Test 3 Economics – Flashcards
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the desire to own something and the ability to pay for it
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What is demand?
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the amount of goods and services that a consumer is willing and able to buy
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What is quantity demanded?
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consumers buy more of a good when its prices decreases and less when its price increases
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what is the law of demand?
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price
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What is the main variable affecting demand?
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provides producers with information/data about a market and what people will buy
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What does consumer demand do/tell?
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the change in consumption resulting from a change in real income (an increase or decrease in a consumer's real income, purchasing power, is caused by a change in price)
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What is the law of demand income effect?
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when consumers react to an increase in a good's price by consuming less of that good and more of a similar, lower priced good - exception: not everything has a substitution (milk, eggs, gas)
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What is the law of demand substitution?
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as more units of a product are consumed, the satisfaction received from consuming each additional unit declines - explains why demand for a product is not limitless (oreos)
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What is diminishing marginal utility (law of demand)?
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demand that is not very sensitive to a change in price; exists when a change in price has little impact on the quantity demanded
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What inelastic demand?
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1. a necessity 2. have few/ no substitutes 3. small portion of consumer's income examples: gas, salt, soap
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What are the characteristics of an inelastic demand? and give examples
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demand that is very sensitive to a change in price: exists when a small change in a good's price causes major change in quantity demanded
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What is an elastic demand?
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1. not a necessity 2. have substitues 3. large portion of income examples: pizza, luxury cars
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what are the characteristics and examples of an elastic demand?
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% change in quantity demand/ % change in price
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What is the formula for calculating elasticity (demand)
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1. availability of substitutes 2. relative importance 3. necessities vs luxuries 4. change over time
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What are the factors affecting elasticity (demand)
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- lack of substitutes= inelastic -a lot of substitutes= elastic
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Explain why availability of substitutes is a factor in affecting elasticity (demand)
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- large portion of income spent on good= elastic -small portion of income on good= inelastic
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Explain why relative importance is a factor affecting elasticity (demand)
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necessity= inelastic luxury- elastic
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explain why necessities vs luxuries is a factor affecting elasticity (demand)
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- when price changes, demand is inelastic in short term - demand becomes elastic overtime as people find substitutes that allow adjustments to what they buy ex: gasoline, inelastic short term, more elastic long term
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explain why change over time is a factor affecting elasticity
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factors other than price cause demand to change - result: entire demand curve shifts, meaning that at every price consumers buy a different quantity than before
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What are changes in demand?
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right- increase in demand left- decrease in demand
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What do shifts to the right and left mean in a demand curve'?
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1. income 2. consumer expectations 3. market size 4. consumers tastes and preferences 5. prices of related goods
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What are factors/ determinants of demand?
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income increases= shift to the right income decreases= shift to the left more income, more quantity demanded
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Explain the income factor as a determinant of demand
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buyers impression of future prices and their future income influences shifts
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Explain consumer expectations as a determinant of demand
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as markets expand, the # of consumers increases, as does demand - reasons: population, advertising, government policy, technology
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explain market size as a determinant of demand
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fads and fashions change; if consumers prefer good and services, quantity demand increases
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explain consumers tastes and preferences as a determinant of demand
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demand curve for one good can be affected by a change in demand for another good - substitute goods ---> butter $ rises, demand for margarine increase -complementary goods ----> paint $ rises, demand for brushes decreases
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explain prices of related goods as a determinant of demand
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suppliers will offer more of a good at a higher price - relationship is direct - price rises, supply rises - price decreases, supply decreases
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What is the law of supply?
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exists when a change in a good's price has little impact on the quantity supplied
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What is inelastic supply?
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-time -$ - hard to find resources example: beach front lots, space shuttles, fine art
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product features of an inelastic supply and examples
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exists when there is a small change in price which causes a major change in the quantity supplied
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What is elastic supply?
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- can be made quickly, inexpensively, and using readily available resources example: tshirts, baseball caps, posters
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product features and examples of an elastic supply
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in the short run, a firm cannot easily change its output level, so supply is inelastic (orange groves) - in long run firms are more flexible, supply is elastic
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Whats the relationship between elasticity and time in supply?
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- none price factors can shift the supply curve
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How can there be changes/ shifts in supply curve?
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right= supply increases left= supply decreases
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right and left shift of a supply curve mean what?
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1. input costs/ costs of resources 2. government action/tools 3. number of supplies 4. producer expectations of prices 5. prices of related goods
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What are the determinants of supply?
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- cost of anything used in production affects supply - TECHnology= make mrs efficient, may be expensive at first but increase in efficiency will outweigh initial costs - research and development, education, is expensive but necessary - resource cost falls, production cost falls, supply rises, profit rises
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explain the input costs/ costs of resources as a determinant of supply
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- regulations (shift left) - example: pollution control adds to cost of production, lowering supply - Taxes (shift left)- reduction of supply, unfair to all, regressive bc poor are strongly affect and a large percent of their income is taxed -----> sin taxes- discoruage sale of harmful products -----> luxury taxes/ non essential goods -----> burden of taxes falls on those who will benefit - subsidies(shift right)= government payments that support a business or market- lowers cost of production and raise supply and profit
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explain government actions/ tools as a determinant of supply
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more suppliers= right less suppliers= left more competition= more supply
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explain number of suppliers as a determinant of supply
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- make current production decisions based on future income
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explain producer expectation of prices as a determinant of supply
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changes in price of product can affect related goods example: wheat $ decreases so production of corn increases and so does price of corn
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explain prices of related goods as a determinant of supply
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all of the product a company makes in a given period of time with a given amount of input
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What is total (product) output?
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the amount of a good or service produced per unit of input
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In costs of productions, define productivity.
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the change in output generated by adding one more unit of input (worker, machine). - marginal product measures the change in output at the margin
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What is the marginal product?
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the change in output from hiring one additional unit of labor, or worker.
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What is the marginal product of labor?
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describes the effect that varying the level of an input has on the total product and on marginal product
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What is the law of diminishing returns?
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1. increasing marginal returns 2. diminishing marginal returns 3. negative marginal returns
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What are the three stages in the law of diminishing returns?
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a level of production in which the marginal product of labor increases as the # of workers increases, due to specialization workers become more skilled and waste less time result: total production increases, marginal production increases
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Describe the increasing marginal returns stage.
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a level of production in which the marginal product of labor decreases as the number of workers increases; due to the limited around of available capital: workers have to wait for machines result: Total production rises, but, marginal production growth begins to diminish. - usually results in down sizing
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Describe the diminishing marginal returns stage.
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a level of production in which the marginal product of labor becomes negative as the number of workers increases; due to bottlenecks: workers get in each other's way. result: total production decreases, marginal production decreases
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Describe the negative marginal returns stage.
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when marginal production levels increase with a new investment
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When do increasing marginal returns occur?
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when marginal production levels decrease with a new investment
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When does diminishing marginal returns occur?
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when the marginal product of labor becomes negative
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When does negative marginal returns occur?
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costs of production (paying workers, purchasing capital goods) must be considered by manufacturers when deciding how much of a good or service to supply
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Define production costs
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1. fixed costs 2. variable costs
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What are the two main types of production costs?
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a cost that does not change no matter how much of a good is produced -production costs that do not as the level of output changes examples: rent, property taxes, insurance premiums, interest on loans, local/state taxes, individual wage rates
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What are fixed costs? And give examples.
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- a cost that rises or falls depending on how much is produced - production costs that do change as the level of output changes examples: raw materials, total wages, utility costs
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What are variable costs and give examples?
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fixed costs + variable costs= total cost
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What equals total cost?
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additional
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what does the word marginal mean?
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the output change from hiring one additional worker
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What is marginal product?
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the additional cost of producing one additional unit, the additional cost of producing one more unit of output
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what is marginal cost?
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it allows firms to calculate the exact cost of a change in production levels and decide whether it is profitable
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What does calculating marginal cost allow?
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economies of scale in production; the increasingly efficient use of personal, plant, and equipment as a firm becomes larger
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what does the marginal cost reflect?
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variable cost/ marginal product = marginal cost
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How to calculate marginal cost, the formula.
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to find the level of output with the highest profit look for: 1. the biggest gap between total revenue and total cost 2. the point at which marginal revenue the additional income from selling more more unit of a good (usually equal to price) is equal to marginal cost note: if the price of the good were to rise, the firm thinking at the margin, would increase production to capture new profits
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With setting an output, what do you do?
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the additional income from selling one more unit of a good, it is usually equal to price
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What is marginal revenue?
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1. shut down the factory- but the firm's total revenue would be zero and they would still have to pay all the fixed costs 2. keep the factory open- if the total revenue from the goods or services the factory produces is greater than its variable costs, thereby leaving money to cover some of the fixed costs option #2 because the firm would lose less money while producing rather than shutting down
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The market price of widgets is so low that the factory's total revenue is less than its total cost.. should you shut down the factory? What are your options and which should you choose?
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business= the excess of total revenue over total costs economics= (MEW) 1. entrepreneurial: when a new technique allows a manufacturer to produce a good for much less than the market price 2. windfall: when there is a huge increase in the number of buyers wishing to consume a good or service 3. monopoly: when a sole provider restricts output so that the demand will outstrip supply
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What is profit in business versus profit in economics?
