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| 1 Decision Making Pitfalls |
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Definition
1. Do not use avg costs and benefits
2. Do not ignore opportunity costs
3. Do not consider sunk costs
4. Use actual dollars, not proportions |
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| Identifying measuring and comparing the benefits (Gains) and costs of a particular action |
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| Expression of personal opinion |
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Using facts, data, theory and principles to objectively analyze cause and effect
Not personal bias |
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| 2 Principle of Comparative Advantage |
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| If each trading partner produces the good for which they have a lower opportunity cost, and trades for higher opp. cost goods, both can become better off |
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| Being able to produce a good/service faster or better |
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| Lower opp cost for producing something than someone else. |
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| 2 Principle of increasing opp costs |
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| When inputs are specialized, the opp cost of producing another unit of goodwill (i.e pizza) increase as you produce more of it. |
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| 2 Production Possibilities Model (PPM) |
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Shows all combinations of 2 goods that can be produced in a nation with available resources
i.e happyland produces beer and pizza
*specialized inputs* |
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| 2 Budget Line (Constraint) |
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Illustrates all of the combinations of 2 good that can be purchased with a given amount of income
Slope= opp cost in terms of one good with another. |
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An artificially low price by law government says you cannot charge any more than Pc
A maximum allowable price |
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Minimum alloable price by law government says you cannot charge lower than Pf
Intended to help sellers by raising price above P* (i.e minimum wage) |
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3 Why does price increase?
Why does it decrease? |
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Definition
Increase: because with new supply curve, there is a (temporary) shortage at the old price
Fall: because there is a (Temp) surplus at the old price with the new demand |
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1) Number of sellers in the market
2) Price of inputs used to produce the product (oranges in OJ)
3)Technology used to produce the good
4)The price of other goods that can be produced
5)For agriculture ->Weather |
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| The name given to the relationship between the price of a good (P) and the quantity that sellers are willing and able to bring to the market |
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| 3 Change in Qd is caused by... |
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Definition
| Change in price and is shown by moving along a stable demand curve |
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| 3 Factors that affect Demand |
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Definition
1) Popularity/preferences/fashions
2)Consumers income
3)The P of complement goods will effect demand
4)P of substitue goods will affect Demand
5)Consumers expectations about income
6)Consumers expectations about future price of good |
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The name given to the relationship between the price of good and quantity demanded (Qd) that consumers are willing and able to purchase
-Relationship between P and Qd by consumers |
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| 4 Determinants of the price elasticity supply |
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Definition
1) Price of inputs
2) Availability of inputs
3) Time |
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| 4 Price elasticty of supply` |
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| Always >0 due to the law of supply |
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| 4 Cross-Price elasticity of demand |
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Definition
| % change in Qd of good "A" following a % change in the price of good "B" |
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| 4 Determinants of elasticity |
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Definition
1) The availability of substitues (More substitues => demand will be more elastic)
2)Time More time=more flewible
3) % of your budget that you spend on the good |
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| 4 If elasticity of demand with respect to price is less than 1 |
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| 4 Elasticity of demand formula |
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| 4 Price elasticity of demand |
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Definition
Measures the percent change in Qd following a percent change in price
^P=↓Qd
↓P=^Qd |
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| A measure of how much one thing chages in response to a change in something else |
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| (SE) of a price change; a change in price affects the relative prices of alternatives which causes consumers to switch accordingly |
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| Of a price change translates a price change into a change in effective income (Purchasing power) which chages your purchases as an income change would |
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| 5 Two Reasons why Qd increases when price decreases |
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1)Income effect(IE)
2)Substitution effect(SE) |
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What comething is worth to a buyer=$ value of utility
M.B.= Maximum willingness to pay |
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For two goods x&Y, the optimal combination is where MUx/Px=MUyPy
reached "consumer equilibrium" |
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| Satisfaction from purchase |
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| The accounting profit needed to be earning exactly zero economic profit |
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| Explicit costs... aka "Expenses" |
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| Explicit costs +implicit costs (Opp costs) |
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1)Specialization of labor & management
2)Buy Inputs in bulk
3)Better/more use of hi-tech capital
4)By-Product can be reused and resold |
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1)Specialization of labor & management
2)Buy Inputs in bulk
3)Better/more use of hi-tech capital
4)By-Product can be reused and resold |
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1)Corporate hierarchy is too thick
->creates slow decision making
2)Labor might feel disconnected
3)Less labor oversight |
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| 7 What is constant returns to scale? |
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Definition
| When the increasing scale of firm causes no change in efficiency and no change in unit cost |
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| A PC market exists when there are many many firms all selling a standardized (homogenous) product, in a market where entry and exit can take place at very low cost, and information is readily available |
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| 7 When do all firms maximize profits? |
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Definition
| When quantity is at MR=MC |
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Long Run Competitive Equilibrium
-says that if position or negative econ profits exist in the short run, they will become 0 in the long run |
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1)Econ profit=0
2)P=Min ATC
3)Firms are not entering
4)Firms are not leaving
5)All firms earn exactly normal profit |
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Most recent example of a monopoly
-15 yrs ago owned 70% of worlds diamonds |
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| 7 Barriers to entry of market |
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Definition
1)economic barrier
A)Ownership of resource supply
B) Large scale cost advantage
2)Legal Barriers
A)Government licenses
B)Patents
3)Technology Barriers
A)Superiority
B)May result in natural monopoly |
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| 7 Principle of diminishing marginal returns |
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Definition
| In the short run as units of a variable input all added to fixed of other inputs, productivity might increase at 1st due to gains from specialization, but eventually the additional output gained from adding variable inputs will decline |
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Fixed- Inputs that cannot be easily changed in a short amount of time
Variable-Inputs that are easy to use more(or less) of in a short amount of time |
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| The cost associated with producing a unit of output |
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| The cost associated with producing a unit of output |
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