Core Economic Principles

Core Economic Principles

• Risk analysis involves picking a company and analyzing it.
• Reading and questions for each week should be done before class.
• Weekly questions should be based on the chosen company.
• A market is a group of buyers and sellers of a good or service.
• A Competitive Market has many buyers and sellers, each with a negligible impact on market price.
• A firm differs from a competitive market.
• A free market allows setting own product prices.
• Market power is the ability to set prices in a market.
• Price takers are companies without market power that must accept a set price.
• Complement products affect each other's supply and demand, for example, increased gas prices which decreases care demand.
• An endogenous variable changes due to price changes of the product.
• A normal good experiences falling demand when income falls; demand rises as income increases.
• An inferior good's demand rises when income falls; demand decreases as income increases.
• Initial cost is where the supply curve starts above zero.
• Raw materials consist of labor and capital.
• Expectations are short term, while attitude changes are long term.
• Seller's interest maximizes utilization.
• Sustainability's three factors include social, environmental, and economic/governance aspects.
• A sunk cost is a cost that bankrupts a company.
• Short-term costs have some fixed costs.
• Long-term costs convert fixed costs to variable.
• Implicit cost doesn't need a direct money value.
• Explicit cost is a direct money outlay.
• Opportunity costs refers to the loss of potential gain from alternatives when one alternative is chosen.
• A perfectly competitive market includes numerous buyers and sellers, price-taking firms, and free entry/exit.
• Marginal income is the change in total revenue divided by the change in quantity.
• Under capitalism, companies seek to maximize profit.
• An industry includes companies selling similar products.
• The fewer companies involved in an industry, the more power each company has.
• Supply and demand illustrates the interactions of people in markets.

Assumptions and Outcomes

• Efficient outcomes are based on many buyers/sellers, perfect buyer/seller information, free entry/exit, identical goods, self-interested buyers/sellers, and clearly defined property rights.
• Buyers want to maximize utilization.
• A competitive market has many buyers and sellers, each with little market impact.
• Perfectly competitive markets have the characteristic that all goods are the same, no buyer/seller can influence market price, and participants are price takers.
• Buyers are represented on an upwards sloping curve called supply; sellers on a downward sloping curve called demand.
• The x-axis represents quantity and the y-axis represents price.
• Equilibrium occurs at the price and quantity equilibrium points.

Demand Elasticity

• When consumer income increases, the price of a product shifts to the right.
• Movement along the demand curve occurs if price increases and quantity decreases.
• According to the law of demand, higher prices decrease quantity demanded and vice versa.
• A shift to the right represents a shift in the supply curve, and a shift to the left represents a decrease.
• The point shift in demand is a shift in the supply quantity and a new equilibrium for price and quantity.
• To analyze equilibrium changes, decide if the event shifts the supply/demand curve, determine the direction of the shift, and use a supply/demand diagram to see how shifts affect equilibrium price and quantity.
• More market competition lowers the supply curve; less competition raises it.
• Factors of production include labor, raw materials, and capital.
• A production function calculates how a company combines factors of production to maximize cost.
• Output is the outputted price.

Profit and Costs

• Economic profit occurs if revenue exceeds implicit and explicit costs and: Total opportunity cost = implicit + explicit cost
• With normal profit there is no incentive to enter the market.
• Normal profit occurs when economic profit is zero, or when total revenue equals the sum of implicit cost and explicit cost.
• To increase profit, a firm should increase quantity when marginal revenue exceeds marginal cost, decrease quantity when marginal revenue is less than marginal cost, and profit is maximized when marginal revenue equals marginal cost.
• Marginal cost curve slopes upwards.
• Outputs increase and cost increase with increasing marginal cost.
• The average total cost curve is U-shaped.
• Marginal cost curve crosses the average total cost curve at the minimum of average total cost, usually at minimum efficiency scale.
• Opportunity cost is all that is forgone to acquire an item.
• Forgone income includes potential earnings unrealized due to fees, expenses, or lost time.
• Implicit cost has already occurred but isn't separate.
• Explicit cost is an out-of-pocket payment.
• Production function describes the relationship between the quantity of inputs and the output of a good.
• Marginal product increases output with each additional input unit.
• Diminishing marginal product property when marginal product declines despite increasing quantity input.
• Many things are fixed in the short run, but variable in the long run.
• If a factory is small, it is fixed, but if expanded larger, it is variable in the long run.
• Efficiency scale is the quantity of output that minimizes average total cost.
• A firm's costs are key to production/pricing decisions.
• Most firms in a competitive market are small.
• Costs happen regularly from the beginning.
• Costs are opportunity costs, including opportunity costs.
• Marginal cost is calculated by the difference between total cost divided by the change in quantity or changing in total cost divided by change in quantity.
• Efficiency scale is the unit of production with minimum average total cost.
• The point before average total cost intersects marginal cost is determined by fixed cost, and the point after is determined by variable cost.
• Firms exit when price is less than average total cost, enter when price is greater than average total cost, shut down if price is less than average variable cost, or shut.
• Elasticity analyzes supply and demand.
• Elasticity gauges buyer/seller response to market changes.
• Elasticity refers to a type of product, not a specific product.
• Price elasticity of demand measures how much quantity demand changes with a percent change in price.
• Percentage change of quantity demanded / percentage change in price equals Price elasticity of demand.
• Price elasticity should be calculated using either midpoint or point formula.
• Above 1.1 is elastic, at 1.0 is unit elastic, and below 0.9 is inelastic.
• The broader the market, the more inelastic it will be.
• Everything is more elastic long term.
• Total expenditure/revenue=price multiplied by quantity.
• Income elasticity is percentage change in quantity demanded / percentage change in income.
• Changes in income alter demand elasticity.
• Higher income raises quantity demanded for normal goods but lowers it for inferior goods.
• Necessities tend to be income inelastic.
• Luxuries tend to be income elastic.
• Cross price elasticity of demand measures how much the quantity demand responds to a price change of another good; it's the percentage change in quantity of the first good divided by the percentage change in the price of the second good.
• If gas prices increases the amount of the increase in public transport is measured by Cross price elasticity of demand.
• Substitutes show positive cross price elasticities ; Complements show negative cross price elasticities

Elasticity of Supply & Goverment Policies

• Supply is more elastic in the long run.
• Productive capacity and seller abilities to change product amounts have an affect to elasticity.
• Firm size/industry has an affect on elasticity.
• Quantity supplied increases in the short run.
• A rotated supply curve clockwise more elastic.
• Vertical means inelastic.
• A perfectly elastic curve (horizontal) means quantity supplied is infinite above the curve, none below, and whatever the amount at the curve.
• Jargon include price ceiling - a legal maximum, price floor - a legal minimum, direct taxes on income/wealth, indirect taxes on sales, specific tax with a fixed rate, ad valorem tax with a percentage or ad valorem, and subsidies - payment to buyers/sellers to lower costs or boost income.
• Price controls occur when policies believes markets do not allocate resources equitably.
• Market forces establish equilibrium prices and quantity in an unregulated market system.
• Equilibrium isn't always fair, so governments influence markets.
• A price ceiling is a legal maximum price.
• A price floor is a legal minimum.
• A price ceiling is not binding, if the set above equilibrium.
• The quantity supplied will be binded and shorted if there is a price ceiling.
• The price floor is binding if set above equelbrium.
• Quantity will have a surplus as quantity if there is a binding price floor.

Taxes

• Taxes raise revenue but discourage market activity.
• When a good is taxed, the quantity reduces and buyers/sellers share the burden.
• Consumer bears tax burden if the demand curve is inelastic; seller bears it if demand is elastic.
• The more inelastic side pays the most tax.
• Ad valorem tax is based on a percentage, wheras Specific tax will specific amount will be imposed on specific items.
• A subsidiary is the opposite of a tax and payment to supplement income/lower costs, encouraging consumption.
• Monopolies entail imperfect competition without many buyers/sellers, price takers and free entry/exit.
• At one endof imperfect competition spectrum is a monopoly.
• Market power is being the dominant firm in the market.
• Market power enables a firm to raise prices without losing sales.
• Competitive firms take prices; monopolies make prices.
• Market share measures a firm's proportion of total sales.
• A monopoly is the sole seller without close substitutes.
• Entry barriers cause monopolies.
• Government rights can give exclusive production rights.
• Lower costs of production make a single greater efficeny for single producers.
• Natural monopoly are industries where a single firm can supply an entire market cheaper than multiple firms.
• Natural monopolies occur with economies of scale, lowering average total costs as scale increases.
• Monopolies can control prices.
• Monopolies face a downward-sloping demand curve.
• Monopolies can increase prices without losing all sales.
• Monopolistic competition is imperfect with similar but not identical sellers competing for the same group.