eco unit7

• Economies of scale


  Technological and/or cost advantages that allow large firms to be more profitable than small firms
• Demand


  A firm's success and ability to grow depends on its pricing and production decisions, which depend on demand and production costs
• Profit


  A firm's success and ability to grow depends on its pricing and production decisions, which depend on demand and production costs
• Gains from trade


  Market interactions between consumers and firms lead to surplus (gains of trade)
• Price elasticity of demand

  Responsiveness of consumers to a price change
• Market structures


  Firms with fewer competitors have more power to set prices
• Supply


  A firm's success and ability to grow depends on its pricing and production decisions, which depend on demand and production costs
• Equilibrium in a perfect competitive market


  If prices are set above the marginal cost the social optimum is not reached as there is a market failure and deadweight loss
• Income elasticity of demand

  Responsiveness of consumers to a change in income
• Technological development has increased the number of large firms, which produce differentiated products
• Wages are determined by interactions between firms and workers
• Competition leads to firms with fewer competitors having more power to set prices
• If prices are set above the marginal cost the social optimum is not reached as there is a market failure and deadweight loss
• Law of diminishing returns

  The extra output produced as more units of the variable factors are added to fixed factors will eventually decrease
• Constant returns to scale


  Output increases with the same percentage as the percentage increase of all inputs
• Increasing returns to scale

  Output increases with a larger percentage as the percentage increase of all inputs
• Decreasing returns to scale

  Output increases with a smaller percentage as the percentage increase of all inputs
• Economies of scale


  Advantages through changes inside the firm, such as technological and/or cost advantages
• Diseconomies of scale


  Disadvantages through changes outside the firm, such as more bureaucracy and coordination issues
• Average cost


  Constant when there are constant returns to scale, falling when there are increasing returns to scale, and increasing when there are decreasing returns to scale
• Calculating returns to scale

  1. Compare the relative changes between input and increase in the rate of output

  2. Increasing returns to scale: inputs increase by 50%, output increases by 80%

  3. Constant returns to scale: inputs increase by 17%, output increases by 17%

  4. Decreasing returns to scale: inputs increase by 11%, output increases by 4%
• Law of demand


  When the price of a good rises, the quantity demanded falls due to the substitution effect and the income effect
• Demand curve


  A curve that shows the relationship between the price and quantity demanded at all possible prices, all other things unchanged
• Determinants of demand


  • Price level
  • Income
  • Price of other goods
  • The number of customers in the market
  • Other factors
• Normal products

  Demand increases as income increases
• Inferior products


  Demand falls as income increases
• Substitutes


  Products of competitors; price increase of substitute good will cause an increase in the quantity demanded of the good in question
• Complements


  Products used in conjunction with each other; price increase of complement good will cause a decrease in the quantity demanded of the good in question
• Unrelated products


  No relationship between products; price increase of unrelated good has no effect on the quantity demanded of the good in question
• Movement along demand curve


  Change in the price of the good causes a change in quantity demanded, but no change in demand
• Shift of demand curve

  Change in one of the other determinants of demand (not the price of the good) causes a shift to a new demand curve and a change in demand
• Reasons for an increase in demand


  • Consumers' tastes change in favour of the good
  • There is a rise in the price of a substitute
  • There is a fall in the price of a complement
  • Incomes rise and the good is normal
  • Incomes fall and the good is inferior
• Price discrimination


  A selling strategy in which different prices for the same product are set for different consumers
• Total revenue


  Total earnings per period from the sale of output
• Average revenue


  Total revenue divided by quantity sold
• Marginal revenue


  The addition to total revenue from selling one more unit of output
• Calculating revenue


  1. Total revenue = price * quantity

  2. Average revenue = total revenue / quantity

  3. Marginal revenue = change in total revenue / change in quantity
• Accounting profit


  Does not include opportunity costs
• Economic profit


  Includes opportunity costs
• Average cost


  Also called unit cost