Normal Goods
Commodities which demand is positively related to income by consumer...steak
Substitutes
Price increases in A results in an increase in demand for B, A and B are said to be substitutes
Compliments
If price increase in A results in a decrease in demand for B than A and b are compliments
Law of supply?
If all other factors are held constant (ceteris paribus), the price of a product and the quantity supplied are directly (positively) related; i.e., the higher the price, the greater the quantity supplied.
The determinants of supply are? (5)
a) Costs of inputs
b) Change in efficiency of the production process, e.g., newer technology
c) Expectations about price changes
d) Passage of time
e) Taxes and subsidies
Market Demand is?
Market demand is the sum of the individual demand curves of all buyers in the market. Market supply is the sum of the individual supply curves of all sellers in the market.
Market equilibrium
Market equilibrium is the combination of price and quantity at which the market demand and market supply curves intersect
relatively elastic
Greater than one, demand is in a relatively elastic range. A small change in price results in a large change in quantity demanded
unitary elasticity
a) Equal to one, demand has unitary elasticity (usually a very limited range). A single-unit change in price brings about a single-unit change in quantity demanded
relatively inelastic
Less than one, demand is in a relatively inelastic range. A large change in price results in a small change in quantity demanded.
Infinite, demand is perfectly elastic (depicted as a horizontal line)
cannot influence the market price. The demand curve faced by a single seller in such a market is perfectly elastic (although the demand curve for the market as a whole has the normal downward slope).
perfectly inelastic
Some consumers' need for a certain product is so high that they will pay whatever price the market sets. The number of these consumers is limited and the amount they desire is relatively fixed.
relatively elastic
a) Greater than one, supply is in a relatively elastic range. A small change in price results in a large change in quantity supplied.
unitary elasticity
Equal to one, supply has unitary elasticity (usually a very limited range). A single-unit change in price brings about a single-unit change in quantity supplied.
- relatively inelastic
a) Less than one, supply is in a relatively inelastic range. A large change in price results in a small change in quantity supplied.
- perfectly elastic
Infinite, supply is perfectly elastic (depicted as a horizontal line).
i) A perfectly elastic supply curve exists only in theory. The costs of inputs and fixed investments in property, plant, and equipment prevent a supplier from charging a single price f
perfectly inelastic
Equal to zero, supply is perfectly inelastic (depicted as a vertical line).
a seller cannot change the quantity supplied
-Explicit costs (accounting costs)
a. Explicit costs are those requiring actual cash disbursements. For this reason, they are sometimes called out-of-pocket or outlay costs.
Implicit costs
A. are those costs not recognized in a concern's formal accounting records.
B. Implicit costs are opportunity costs, i.e., the maximum benefit forgone by using
a scarce resource for a given purpose and not for the next-best alternative
- Accounting profits
Accounting profits are earned when the (book) income of an organization exceeds the (book) expenses.
Economic profits
Economic profits are a significantly higher hurdle. They are not earned until the organization's income exceeds not only costs as recorded in the accounting records, but the firm's implicit costs as well. Economic profit is also called pure profit.
Short- vs. Long-Run Costs
a. The short run is a time period so brief that a firm cannot vary its fixed costs.
b. The long run is a time period long enough that all inputs, including those incurred through fixed costs, can be varied.
-Marginal Analysis
A. Marginal analysis allows economic decisions to be made based on projecting the result of varying level of resource consumption and output production
- Total product
- Marginal product
- Average product
1) Total product is the entire production of a good or service for a given period of time.
2) Marginal product is the additional output obtained by adding one extra unit of input. It is computed by dividing the change in total output at a given level of i
-law of diminishing returns
Each additional unit of input leads to increased production, but the increase is smaller with each unit; the "bang for the buck" steadily diminishes. This is referred to as the point of diminishing marginal returns
- Marginal Revenue
Marginal revenue is the additional (also called incremental) revenue produced by generating one additional unit of output. Mathematically, it is the difference in total revenue at each level of output.
- Marginal Cost
Marginal cost is the additional (also called incremental) cost incurred by generating one additional unit of output. Mathematically, it is the difference in total cost at each level of output. Typically, unit cost decreases, Thus, while total cost increas
Economies of scale
Economies of scale, also called increasing returns to scale. Initially, as production increases, average costs of production tend to decline. Some of the reasons are
a) Increased specialization and division of labor
b) Better use and specialization of man
Constant returns to scale
With some plant sizes, an increase in the level of production results in no change in average costs.
- Diseconomies of scale
also called decreasing returns to scale. Eventually, as most firms continue to expand output, the marginal cost of production tends to increase.
a) The most frequent reason given for diseconomies of scale is the difficulty of managing a large-scale entity
PURE COMPETITION Defining characteristics (5)
a. A very large number of buyers and sellers act independently. Examples are the stock market and agricultural markets.
b. The product is homogeneous or standardized. Thus, the product of one firm is a perfect substitute for that of any other firm. The on
MONOPOLY defining characteristics
A. The industry consists of one firm.
b. The product has no close substitutes.
c. The firm can strongly influence price because it is the sole supplier of the product. Economists commonly use two terms to describe a monopolist's pricing behavior. Price Ma
-Price maker Monopoly characteristic
Draws attention to the monopolist's power to set price as high as it likes, unconstrained by competition.
Price searcher Monopoly characteristic
on the other hand, implies that the monopolistic firm will not simply set prices arbitrarily high but will seek the price that maximizes its profits
Natural Monopoly
natural monopoly exists when economic or technical conditions permit only one efficient supplier
-Notes on Monopoly Profit Maximization
The corresponding price is found with reference to the (downward-sloping) demand curve.
Note that monopoly does NOT result in the highest possible price, nor
does the monopolist produce at the lowest average total cost.
A key point is that, when the monop
- What are the economic consequences of Monopoly
A. Given sufficiently low costs and adequate demand, a monopolist earns an economic profit in the long run.
B. Because the firm is restricting the level of output to the profit-maximizing level, consumers have fewer goods and pay higher prices than under
MONOPOLISTIC COMPETITION Defining Characteristics? (4)
a. The industry has a large number of firms. The number is fewer than in pure competition, but it is great enough that firms cannot collude, i.e., they cannot act together to restrict output and fix the price.
b. Products are differentiated. In pure compe
Profit Maximization Under Monopolistic Competition
Maximization
a. To maximize profits (or minimize losses) in the short run or long run, a firm in monopolistic competition produces at the level of output at which MR = MC. Just as for a monopolist, the MR curve is negatively sloped and lies below the demand curve.
b.
MARKET STRUCTURES. Defining Characteristics (4)
a. The industry has few large firms. Firms operating in an oligopoly are mutually aware and mutually interdependent. Their decisions as to price, advertising, etc., are to a very large extent dependent on the actions of the other firms.
b. Products can be
kinked demand curve
The essence of the theory is that firms will follow along with a price decrease by a competitor but not a price increase.
b. To avoid the hazards of the kinked demand curve, price leadership is typically employed in oligopolistic industries.
Define Cartels
a. A cartel arises when a group of oligopolistic firms join together for price-fixing purposes. This practice is legal only in international markets.
b. A cartel is a collusive oligopoly. Its effects are similar to those of a monopoly. Each firm will rest
1. Nominal wages
2. real wages
1. Nominal wages are the amounts paid (and received
2. real wages represent the actual purchasing power (goods and services) of nominal wages.
In any competitive market, an equal increase in both demand and supply can be expected to
always
A. Increase both price and market-clearing quantity.
B. Decrease both price and market-clearing quantity.
C. Increase market-clearing quantity.
D. Increase pr
In a competitive market, equilibrium exists when demand is exactly
equal to supply. If both demand and supply increase in equal amounts, the market will still be
in equilibrium, but the new price may be higher, lower, or unchanged depending upon the
slope
If the coefficient of elasticity is zero, then the consumer demand for the product is said to be
When the coefficient of elasticity (percentage change in
demand/change in price) is less than one, demand is inelastic. When the coefficient is
zero, the demand is perfectly inelastic.
A perfectly inelastic supply curve in a competitive market
A. Implies a vertical demand curve.
B. Exists when firms cannot vary input usage.
C. Implies a horizontal market supply curve.
D. Can exist only in the long run.
The elasticity of supply is a measure of the responsiveness of a change
in the quantity supplied to a percentage change in the price of the commodity. A perfectly
inelastic supply curve has an elasticity of zero. This can occur only when the numerator of
Name 4 parts of business cycle in order:
in order
1. expansion phase
2. peak
3. contraction phase
4. trough
5. recovery phase
Expansion phase
an expansion is a period of rising economic activity. Rising level of national output GDP, and by a decline in unemployment rate. Firm profits are likely to be rising. bc the demand for goods and services increase, firms are likely to invest in more new p
contractionary phase.
What is gdp doing?
What are profits doing?
gdp is falling, unemployment rising
profits are falling from their highest level
Peak
What is gdp doing?
What are profits doing?
Any hindrances are advantages?
gdp is at its highest
firm profits are at highest
capacity constraints and input shortages leading to higher cots and higher overall price level
What are the characteristics of a Trough?
low point in economic activity
a. real gdp is at its lowest level and the unemployment rate tends to be at its highest
b. profits are at their lowest level
c. firms are likely experience significant excess in production capacity leading them to reduce the
What ways do price increases shift the supply curve?
1. an increase in input costs(wages or raw materials, shifts the supply curve left
2. a decrease in input costs shifts the supply curve right.
What way does the supply curve shift with an advancement in technology?
shifts the supply to the right
Explain M1 money supply
the amount of notes and coins in circulation plus demand deposits, checking accounts from which money can be withdrawn on demand. also referred to as narrow money
Explain M2 money supply
all of m1 plus savings deposits of 100k and below
Explain m3
inclues all of m2 items plus savings deposits over 100k
Net national product NNP
NNP = GNP-depreciation
National income =
NNP=NIP-indirect business taxes
Nominal GDP =
nominal gdp measures the value of all final goods and services in current prices
Under pure competition, strategic plans focus on:
a. Profitability from production levels that maximize profits.
b. Maintaining the market share and being responsive to market conditions related to sales price.
c. Maintaining the market share and planning
Choice "b" is correct. Under pure (or perfect) competition, strategic plans include maintaining the market
share and responsiveness of the sales price to market conditions.
Under oligopoly, strategic plans focus on:
a. Profitability from production levels that maximize profits.
b. Maintaining the market share and being responsive to market conditions related to sales price.
c. Maintaining the market share and planning for en
Choice "d" is correct. Under oligopoly, strategic plans focus on maintaining market share and call for the
proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price
changes or required changes in production volum