Willingness

Ability

Given price

price -> buy-

Q = f(Px, I, Py, ...)

graph of inverse demand function

Movements

Shifts

difference between highest price willing to pay and actual price

Normal goods: positive income elasticity

Inferior goods: negative income elasticity

Substitutes: positive cross-price elasticity

Complements: negative cross-price elasticity

price decrease together

price decrease -> real purchasing power increase

Accounting profit = total revenue - accounting costs (explicit costs)

Economic profit = total revenue - total economic costs = total revenue - explicit costs - implicit costs = accounting profit - implicit costs

Normal profit is the accounting profit that makes economic profit zero

no impact on market price (price taker)

identical products

horizontal demand curve

price maker

downward-sloping demand curve

P = MR = MC

P = MR = MC = ATC

Zero economic profits

Total revenue (TR) = total cost (TC)

Average total cost (ATC) =price (P)

Short-run shutdown point: average revenue(AR) = average variable cost (AVC)

Long-run shutdown point: average revenue (AR) equals average total cost (ATC)

AR >= ATC, firm stay

ATC > AR >= AVC, firm stay in the short run, but will exit in the long run

AR < AVC, firm shut down in the short run and exit in the long run

lower cost structures when it grows in size

Reasons

less efficient with size

Reasons

A small number of potential sellers

Products close or differentiated

Entry into the market is difficult

Substantial pricing power

Products are highly differentiated

Assumption: An increase will not be followed but a decrease will

Result: Elasticity of demand is greater when price increases than decreases

Dominant firm (DF): determining the market price as a monopoly company, when MR=MC

Other competitive firms (CF) take market price as given

If the other companies undercut the price, the market share of the dominant firm will increase ultimately

Over time, the dominant company's market share tends to decrease

Single seller

product has no close substitute

Entry into the market is very difficult

Considerable pricing power

Non-price strategies such as advertising

Average cost pricing: P = ATC, no economic profit

Marginal cost pricing: P = MC, government subsidy

N firms concentration ratio (CRn)

Herfindahl-Hirschman Index (HHI)

Consumer surplus reduced to zero

In a country

In a given period of time

Newly goods and services produced

Final goods and services

Market value

Exclusions

Nominal GDP is measured by current prices

Real GDP is measured by constant prices

Aggregate Output (AO): The value of all the goods and services produced in a specified period of times

Aggregate Income (Al): The value of all the payments earned by the suppliers of factors used in the production of goods and services

Aggregate Expenditure (AE): The total amount spent on the goods and services produced in the domestic economy during the period

AO = AI = AE

GDP

NI

PI

Marginal Propensity

Long-Run Equilibrium

Recessionary Gap

Inflationary Gap

Stagflation

Discretionary

Automatic