# Shared Flashcard Set

## Details

ECON 705
Mid Term
44
Economics
08/18/2013

Term
 Study of economics
Definition
 ·      Study of optimum allocation of limited resources to satisfy our unlimited wants
Term
 Three important factors:
Definition
 Optimum allocation Limited resources Unlimited wants (happiness, profit, revenue)
Term
 Limited Resources
Definition
 leads to Opportunity Cost Graphical Analysis:  Budget Line (y-intercept and slope)   Algebraic Analysis:   Budget = (Pa)(A) + (Po)(O)   y-intercept:  (Budget/Po) slope:  -Pa/Po
Term
 Slope (change in oranges/change in apples) = -1.5
Definition
 for every additional apple, we must give up 1.5 oranges
Term
 Opportunity Cost
Definition
 Value of your next best alternative you must give up  slope of a budget line  trade off
Term
 Unlimited Wants (Utility)
Definition
 utils to measure happiness
Term
 Indifference Curve
Definition
 Utility level curves   In order to keep the same trend of U, trade off between A & O   decisions based on margins, not total
Term
 Marginal Revenue and Marginal Cost
Definition
 MR = Δ Revenue / Δ Output   MC = Δ Cost / Δ Output
Term
 Marginal Rate of Substitution
Definition
 The rate at which we trade off apples & oranges at the same level of happiness
Term
 Opportunity Cost = Marginal Rate of Substitution
Definition
 (ΔO / ΔA = PA / PO) = (MUA/MUO = ΔO / ΔA)
Term
 Achieve Optimum Consumption or Optimum Decision Making Rule
Definition
 MUA / PA = MUO / PO
Term
 How to influence behavior:
Definition
 Incentive Value Creation Changing Preference
Term
 Incentive
Definition
 Make budget line flatter - changing opportunity cost examples:  employee evaluation, pay system, recognition Another example:  reduce opportunity cost between sales commission and honesty; honesty is cheaper to consume for the employee (relatively inexpensive)
Term
 Value Creation
Definition
 value = what you are willing to pay, willingness goes high - value increases determine what employee is willing to pay (typically intangible) then provide it at no cost Examples:  working environment, flexibility
Term
 Changing Preference
Definition
 Education, training - used to change people's behavior
Term
 Market
Definition
 When consumers and producers get together and perform an exchange (transaction)
Term
 Demand
Definition
 Provides information regarding consumer's willingness (value) to pay
Term
 Supply
Definition
 Provides information regarding producer's willingness to charge (sell price)
Term
 Demand Curve
Definition
 Along demand curve, we observe utility maximization
Term
 Supply Curve
Definition
 Profit maximization behavior
Term
 Market Equilibrium
Definition
 Stable Market When S = D, thus Qs = Qd
Term
 Total Surplus
Definition
 equals to consumer surplus + producer surplus
Term
 Efficient Market
Definition
 A market generates maximum surplus, market is at equilibrium point
Term
 Inefficient Market
Definition
Term
 Value Creation
Definition
 Demand Expansion:  demand curve shifts to the right (at every level of price, consumer buys more)   Supply Expansion:  supply curve shifts to the right (at every level of price, seller wants to sell more)
Term
 Market Analysis
Definition
 When demand increases, P and Q increase When demand decreases, P and Q decrease When supply increases, P decreases and Q increases When supply decreases, P increases and Q decreases
Term
 Market Analysis when S&D change simultaneously
Definition
 When D & S increase, Q increases, P? When D & S decrease, Q decreases, P? When S increases and D decreases, P decreases, Q? When S decreases and D increases, P increases, Q?
Term
 Demand Estimation
Definition
 Sales Volume = a (baseline) - 2P + 3 Pcomp + 1P..+4Online+...   Demand Equation:  Q = a - 2P Inverse Demand Equation:  P= a/2 - 1/2 x Q (used to draw demand curve)
Term
 Elasticity (sensitivity)
Definition
 How sensitive is sales volume to each variable   ε = %ΔQ / %ΔP ε =((Q2-Q1)/Q1)/((P2-P1)/P1) ε = (ΔQ / ΔP) x (P/Q) = slope of demand eq. x (P/Q) or 1/(slope of inverse demand eq.) x (P/Q)   ε = - 2/5 means that a 1% increase in price leads to 2/5% decrease in sales
Term
 Elasticity
Definition
 ε > 0 ---- Substitutes ε < 0 ---- Complements 0 to <-1 implies Inelastic -1 is Unit Elastic  Less than -1 implies Elastic   Price elasticity is always a negative #   In elastic condition, increase P, reduce Q, improve Rev
Term
 Profit
Definition
 ∏ = Revenue - Cost   ∏ = (P - AC) x Q   Total Cost = Fixed Cost + Variable Cost   Average Cost (AC) = TC / Q
Term
 Profit Maximization Rules
Definition
 MR = MC   MR > MC --- Q goes up (produce more - time to expand)   MR < MC ---- Q goes down - (Produce less)
Term
 Market Structures
Definition
 Perfectly competitive market (baseline market structure) Imperfectly competitive market: Monopoly Monopolistically competitive Oligopoly
Term
 Characteristics of Perfectly Competitive Market
Definition
 Many buyers Many sellers Homogeneous goods/services Complete Information/Symmetric Information Easy entry/exit
Term
 Imperfectly Competitive Market
Definition
 Sellers have the ability to set price (Market Power) then "Pricing Strategy" makes sense
Term
 Monopoly - Single Producer
Definition
 Producer = Market   MR has slope twice greater than slope of D   Supply curve is producer's MR Price is always set at demand curve not supply curve
Term
 Monopolistically Competitive Market
Definition
 = Monopoly + Perfectly Competitive   -  Goods not homegeneous through differentiation
Term
 Five elements to minimize competition
Definition
 Entry Barrier (lobby, patents, M&A, supply) Supply Buyer Substitution Rivalry
Term
 Pricing Strategy
Definition
 Simple Pricing - demand known and homogeneous Single Pricing (MR = MC) Multiple Pricing: Bulk (Block) Pricing Two Part Tariff (membership) Complex Pricing - demand known and heterogeneous Personalized (1st degree) Group (3rd degree) Menu (2nd degree)
Term
 Simple Pricing
Definition
 Used when demand is known and demand is homogeneous   Used for high ticket items
Term
 Multiple Pricing
Definition
 Used for product/service that Consumers use frequently Not so durable Replace frequently
Term
 Personalized Pricing
Definition
 different with each customer want to reach the highest point of demand
Term
 Group Pricing
Definition
 can identify what group a customer falls into once identified - use pre-defined price for the group   with group pricing there is usually a slight differentiation on the product
Term