Econ 315 (chat gpt study guide)

Flashcards covering key concepts in managerial economics, market structures, demand and supply, and production and cost analysis.

Managerial Economics

The use of economic analysis and reasoning to make better managerial decisions.

Accounting Profit vs Economic Profit

Accounting profit = Revenue – Explicit Costs; Economic profit = Revenue – (Explicit + Implicit Costs).

Economic Profit

Measures the firm’s true wealth creation after considering opportunity costs of all resources.

Principal-Agent Problem

Conflict between owners (principals) and managers (agents) over firm objectives and performance goals.

Incentives Alignment

Using stock options, bonuses, monitoring systems, and performance-based pay to align managers' interests with owners'.

Market Structures

The four main market structures are Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly.

Value Maximization

The process of maximizing the present value of expected future profits of the firm.

Globalization's Effect on Firms

Expands markets and opportunities but increases competition, risk, and exposure to global shocks.

Demand Function

Qd=a+bP +- cM
b shows how price affects quantity (usually negative).
c shows how income affects demand.+cM: normal (superior) good.
−cM: inferior good.

Supply Function

Qs​=a+bP+cT−dPi​, where T = technology (positive) and Pi=input price (negative)

Law of Demand

As price falls, quantity demanded rises (inverse relationship between price and quantity demanded).

Law of Supply

As price rises, quantity supplied rises (direct relationship between price and quantity supplied).

Change in Quantity Demanded vs Change in Demand

Change in quantity demanded is movement along the demand curve due to price change; change in demand is a shift of the entire curve due to income, tastes, or prices of related goods.

Equilibrium Price and Quantity

Equilibrium price is where quantity demanded equals quantity supplied; equilibrium quantity is the amount exchanged at that price.

Surplus Condition

If the market price is above equilibrium, a surplus occurs; suppliers lower prices to restore equilibrium.

Shortage Condition

If the market price is below equilibrium, a shortage occurs; buyers bid prices upward until equilibrium is reached.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay; area under the demand curve and above market price.

Producer Surplus

The difference between the market price and the minimum price producers are willing to accept; area above supply and below market price.

Total Surplus

The sum of consumer and producer surplus; measures total gains from trade in a market.

Equation of Exchange

MV = PY; links money supply growth to inflation and output.

Total Revenue (TR)

TR = P × Q; total amount of money earned from selling goods or services.

Price Elasticity of Demand (Ed)

Ed = (% change in Qd) / (% change in P); measures responsiveness of quantity demanded to price changes.

Income Elasticity of Demand (Ey)

Ey = (% change in Qd) / (% change in income); positive for normal goods and negative for inferior goods.

Cross-Price Elasticity of Demand (Exy)

Exy = (% change in Qx) / (% change in Py); positive for substitutes and negative for complements.

Determinants of Elasticity

Factors affecting elasticity include availability of substitutes, share of income spent on the good, time horizon, and definition of the market.

Price Controls

Government-imposed limits on prices; price ceilings cause shortages, price floors cause surpluses.

Production Function

It shows the maximum output obtainable from various combinations of inputs under current technology.

Short Run vs Long Run in Production

Short run: at least one input fixed; Long run: all inputs are variable.

Total, Marginal, and Average Product

TP: total output; MP: ∆Output/∆Input; AP: Output/Input. MP intersects AP at AP’s maximum.

Law of Diminishing Marginal Returns

Adding more of a variable input to fixed inputs eventually reduces marginal product.

Isoquant

A curve showing all input combinations that produce the same output level.

Marginal Rate of Technical Substitution (MRTS)

Rate at which one input can replace another while keeping output constant (slope of isoquant).

Fixed, Variable, and Total Costs

FC: costs that remain constant; VC: costs that vary with output; TC = FC + VC.

Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC)

AFC = FC/Q; AVC = VC/Q; ATC = TC/Q; MC = ∆TC/∆Q. MC cuts AVC and ATC at their minimum points.

Shapes of Cost Curves

AFC declines with output, AVC and ATC are U-shaped due to diminishing returns, and MC is U-shaped intersecting at minima of AVC and ATC.

Long Run Average Cost (LRAC) Curve

Shows the lowest achievable cost per unit when all inputs are variable; envelope of SRATC curves.

Economies and Diseconomies of Scale

Economies: average cost decreases as output rises; Diseconomies: average cost increases at high output due to inefficiencies.

Returns to Scale

Increasing returns: output rises more than inputs; constant returns: proportional rise; decreasing returns: output rises less than inputs.

If % change in quantity demand > % change in price, then demand in elastic there for is?

Elastic price >1

If % change in quantity demand < % change in price, then demand in inelastic there for is?

Elastic price <1

If % change in quantity demand = % change in price, then it is unit elastic?

Elastic price =1

If elastic price is infinity then demand is?

Perfectly elastic

If elastic price is 0 then?

Demand doesn’t change

If elastic price >1 as

Price goes → total revenue goes down or price goes down → total revenue goes up

If elastic price <1

Price goes down → total revenue goes down or price goes up → total revenue goes up

If elastic price =1

Price goes up → total revenue remains unchanged or price goes down → total revenue remains unchanged