CT7 Part 1

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CT7 Part 1
2013-08-27 04:58:06
actuarial ct7

CT7 Cards
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  1. Total Revenue (TR)
    refers to total earnings of firm from selling specific goo over specified time period
  2. Average Revenue (AR)
    amount earned for each unit of good sold (=TR/Q)
  3. Marginal Revenue (MR)
    change in the Total Revenue obtained by selling one more unit of good
  4. Price Taker
    firm that accepts the market price determined by the interaction of supply & demand
  5. Profit Maximising Level of Output
    occurs where MR=MC
  6. Normal Profit
    opportunity cost of being in business, minimum return required by owners to stay in business
  7. Supernormal Profit
    • profit in excess of normal profit
    • aka pure profit, economic profit, abnormal profit
  8. Short Run Shut Down Point
    where AR curve is tangential to the AVC curve
  9. Long Run Shut Down Point
    where AR curve is tangential to the LRAC curve
  10. Scarcity
    excess of human wants over what can be produced to fulfill those wants
  11. Consumption
    act of using goods and services to satisfy wants
  12. Production
    transformation of inputs into outputs to earn profit or meet objective
  13. Three Factors of production
    • 1. Labour: all forms of human input
    • 2. Land & Raw Materials: all naturally occurring resources
    • 3. Capital: manufactured resources eg factories/computers
  14. Recession
    • period where national output falls for few months or more
    • i.e. actual economic growth negative
  15. Inflation
    general rise in level of prices throughout economy
  16. Balance of Trade
    exports of goods and services - imports of goods and services
  17. Demand-side Policy
    • seeks to influence level of spending (thus, aggregate demand)
    • governmant can: cut taxes, incr. gvt spending, reduce interest rates
  18. Supply-side Policy
    • seeks to influence level of production directly (thus, aggregate supply)
    • government can: introduce tax incentives, new training schemes, or build new infrastructure
  19. Three key allocation decisions faced by society
    • 1. What G&S produced and in what quantities
    • 2. How G&S produced
    • 3. For whom G&S produced
  20. Opportunity Cost
    cost of the activity measured in terms of the best foregone alternative
  21. Rational Choice
    • involves weighing up benefit of activity against opportunity cost
    • weighs up marginal benefit of activity against marginal cost
  22. Marginal Cost
    • additional cost of producing one more unit/output
    • additional cost of one more "unit" of particular activity
  23. Marginal Benefit
    • additional benefit of consuming one more unit/output
    • additional benefit of one more "unit" of a particular activity
  24. Firm's economic choices
    • How much to produce
    • What to charge
    • What type / how many inputs to use
    • What production techniques
    • Whether to invest in new capital / undertake R&D
    • How to respond in changes in competition 
    • How to respond to changes in market
  25. Law of Demand
    quantity of good demanded per period of time will fall as price rises and rise as price falls, ceteris paribus
  26. Income Effect
    effect of a change in price on QD arising from consumer being better / worse off after change
  27. Substitution Effect
    effect of change in price on QD arising from consumer switching to/from alternate products
  28. Quantity Demanded (QD)
    amount of good a consumer is willing and able to buy at given price over given time period
  29. Substitute Goods
    • Pair of goods which are considered by consumers to be alternatives to each other
    • as price of one goes up, demand for other rises
  30. Complementary Goods
    • pair of goods consumed together
    • as price of one goes up, demand for both will fall
  31. Normal Good
    goods whose demand rises as people's incomes rise
  32. Inferior Goods
    goods whose demand falls as people's incomes rise
  33. Determinants of Demand
    • (In addition to price)
    • Consumer tastes
    • Number and price of substitute goods
    • Number and price of complementary goods
    • Consumer incomes
    • Distribution of income
    • Expectations of future price changes
  34. Why does Quantity Supplied increases with Price?
    • When firms incr output above certain level costs rise more rapidly, thus this only worthwhile if prices rise
    • Higher price means more profitable, firms produce more of these goods than less profitable ones
    • More firms set up production if prices remain high
  35. Factors influencing supply of good
    • Costs of production and distribution
    • Profitability of alternate products (substitutes in supply)
    • Profitability of goods in joint supply
    • Random shocks
    • Aims of producers
    • Expectations of future price changes
    • Number of Suppliers
    • Price
  36. What four factors may lead to change in firm's production costs
    • Change in input prices
    • Change in technology
    • Organisational changes within firm
    • Change in government policy
  37. Substitutes in supply
    two goods where increased production of one means diverting resources from another
  38. Goods in Joint Supply
    two goods where production of more of one leads to the production of more of the other
  39. Market clearing
    When supply matches demand leaving no shortage or surplus
  40. Free Market
    • one in which there is no government intervention
    • individual producers and consumers free to make own economic decisions
  41. Price Mechanism
    system whereby changes in price in response to changes in demand and supply (to make demand equal supply)
  42. Price Elasticity of Demand (PED)
    • measures sensitivity of QD to change in price
    • ε=%
    • change in QD / % change in price
  43. Elastic / Unit Elasticity / Inelastic
    • Elastic if |PED|>1
    • Inelastic if |PED|<1
    • Unit elasticity if PED = -1
  44. Determinants of PED
    • Availability of substitute goods
    • Proportion of income spent on goods
    • Time period (takes longer to find alternative goods)
  45. Total Sales Revenue
    total earned from selling a particular good at a particular price, equal to price x quantity
  46. Income Elasticity of Demand (IED)
    • measures sensitivity of QD to change in consumer incomes
    • εY = % change QD / % change income
  47. Cross-Price Elasticity of Demand (CPED)
    • measures sensitivity of QD of one good to change in price in another
    • εC = % change QD Good X / % change Price Good Y
  48. Price Elasticity of Supply (PES)
    • measures sensitivity of QS to change in price
    • εS = % change in QS / % change Price
  49. Factors influencing PES
    • How costs increase with output: lower marginal costs imply increasing PES
    • Time period
  50. Speculation
    where people make trading decisions based on expectations of future price movements
  51. Risk / Uncertainty
    Risk: situation where probabilities of different possible outcomes are known, but it is not known which outcome will occur
  52. Ways firm can deal with uncertainty
    • Holding stock / inventory
    • Purchasing information
    • Using futures & forwards
    • Using insurance
  53. Futures / Forwards
    Agreements to trade a specified quantity of a good / asset at specified price at an agreed date in future
  54. Total Utility
    total satisfaction derived from consumption of goods within given time period
  55. Marginal Utility
    addition to total satisfaction derived from consumption of one extra unit of good within given time period, assuming consumption of other goods constant
  56. Principle of diminishing marginal utility
    • additional utility gained from consuming successive units of a good will decrease
    • may eventually become zero or even negative
  57. Marginal Consumer Surplus (MCS)
    • excess utility gained over and above price paid for an additional unit of good
    • MCS = MU - P
  58. Total Consumer Surplus (TCS)
    • total excess of what people would have paid over what was actually paid
    • TCS = TU - TE
  59. Rational consumer behaviour
    • attempts to max TCS
    • if MU > P, consumer should buy more
    • TCS maxed when consumer consumed until MU = P
  60. Weaknesses of one-commodity version of Marginal Utility theory
    • Ignores interdependence of changes in consumption of different goods
    • Ignores dependence of consumption on income
  61. Diminishing Marginal Utility of Income
    • refers to situation which an individual gains less additional utility from each extra dollar of income
    • represented by Marginal Utility curve which is upward sloping and concave
  62. Adverse Selection
    • describes fact that people who know they are particularly bad risks are more inclined to take out insurance than those who know they are good risks
    • occurs when information is imperfect
    • aka "self-selection" or "anti-selection"
    • to reduce: firms need to underwrite, then put people into small homogeneous pool and charge appropriately
  63. Moral Hazard
    • policyholder may act in way that makes insured event more likely, safe in knowledge that they have insurance
    • makes insurance more expensive
    • to reduce: add excesses, claim caps, exclusions, premium discounts for no claims
  64. Feasible insurance contract
    contract where the minimum premium an insurer is prepared to charge is less than the maximum amount a potential policyholder willing to pay
  65. Max Insurance Premium Individual will pay
    • Max Premium P paid to insure against loss X is
    • E[U(a-X)] = U(a-P)
    • where a = initial level of wealth
  66. Min Insurance Premium Firm will accept
    • Insurance Premium Q prepared to accept for potential loss Y is
    • E[U(a+Q-Y)] = U(a)
    • where a = initial level of wealth
  67. Explicit Costs and Inplicit Costs
    • Explicit costs: payments to external suppliers
    • Internal costs: use of factors already owned by firm (no money paid externally)
  68. Bygones Principle
    when deciding how much to produce, only VC should be considered (ignore sunk and fixed costs)
  69. Law of diminishing (marginal) returns
    • as successive units of a variable factor are combined with fixed amounts of fixed factors, then the increase in total output will eventually decrease
    • applies in SR when fixed factors become overloaded
  70. Opportunity Cost of Firm
    earnings foregone using factors to produce one good instead of another
  71. Total Physical Product (TPP)
    • amount of output produced over given time period from a given quantity of inputs
    • TPP = f(K,L), where f() is the production function
  72. Production Function
    captures relationship between quantities of factor inputs
  73. Average Physical Product (APP)
    • TPP per unit of variable factor
    • APP = TPP / Qv
  74. Marginal Physical Product (MPP)
    • extra output produced by employing one extra unit of the variable factor, when input of other factors held constant
    • MPP = change TPP / change Qv
  75. LR decisions made by firms
    • scale of production
    • location of production
    • production techniques to use
  76. Economies of Scale
    situation where LRAC fall as the scale of production is increased
  77. Increasing / Constant / Decreasing Returns to Scale
    When changing all inputs by same % leads to greater / same / smaller % change in output
  78. Six Plant Economies of Scale Factors (arise due to bigger factory)
    • specialisation & division of labour
    • indivisibilities
    • "container" principle
    • greater efficiency of large machines
    • production of by-products
    • multistage production - saves time and cost involved in changing factories between stages
  79. "Other" Economies of Scale Factors
    • organisational
    • spreading of overhead costs
    • financial economies
    • scope economies (eg shared marketing)
  80. Rationalisation
    • comes under "organisational" economies of scale factor
    • reorganisation of production to reduce waste and duplication
  81. Diseconomies of Scale
    • refers to situation where LRAC rise as scale of production increased, arises from
    • managerial problems
    • alienation & poor motivation of workforce
    • poor industrial relations
    • problems in one area holding up production
  82. Factors influencing choice of location
    • factor availability, cost and suitability
    • transport costs
  83. External Economies of Scale
    • refers to situation where firm's AC fall as size of whole industry increases
    • may reflect improvements in industry's infrastructure
  84. Cost Minimising Combination of Factors
    • Given N factors A...N,
    • MPPA/PA = ... = MPPN / PN
  85. Long Run Average Cost Curve
    • shows how average costs vary with output, assuming all factors can be varied and costs minimised
    • typically an "envelope curve" lying below corresponding SRACs, which lie tangential to it
  86. Minimum Efficient Scale (MES)
    output level beyond which no further economies of scale can be reached
  87. Assumptions underlying LRAC
    • fctor prices are given
    • technology and factor quality given
    • firms choose cost-minimising combo of factors for each output level