Shared Flashcard Set


Econ 100A
Microeconomic Analysis
Undergraduate 2

Additional Economics Flashcards




Positive Statements

Questions about cause and effect


They are objective and can be tested by looking at evidence

Normative Statments

They are subjective statements that carry value judgments


ex= pollution is most serious economic problem


unemployment is worse than inflation


Characteristics of a Perfectly Competitive Market




Price-taker = all firms sell the exact same product and therefore have to take the price that the market has set


Buyers know the market price

Competitive Markets Entry and Transactions

If a firm raised price above the market price, it would not be able to make any sales



Transaction costs = the expenses of finding a trading partner and making a trade for a good other than the good or service are low


Since transaction costs are low, it is easy for a consumer to purchase goods from a rival firm because buyers and sellers don't have to spend time finding each other to make a trade

In Perfect competition, what if raised or lower price?

Raise price= nobody would buy from them


No incentive to lower price because the demand curve is horizontal at market price, so there the firm can sell as much as it wants at market price

Examples of Perfectly Competitive Markets

Agricultural and other commodity markets, stock exchanges, retail and wholesale markets


Perfect competition also has many ideal properties that economists use to be the ideal comparison


Increasing Returns to Scale (aka Economies of scale) means that




You can look at a quantity - x, total cost- y graph and see a curve that


it is cheaper to be bigger



looks like the square root function. As quantiy increases total cost increases at a decreasing rate


Or as quantity increases, Average Total Cost decreases

Examples of Increasing Returns to Scale

Factory can get a large amount of items cheaper if they buy in bulk


As they get bigger, factories can specialize people more

make ppl do what they are trained to do



Increasing Returns to Scale






If you double the inputs, you get more than double the output




Decreasing REturns to Scale


total cost (y) vs quantity (x)


It's more expensive to be bigger


total cost increases at exponential rate compared to quantity


And average total cost increases as quantity decreases

Decreasing returns to scale (equation)

Double all inputs and get less than double output


because less efficient


(or if want to double outpur, need to put more than double input into it)


coodination problems, manegerial problems, unorganized, too big and inefficient


Constant Returns to Scale




Look at total cost (y) vs quantity (x-axis)


As quantity increases, the total cost increases at the same rate


total cost is linear and proportional to quantity


And Average Total Cost is constant with relations to quantity

Constant Returns to Scale (equation)
Put twice as much input, and get exactly twice as much output

Conditions of Perfect Competition


Effects of Perfect Competition


Conditions = large number of buyers and sellers

- all firms produce identical products

-all market participants have full information about price and product characteristics, so transaction costs are negligible

-easy entry and exit


Effects = Firms are price takers, and firms cannot influence market price


Price Elasticity of Demand

PED = dQ/dp * p/Q


> 1 = luxury good


< 1 = necessity good (b/c not many substitutes)

Income Elasticity of Demand

dQ/dI * I/Q


If income elasticity of demand is positive, the good is a normal good


if income elasticity of demand is negative, the good is an inferior good

Cross Price Elasticity of Demand

dQx/dPy * Py/Qx


change in the quantity of x divided by change in the price of y * price of y divided by quantity of x


If Cross price elasticity of demand is positive, the two goods are substitutes


Price Ceilings and Consumer Welfare


Where are price ceilings in realtion to the equilibrium?


What does government, if anything, in result of price ceilings?


Price ceilings are actually below equilibrium even though they sound like they should not be


Ceilings do the opposite- instead of top, go to bottom


With price ceilings, what happens is that prices are actually cheaper than they were before, so the demand for them increases


However, suppliers cannot supply enough at the cheaper ceiling price to satisfy customers, so there is a shortage


The government does nothing to reduce the shortage, so you don't need to account for government expenditure when caculating Deadweight Loss


Price Floors and Consumer Welfare


Where is a price floor in relation to equilibrium ?


What does the government do as a result of a price floor?


A price floor is actually above equilibrium (opposite of what it sounds like)


A price floor raises the price of a good, so the consumers demand less of it


This also means that since the suppliers are not selling the good enough, there is a surplus


The government resolves teh surplus by purchasing all the surplus, and that's the area of:


(Qs - Qd) price ceiling price

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