism , Efficient markets |
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Definition
| is a value not measured in dollars, it is the best alternative we forego, or give up, when making a decision |
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Definition
| or marginal cost, is the price of the last decision made, we consider marginal cost when weighing up the amount of added revenue minus the added cost of consuming (or producing) one extra unit of input (output) |
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Term
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Definition
| Are markets where profit oppurtunites are eliminated almost immediately, market supply and market demand are in equilibrium |
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Term
| Production Possibility Frontier |
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Definition
| Is a graph illustrating the attainable choices available to a frim or economy, assuming a given level of resources, and a given state of technology |
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Term
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Definition
| There are two types, capital goods and consumer goods |
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Definition
| Are goods produced for society and the public, e.g., food, travel, entertainment |
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Definition
| Are goods that produce other goods, e.g., buildings, machines, factories, robotics |
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Term
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Definition
| The quantity demanded is the quantity of a good that consumers are wiling to buy at a given price |
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Term
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Definition
| The law of demand states that there is an inverse relationship between price and quantity demanded, so, as price increases, quantity demanded decreases |
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Term
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Definition
| literally meaning "all other things held equal", is used to state that when we study one variable (price) we assume all other variables remain constant |
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Term
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Definition
| the demand curve is a downward sloping straight line, expressed as the function y= mx-c |
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Term
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Definition
| re written as P=C-MQ, where; P = price, C= y intercept, M=gradient, Q=quantity |
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Term
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Definition
| refers to the sum of all individual demands in a particular market the market demand curve slopes downwards because a lower price causes, each consumer to buy more, and new consumers to enter the market |
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Term
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Definition
Determinants = PTIPS
P = Price (of the good itself, is not a determinant of demand, only of the quantity demanded)
T = Tastes and fashion
I = Income
P = Price of related goods (complements and substitutes)
S = Size and nature of population |
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Term
| Shifts in the demand curve |
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Definition
are caused by changes in Tastes, Income, Price of related goods, and size and nature of population .
Price results in a shift along the demand curve, not a shift in the demand curve |
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Term
| Changes in income - Normal goods |
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Definition
Normal good = positively related to income
Demand increases when income increases
Demand decreases when income decreases
e.g., cars, spirits, holidays |
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Term
| Changes in income - inferior good |
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Definition
inferior good = inversely related to income
demand decreases when income increases
demand increases when income decreases
e.g., public transport, beer |
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Term
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Definition
to the left = demand decreases
to the right = demand increases |
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Term
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Definition
Two goods are substitutes if the price of one is positively related to the demand for the other
An increase in the price of one good increases demand for the other
A decrease in the price of one good decreases demand for the other
e.g., butter and maragarine |
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Term
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Definition
Two goods are complements if the price of one good is inversely related to the demand for the other
An increase in the price of one good decreases the demand for the other
A Decrese in the price of one good increases demand for the other
e.g., DVD players, DVD's |
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Term
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Definition
| The quantity supplied is the amount of a good that sellers are willing and able to sell at every price |
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Term
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Definition
| The law of supply states that there is a positive relationship between price and quantity supplied, so, as price increases, quantity supplied increases |
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Term
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Definition
| the supply curve is an upward sloping line relating price to quantity supplied, it is expressed as the function y=MX+C |
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Term
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Definition
| we rewrite y=mx+c, into P=C+MQ, where; P = price, C = y intercept, M = Gradient, and Q = Quantity supplied |
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Term
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Definition
| is the sum of all individual suppliers supply curves for a particular good or service |
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Term
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Definition
Determinants = PCENT
P = Price of the good itself (not a change in the supply curve, only a change of the quantity supplied)
C = cost of production
E = environment
N = Number of suppliers
T = Technology |
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Term
| Shifts in the supply curve |
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Definition
are caused by changes in CENT
Cost of production
Environment (for agricultural markets)
Number of suppliers
Technology |
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Term
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Definition
| The price and quantity where which the demand and supply curves intersect on a graph |
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Term
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Definition
for various reasons, equilibrium does not occur, usually,
shortages of goods = excess demand, surplus of goods = excess supply |
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Term
| Price elasticity of demand equation |
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Definition
PED= % change of quantity demanded/% change of price
or
PED = (P1/Q1) x (1/gradient of demand curve) |
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Term
| The larger the price elasticity |
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Definition
| the more sensitive the change in quantity demanded to price is |
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Term
| If elasticity curve is vertical |
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Definition
| then demand is perfectly inelastic, price elasticity = 0 |
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Term
| if elasticity curve is horizontal |
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Definition
| then the demand is perfectly elastic, and price elasticity = infinity |
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Term
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Definition
| this is the midpoint of the demand curve |
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Term
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Definition
1) this is an essential good, with no satisfactory substitutes available
2) this is sellers market
3) a price increase will result in relatively less decrease in demand
4) a price increase causes total revenue to increase, a price decrease causes revenue to decrease |
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Term
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Definition
1) this is a non essential good, with many satisfactory substitutes
2) this is a buyers market
3)a price increase will result in a relatively large demand decrease
4) a price increase will cause total revenue to decrease
5) a price decrease will cause total revenue to incease |
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Term
| Determinants of price elasticity of demand |
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Definition
PFANTA
P = price at which elasticity is evaluated
F- fraction of income
A = availability of substitutes
N = nature if the good (luxury/necessity)
T = time
A = attitutude/ advertising |
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Term
| Price elasticity of supply |
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Definition
| this indicates how responisive quantity supplied us to price changes, this depends on, time period, whether it is fixed in quantity, and price at whuch elasticity is evaluated |
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Term
| elasticity of supply equation |
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Definition
| PES = (P/Q) x (1/Gradient of supply curve) |
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Term
| Cross price elasticity of supply |
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Definition
| is the response of quantity demanded of one product, in relation to a price change of another product (complements and substitutes) |
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Term
| Cross price elasticity equation |
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Definition
| XPED = % change in quantity demanded of good x/ % change of good y |
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Term
| Positive cross price elasticity |
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Definition
| if a rise in the price of (meat) good y, results in a rise in quantity demanded of (fish) good x, then the cross price elasticity is positive, this positive cross price elasticity shows that the two goods are substitutes |
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Term
| negative cross price elasticity |
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Definition
| if a rise in the price of (DVD players) good y, results in a decrease of the quantity demanded of (DVD'S) good x, then the cross price elasticity is negative, this negative cross price elasticity shows the two goods are complement |
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Term
| Income elasticity of demand |
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Definition
| is the responsiveness of demand for a good in relation to changes in income |
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Term
| income elasticity of demand equation |
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Definition
| IED= % change in quantity demanded/% change in income |
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Term
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Definition
an increase in income = an increase in quantity demanded
= positive income elasticity
= rightward shift in the demand curve |
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Term
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Definition
an increase in income = a decrease in the quantity demanded
= a negative income elasticity
= a leftward shift in the demand curve |
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Term
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Definition
| the difference between the price you were willing to pay, and the price you actually pay |
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Term
| consumer surplus is found by |
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Definition
| calculating the area of the triangle above the equilibrium price, and below the demand curve |
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Term
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Definition
| the price a supplier is wanting to sell his products at, and the price he actualy gets for them |
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Term
| producer surplus is found by |
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Definition
| calculating the area of the triangle, below the equilibrium price, and above the supply curve |
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Term
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Definition
| is a maximum price, below the equilibrium price set by the market, at the lower price, suppliers supply less, and consumers demand more, resulting in a shortage |
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Term
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Definition
| are a minimum price above the equilibrium price set by the market, at the higher price, suppliers supply more, and consumers demand less, resulting in a surplus |
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Term
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Definition
| deadweight loss, is the loss to society casued by an implementation of a sales tax which oncreases the price of a certain product, shifting the demand curve, and squeezing certin buyers and sellers out of the market |
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Term
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Definition
1) demand is highly elastic
2) a shift in the supply curve will have a large effect on quantity, and a small effect on price
3) immpct depends on elasticity at beggingin equilibrium
4) if demand is highly elastic, producer pays most of implemented tax |
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Term
| tax and high inelasticity |
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Definition
1) demand is highly inelastic
2) a shift in the supply curve will have a large effect on price, and a small effect on quanity demanded
3) consumer pays most of implememnted tax |
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Term
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Definition
| a straight negatyive line drawn between two oppurtinity sets, the maximum amount a person can buy of two given goods |
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Term
| the budget constraint and changes in income |
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Definition
| an increase or decrease in income will change the length of the budget constraint, a change in the price of one good will swivel the budget constraint accordingly |
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Term
| Marginal rate of substitution |
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Definition
| is the principle that the more of one good a person has, the more they are willing to give up to obtain one more unit of the other good |
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Term
| Marginal rate of substitution equation |
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Definition
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Term
| why do prices increase or decrease? |
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Definition
| either the income effect or substitution effect |
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Term
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Definition
| is the change in quantity demanded due to the fact that the price change has changed the amount of both goods that can be purchased (price increases, are the same as income being reduced by the % change of the price) |
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Term
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Definition
| is the change in quantity demanded due to the change in the relative price of the good, consumers substitute towards cheaper goods, and the away from expensive goods |
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Term
| Substitution effect, graphically |
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Definition
| simply get a ruler, and shift the new budget constraint out towards the new indifference curve, tangential point of utility should be higher than old point |
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Term
| income effect, graphically |
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Definition
| income effect is the difference between the amount consumed, at the new tangential point on the old indifference curve (found by substitution effect) and the amount consumed at the tangential point on the new indifference curve and budget constraint |
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Term
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Definition
| are the only thing a business can control, if it wants to increase profit, it needs to decrease costs |
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Term
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Definition
| the relationship between inputs and outputs |
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Term
| marginal product of an input |
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Definition
| is the increase in output due to an increase of one input (where all other inputs are held constant) |
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Term
| Principle of diminishing marginal returns to an input |
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Definition
| is the idea that the more of one input added (e.g., labour), the marginal product of the added input diminishes (the less productivity you get) |
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Term
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Definition
the long is the shortest time it takes for all inputs to become variable
firms plan for the long run |
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Term
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Definition
is the time period in which at least one input is fixed
firms operate in the short run |
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Term
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Definition
TC = FC + VCx
(total cost = fixed costs + variable costs at a given quantity) |
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Term
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Definition
MC = (delta)TC/(delta)Q
(marginal cost = change in total costs, divided by, change in quantity) |
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Term
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Definition
AC= TC (at Q)/Q
(average cost = total cost (at a given quantity)/quantity) |
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Term
| average varialble cost equation |
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Definition
AVC(at Q) = TVC (at Q)/Q
(average variable cost, at a given quantity, is equal to total variable cost/quantity) |
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Term
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Definition
| breakeven, just covers costs (accounting profit) |
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Term
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Definition
| covers costs and then some (P>MC), economic profit |
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Term
| Characteristics for competitive markets |
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Definition
1) large number of buyers and sellers
2)seller is a passive price taker
3) homogeneous (identical) product
4) free entry and exit (no barriers)
5) perfect information for both buyers and sellers |
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Term
| Perfect competition and demand |
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Definition
| in perfect competition, demand is perfectly elastic |
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Term
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Definition
the difference between total revenue and total costs
(P = R-C) |
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Term
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Definition
| a situation when a firm earns exactly zero economic profit (or normal profit) |
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Term
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Definition
| the extra revenue a producer gets when he produces and sells an extra unit of output |
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Term
| in perfect competition price is |
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Definition
| equal to MC (marginal cost) |
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Term
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Definition
P=MC
(profit = marginal cost) |
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Term
| If price = MinimumAVC then, TR... |
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Definition
| =TC, firms breakeven and earn zero economic profit |
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Term
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Definition
| when selling price falls below the average cost of production, you cannot cover variable costs at this market price |
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Term
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Definition
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Term
| If an industry is experiencing supernormal profits... |
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Definition
| then P>MC, firms will continue to enter, driving the supply curve to the right, until all firms make zero economic profit, and P=MC |
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Term
| If an industry is experiencing a loss |
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Definition
| then P>AC, firms will exit, driving the supply curve to the left, until all firms earn zero economic profit, and P=MC |
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Term
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Definition
1) workers have a fixed time to work (24 hours)
2) we assume they can work the full 24 hours if they want
3) they use money to consume goods and services
4) the hours they don't work, they consume as leisure |
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Term
| the indifference curve for labour |
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Definition
| shares the same similarities as the budget constraint ones (downward sloping, diminishing marginal rate of substitution, etc.) |
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Term
| a decrease in the wage rate |
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Definition
| results in a decrease of hours worked, opportunity cost of leisure falls, so people desire more leisure, as wage rate is not attractive, this is the substitution effect dominating |
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Term
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Definition
| also results in a decrease in hours worked, although the opportunity cost of leisure has increased, and people demand more work, an increase in income results in an increase in the demand for normal goods (leisure), and hours work still decreases, this is the income effect dominating |
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Term
| Supply curve of labour (shape) |
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Definition
| the supply curve of labour may be backward bending, the hours worked will increase as wage increases (following normal substitution effect patterns), but the supply curve will bend backwards, and hours worked will decrease, at a higher wage rate, where the income effect dominates |
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Term
| characteristics of a monopoly |
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Definition
1) one seller
2) one product
3) large barriers to entry
4) they are price makers
5) there is deadweight loss occurring
6) because p>MC |
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Term
| Characteristics of oligopoly |
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Definition
1) a few large firms
2) same product, but different defining features
3) large barriers to entry
4) they set the price
5) Deadweight loss occurs
6) because P>MC |
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Term
| Characteristics of monopolistic competition |
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Definition
1) many sellers (50-100)
2) differentiated products
3) no/weak barriers to entry
4) they make prices
5) deadweight loss occurs
6) because P>MC |
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Term
| Barriers to entry in monopolies |
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Definition
1) government franchise or other government directive (e.g., utilities)
2) Patents, or barriers that grant exclusive use if product to inventor
3) economies of scale (existing monopoly has large cost and technological advantages)
4) ownership of a particular resource, e.g., DeBeers diamonds in south africa |
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Term
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Definition
| is equal to zero, because MR is the slope of TR |
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Term
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Definition
| is equal to 16-4Q, ewe simply double the gradient |
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Term
| If TR is max, and MR equals zero, the elasticity.;.. |
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Definition
| is equal to one, as it is the midpoint of the graph |
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Term
| For Price discrimination to occur... |
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Definition
1) Different markets must exist
2) the firm can identify the types
3) firms can prevent arbitrage (resale) |
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Term
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Definition
| are firms who "work together" to achieve almost monopolistic like prices |
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Term
| In oligopoly, price wars are... |
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Definition
| not common, and so compete on other grounds, such as product (real) differentiation, and imagined (advertising, brand loyalty, sponsorship) differentiation |
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Term
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Definition
| are formed by oligopolies who agree to work together, to set a high price (P>MC) |
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Term
| Imperfect competition (monopolies, oligopolies, monopolistic competition), can be inefficient because... |
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Definition
1) P>MC
2) this results in underproduction (from societies view)
3) consumer welfare is reduced
4) lack of competition results in lack of incentive to innovate (R&D) |
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Term
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Definition
| is an industry so large that it recognises massive economies of scale, that single firm production is the most efficient way to produce this product |
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Term
| Collusion (same as cartel) |
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Definition
| working together to set the most favourable price (remember this is illegal) |
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Term
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Definition
| is where firms coordinate their actions without actually talking to each other, usually through price leadership (e.g., BP raises prices, all other petrol stations will) |
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| Restrictive practices (to competition) |
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Definition
1) exclusive territories
2) exclusive dealing
3) tie ins
4) Resale price maintenance |
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Term
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Definition
| producer (coca cola) gives a wholesaler or retailer exclusive right to sell in a region, stores in area can only buy from that wholesaler, restricts competition amongst wholesalers |
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Definition
| producer insists any firm selling its product not deal with its rivals (e.g., shell only sells shell petrol) |
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Definition
| one product being pushed to be bought with another product from the same company (e.g., Xerox printers and Xerox paper, or Nintendo and Nintendo games) |
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Definition
| producer insists retailers must sell their product at "list" price, reduces competition amongst retailers |
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Term
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Definition
1) informative, acceptable, when giving consumer information they do not have
2) promotional, not good, waste of money and resources |
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Term
| Pros of product differentiation |
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Definition
1) advocates of free and open competitive markets believe that product differentiation and advertising give the market system its vitality and power
2) product differentiation ensures high quality and efficient production
3) advertising provides consumers with relevant information |
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Term
| cons of product differentiation |
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Definition
1) critics argue that advertising amounts to nothing and is a waste of money and resources
2) enormous sums are spent creating meaningless, minute differences amongst products
3) advertising raises costs of products and is merely an annoyance
4) advertising serves as a massive barrier to entry to other smaller firms looking to enter the market |
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