AREC 323 Lecture 1: Economic Concepts Review

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Questions and Answers

According to the law of supply, how does an increase in price typically affect the quantity supplied?

Quantity supplied increases. (correct)

Quantity supplied remains unchanged.

Quantity supplied decreases.

Quantity supplied initially increases then decreases.

What does the concept of demand refer to?

The quantity of product consumers are willing and able to purchase at a given time and price (correct)

The quantity of goods or services producers are willing to supply

The total amount of product available in the market

The price at which goods and services are sold.

According to the law of demand, what is the relationship between price and quantity demanded?

An inverse relationship, where the two move in opposite directions. (correct)

A relationship dependent on the income of the consumer.

No relationship, there is no clear pattern between price and quantity demanded.

A direct relationship, where both move in the same direction.

What does 'own-price elasticity of demand' measure?

How much the quantity demanded of a good responds to a change in its price. (A) Signup and view all the answers

When demand is considered 'elastic', how does the quantity demanded typically respond to price changes?

Quantity demanded changes significantly more than the percentage change in price. (D) Signup and view all the answers

Which factor is NOT listed as a key influence on the price elasticity of demand?

The size of the producing company. (B) Signup and view all the answers

What does price elasticity of supply measure?

How much the quantity supplied of a good responds to a change in its price. (B) Signup and view all the answers

Which term does $\frac{\Delta Q}{\Delta P} \times \frac{P}{Q}$ represent?

Original Point Elasticity (D) Signup and view all the answers

Which of the following best describes the relationship between price and quantity supplied, according to the law of supply?

A positive relationship; as price increases, quantity supplied increases. (A) Signup and view all the answers

What is the relationship between price and quantity demanded, according to the law of demand?

An inverse relationship; as price decreases, quantity demanded increases. (C) Signup and view all the answers

What does it mean if the absolute value of the price elasticity of demand is greater than 1?

Demand is elastic. (C) Signup and view all the answers

If the price elasticity of supply (PES) is positive, what does this indicate?

An increase in price leads to an increase in the quantity supplied. (A) Signup and view all the answers

Which factor is the MOST significant determinant of price elasticity of supply?

The availability of inputs for production. (C) Signup and view all the answers

Which of the following is NOT a key factor influencing own-price elasticity of demand?

Production cost. (C) Signup and view all the answers

What does the term 'arc elasticity' refer to?

Elasticity measured over a range of prices and quantities. (B) Signup and view all the answers

Which of the following would likely have the LEAST elastic demand?

Insulin for a diabetic. (D) Signup and view all the answers

What is indicated by $rac{\Delta Q}{\Delta P} imes rac{P}{Q}$?

Own-price elasticity of demand (point elasticity). (A) Signup and view all the answers

In the short run, the price elasticity of supply is typically:

Less elastic than in the long run. (B) Signup and view all the answers

Which of the following best describes the relationship between the price elasticity of demand (PED) and the law of demand?

PED measures the responsiveness of quantity demanded to price changes, as described by the law of demand. (A) Signup and view all the answers

Which scenario would MOST likely result in a more elastic price elasticity of demand?

A good with many available substitutes. (B) Signup and view all the answers

When calculating price elasticity using the 'arc elasticity' method, what does using average price and average quantity aim to achieve?

To provide a midpoint estimate of elasticity over a range of prices and quantities. (A) Signup and view all the answers

If the price of a good increases, and the quantity supplied also increases, this reflects:

The law of supply. (D) Signup and view all the answers

Which of the following is LEAST likely to influence the price elasticity of supply (PES)?

The consumers level of income. (C) Signup and view all the answers

What is the primary difference between 'original price and quantity' and 'arc elasticity' methods when analyzing elasticity?

The 'original price and quantity' uses a single point and arc elasticity uses a multiple points. (D) Signup and view all the answers

What does it mean if a product's price elasticity of demand (PED) is equal to zero?

The quantity demanded will not change when the price changes. (A) Signup and view all the answers

If the time horizon increases, how does this generally affect the price elasticity of supply (PES)?

PES becomes more elastic. (A) Signup and view all the answers

What is the effect on demand when the price of a complementary product increases?

The demand will decrease. (B) Signup and view all the answers

Which of the following is NOT a valid determinant of price elasticity of demand?

The production cost. (B) Signup and view all the answers

What is the primary process that defines a business?

Taking inputs and adding value. (A) Signup and view all the answers

Which of the following is NOT considered a fundamental requirement for a business?

Philanthropic goals. (C) Signup and view all the answers

In the context of business, what does 'utility' refer to?

Satisfaction from consuming a product or service. (B) Signup and view all the answers

Which of the following best describes a business 'opportunity'?

A situation suitable to introduce a new product to gain profit . (A) Signup and view all the answers

According to the business process web, what is transformed in the process?

Inputs to outputs. (D) Signup and view all the answers

What is the role of 'feedback' in a business's operational system?

To provide information for system adjustment. (C) Signup and view all the answers

Which of the following refers to activities that enhance the perceived value of a product?

Add form, time, place, or possession utility. (D) Signup and view all the answers

Which management activity involves setting goals and short-term strategies for a business?

Planning (A) Signup and view all the answers

Which of these is the best description of the 'controlling' function of management?

Monitoring and evaluating performance (C) Signup and view all the answers

A manager's role in 'organizing' primarily involves:

Grouping activities and resources (C) Signup and view all the answers

What does a manager's 'technical' skill refer to?

Proficiency in a specialized field (A) Signup and view all the answers

Which managerial skill involves working well with others, both individually and in teams?

Human (D) Signup and view all the answers

What is the primary focus of 'conceptual' management skills?

Understanding abstract situations (B) Signup and view all the answers

Besides just profits what else should a company consider, when defining their goals?

Sales, and other similar metrics (A) Signup and view all the answers

Which term best describes a situation where a business is getting the most output from the least amount of inputs?

Efficiency (D) Signup and view all the answers

What is generally meant, when someone says 'value' within the context of a business?

The relative worth, utility, or importance of something to a customer, or other stakeholder within the context. (A) Signup and view all the answers

Which of the following is NOT a core function of management?

Ignoring conflict (B) Signup and view all the answers

What is the primary focus of the 'controlling' function in management?

Monitoring and adjusting activities towards goals (C) Signup and view all the answers

Which management function is MOST concerned with motivating employees?

Leading (B) Signup and view all the answers

If a business is looking to increase its competitiveness by making it difficult for new companies to enter the market, which strategy are they using?

Increasing the barrier to entry (A) Signup and view all the answers

What is the objective of a company engaging in a merger or an acquisition?

Consolidation of firms (C) Signup and view all the answers

What is a key implication of a company increasing barriers to entry in a market?

Higher prices (A) Signup and view all the answers

Which of the following would be a strategic management decision for a new ice cream shack on a beach?

Selecting the shack's location (B) Signup and view all the answers

Which of the following is NOT a listed benefit of good management?

Guaranteed innovation (D) Signup and view all the answers

What does 'cross-licensing' primarily involve for firms?

Sharing patents or proprietary information (D) Signup and view all the answers

Study Notes

AREC 323 Lecture 1: Review of Economic Conceptions

Course name: AREC 323
Lecture topic: Review of Economic Concepts
Instructor: Jiaxun Li
Email: [email protected]

Outline

Supply and Demand
- Definition, elasticity
- Product characteristics (substitutes and complements)
Cost
- TC, AC, MC
- Derivative formulas
Revenue
- TR, AR, MR
Profit
- Economic profit
- Accounting profit
Elasticity
- Own-price elasticity of demand (PED)
- Own-price elasticity of supply (PES)
- Cross-price elasticity
Derivatives
- Constant Rule
- Power Rule

Supply and Demand

Supply
- Definition: The quantity of a good or service producers are willing and able to offer for sale at various prices during a specific period.
- Law of Supply: A positive relationship exists between price and quantity supplied. As price increases, the quantity supplied increases, and vice versa.
Demand
- Definition: The quantity of a good or service consumers are willing and able to purchase at various prices during a specific period.
- Law of Demand: An inverse relationship exists between price and quantity demanded. As price decreases, the quantity demanded increases, and vice versa.

Elasticity

Own-price elasticity of demand (PED): Measures how much quantity demanded of a good responds to a price change.
- Price and quantity demanded are inversely related; PED is usually negative.
- Key factors: Availability of substitutes, necessity vs. luxury goods, proportion of income spent, time horizon, and the degree of commodity aggregation.
Own-price elasticity of supply (PES): Measures how much quantity supplied of a good responds to a price change.
- Price and quantity supplied are directly related; PES is usually positive.
- Key factors: Time frame (short-run or long-run), availability of inputs, and flexibility of production.
- Cross-price elasticity: Measures the percentage change in the quantity demanded of one good (product Y) in response to a 1% change in the price of another good (product X).
- η_yx > 0: Goods X and Y are substitutes.
- η_yx < 0: Goods X and Y are complements.

Elasticity: Formula for Own-Price Elasticity

Original price and quantity: η = ΔQ/Q₀ / ΔP/P₀
- ΔQ = change in quantity
- Q₀ = initial quantity
- ΔP = change in price
- P₀ = initial price
Arc elasticity: η = (Q₂ - Q₁)/(Q₂ + Q₁)/2 / (P₂ - P₁)/(P₂ + P₁)/2
- Q₁ = initial quantity
- Q₂ = new quantity
- P₁ = initial price
- P₂ = new price

Cost

Total Costs (TC): FC + VC
Fixed Costs (FC): Costs that do not vary with the level of production (e.g., rent, insurance).
Variable Costs (VC): Costs that vary directly with the level of production (e.g., raw materials, labor).
Average Fixed Costs (AFC): FC/Q
Average Costs (AC): TC/Q
Average Variable Costs (AVC): VC/Q
Marginal Costs (MC): The additional cost of producing one more unit of output. MC = dTC(Q) / dQ

Revenue

Total Revenue (TR): P(Q) × Q
Marginal Revenue (MR): MR = dTR(Q)/dQ = (TR(Q+ΔQ) - TR(Q))/ΔQ = P(1 - 1/|η|)

Profit

Profit = TR - TC
Factors affecting profit: Revenue (price levels, sales volume, market demand), costs (fixed and variable), market conditions (competition, regulations, economic trends), profit maximization (MR = MC).

Economic and Accounting Profits

Explicit costs: Direct monetary payments (e.g., wages, rent).
Implicit costs: Opportunity costs of using resources owned by the business (e.g., forgone salary).
Accounting profit: TR - explicit costs
Economic profit: TR - total costs (explicit and implicit).

Practice

Provided formulas and questions for calculating elasticity, cost, and profit. TC = 40 + 8q + 4q² and Demand P = 80 – 2q are given. Specifics include calculations for average cost, marginal cost, marginal revenue, profit maximizing output (q), and costs/revenue/profit at max profit.
Practice question about calculating elasticity given price and quantity information and determining the category.

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Description

This quiz covers the key economic concepts discussed in AREC 323 Lecture 1, focusing on supply, demand, cost, revenue, and profit. Test your understanding of definitions, elasticity, and the relationships between these fundamental concepts. Prepare to apply these theories in practical scenarios.