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Accounting Costs =
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Explicit Costs
question
Accounting Profits =
answer
Total Revenue - Explicit Costs
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What is the value of the resources ou already own?
answer
Opportunity Cost
question
Economic Profit =
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Total Revenue - Explicit Costs - Implicit Costs
question
The cost of a farmer's machinery, workers, seeds are referred to as
answer
Explicit Costs
question
If someone could be making $5 more per hour working somewhere else, that is an example of _______
answer
Opportunity Cost
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What does a negative economic profit mean?
answer
Could be making more money doing something different or working in a different industry.
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Zero Economic Profit is referred to as _____
answer
Normal Accounting Profit
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If a company has zero economic profit, then they are making :
The same as other firms
Less than other firms
Losing Money
More than other firms
The same as other firms
Less than other firms
Losing Money
More than other firms
answer
The same as other firms
question
If a price is lower, ____ of a good will be bought.
answer
More
question
What does Ceteris Paribus mean?
answer
All else being the same (having constants)
question
What are incentives to buy?
answer
Price, Income, Luxury or Necessity, Tastes or preferences, weather, expectations for future, etc.
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Quantity - Demand is a function of
answer
Pproduct, Psubstituteproducts, Pcost, Income, Weather, etc...
question
Law of Supply
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More of a good will be provided the higher its price, less will be provided the lower its price, ceteris paribus.
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Sellers like ______ prices
answer
Higher
question
A suppliers decision is more complicated than just price
answer
True (Price of product, profitability-cost of production, cost of raw materials, taxes, paperowkr, licensing, employment, transportation, and many more things)
question
What of the many factors that affect a suppliers decision to we want to look at?
answer
Price, Quantity Supplied
question
A change in price will _________________ (supply)
answer
move along the supply curve, changing the quantity supplied
question
A change in supply means
answer
the curve SHIFTS.
question
A chage in QUANTITY supplied means we
answer
moved to a new point on the existing supply curve
question
The price where people want to buy and businesses want to sell
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The Equilibrium Price
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Buyers with ______ bid, seller with ______ price
answer
highest, lowest
question
Surplus means
answer
there is more supply than demand
question
Shortage is when
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consumers can't get as much as they want, so price goes up
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At any price other than equilibrium price
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the factors will push it back (no matter what the price of oil is, factors will push it back to normal bcs people won't buy it as much so it'll be forced back)
question
Gains from Trade =
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Difference between value a good creates and it's cost
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When supply is higher than demand, there is
answer
waste
question
What determines if a business should raise or lower prices?
answer
Price elasticity
question
What is price elasticity?
answer
The level of reaction that consumers have to a change in price of a product
question
Price Elasticity of Demand =
answer
Measures te responsiveness of quantity demand to a change in price
question
Edemand =
answer
%△Qd / %△Price
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Is Edemand negative or positive usually?
answer
Negative
question
What do we need to know for Edemand?
answer
Dollar amount of price change, and starting price
question
%△Qd =
answer
[(Qf-Qi) / (Qf+Qi)/2]
question
%△Price =
answer
[(Pf-Pi) / (Pf+Pi)/2]
question
If Ed is less than 1, what does this mean?
answer
The price is inelastic
question
Why does cigarette price not matter to a smoker?
answer
They are going to buy ciggys no matter what
question
If |Ed| < 1, would you raise or lower price?
answer
Raise (the price is inelastic so people will still buy with higher price)
question
If |Ed| > 1, would you raise or lower price?
answer
Lower (People will react a lot to price change so you will get more buyers with lower price. Can think of electricity bcs you have to buy it no matter what the price is)
question
Can |Ed| == 1, and if so what does it mean?
answer
Yes. The price is perfectly elastic. (A 10% increase in price results in a -10% profits)
question
What are the factors of Perfect Competition?
answer
Large # of sellers
Large # of buyers
No individual is large enough to affect the market
Identical Goods (commodities)
Perfect Information (sellers and buyers know each other)
Marginal Revenue = Marginal Cost
Easy Entry and Exit
No market power (firm can't adjust price)
0$ economic profit (in long run)
Firms demand curve is flat
Large # of buyers
No individual is large enough to affect the market
Identical Goods (commodities)
Perfect Information (sellers and buyers know each other)
Marginal Revenue = Marginal Cost
Easy Entry and Exit
No market power (firm can't adjust price)
0$ economic profit (in long run)
Firms demand curve is flat
question
Why is the demand curve for a firm flat in a perfectly competitive market?
answer
A perfectly competitive firm faces perfectly elastic demand. (the price is always going to be the same)
question
Why can't a firm raise or lower price in a perfectly competitive market?
answer
Too high of a price, they lose customers. Too low of a price, they get too many customers.
question
What is P*?
answer
Equilibrium Price
question
What factors can a firm change in a perfectly competitive market if they can't adjust price?
answer
Output
question
Marginal Revenue(formula) =
answer
addition to tot revenue / addition to output
(△TR / △Q)
(△TR / △Q)
question
What should a firm do to maximize profit in a perfectly competitive market?
answer
Make Marginal Revenue = Marginal Cost
question
In a perfectly competitive market, MR =
answer
P* or MC
question
Marginal Cost is
answer
the cost of producing on more unit
question
What is Q* on a firm's price and q graph?
answer
Best level of output
question
Marginal Revenue =
answer
Marginal Cost
question
Scarcity =
answer
wants > available resources
question
Shortage =
answer
quantity demanded > quantity supplied (at the price sellers want to sell at)
question
What makes a straight choice model?
answer
Constant Opportunity Cost (Amount to give up doesn't change)
question
What makes a concave choice model?
answer
Changing Opportunity Cost (Amount to give up changes)
question
Increasing Opportunity cost creates a ________ concaving choice model.
answer
Negative ( the more resources you dedicate to choice #2, the less you are getting back so slope is increasing negatively)
question
Opportunity Cost =
answer
What one sacrifices / What one gains
question
A smaller opportunity cost is
answer
Better
question
(Demand Equation) | Qd =
answer
a - (b)P. (where a is demand determinants | downwards sloping)
question
Increase in demand means the curve
answer
shifts to the right (vise versa for decrease)
question
Shift in demand happens when there is
answer
A change in economic factors causes a different quantity to be demanded at every price.
question
(Supply Equation) | Qs =
answer
c + (d)P. (Where c = determinants of supply | upwards sloping)
question
Normal Good:
answer
With more income, you will buy more of it
question
Inferior Good:
answer
A product for which demand decreases with income increase (SPAM)
question
Substitute:
answer
A good or service that we can use in place of another good or service (Coke and Pepsi)
question
Complements:
answer
Goods or services that are often used together so that consumption of one good tneds to enhance the consumption of the other (socks and shoes)
question
Inputs or factors of production:
answer
The combination of labor materials and machinery that is used to produce goods and services.
question
Four step process for Equilibrium:
answer
1) draw demand and supply in equilibrium before the "shock"
2) Identify the determinant that changes to determine if changes supply or demand
3) decide if it causes curve to shift left or right
4) Identify new equilibrium, as well as new P and Q.
2) Identify the determinant that changes to determine if changes supply or demand
3) decide if it causes curve to shift left or right
4) Identify new equilibrium, as well as new P and Q.
question
Does the hurricane in Florida change the supply or demand of oranges? Which way will the curve shift?
answer
Supply. Left. (Shortage because Qd > Qs)
question
Technology makes making beer easier, does this change supply or demand? Which way will the curve shift?
answer
Supply. Right (increase in the amount of beer available)
question
Esupply =
answer
%△Qs / %△Price
question
Time in relation to elasticity?
answer
Ed is often lower in the short run, compared to the long run
question
Demand in relation to elasticity?
answer
More elastic when consumers have more substitutes
question
Supply in relation to elasticity?
answer
More elastic when goods are manufactured with easily obtained inputs and can be kept for long periods.
question
Income elasticity of demand (Eincome) =
answer
%△Qd / %△Income
question
For Normal Goods, the income elasticity is _______
answer
positive (increase in income will increase quantity demanded)
question
For Inferior Gods, the income elasticity is ______
answer
negative (increase in income will decrease quantity demanded)
question
If |Eincome| >> 1, then the good is
answer
a normal luxury good
question
Cross Price Elasticity of Demand (CPE) =
answer
%△Qd of A / %△Price of B
question
Example of CPE 2 =
answer
Qd of contacts goes up, so does the price of glasses (positive CPE | Substitutes)
question
Example of CPE 1 =
answer
Spaghetti an Meatballs. As more Spaghetti is demanded, the price of meatballs drops. (Negative CPE | Complements)
question
The further away from 0 (either negative or positive) the CPE is,
answer
the more closely the goods are related (either substitutes or complements)
question
TR per unit is "Average Revenue" =
answer
TR / Q = Price (per unit)
question
TC per unit is "Average Cost" =
answer
TC / Q = AC (aka ATC)
question
VC per unit is "Average Variable cost" =
answer
VC / Q = AVC
question
What do we do to Marginal Cost to get it in terms of per unit?
answer
Nothing, it already is per unit.
question
If profit per unit = $0
answer
the firm has a normal profit
question
If profit per unit > $0
answer
the firm has economic profit
question
If profit per unit < $0
answer
the firm has economic loss (just because they are at economic loss doesn't mean the business is losing money in terms of accounting)
question
Accountants count
answer
Explicit Costs
question
Economists count
answer
Explicit and implicit costs
question
Accountatns calculate profit by subtracting explicit cost from Total Revenue. How do economists calculate economic profit?
answer
Total Revenu - (explicit + implicit costs)
question
Total Revenue =
answer
Price * Quantity
question
$0 economic profit means
answer
Total revenue covers all economic costs, both explicit and implicit.
Accounting profit = implicit cost
Accounting profit = implicit cost
question
The law of demand says, as price falls
answer
quantity demanded increases; all else equal
question
What happens when all those other factors (like income, preferences, and tastes) change, but the price stays constant?
answer
The demand curve changes
question
The law of supply tells us there is a direct relationship between price and quantity supplied. This means ...
answer
when price falls, quantity supplied falls
question
A firms profitability is determined by ____ and ______
answer
price and cost of production
question
A change in price means
answer
we move to a new price and quantity combination on the EXISTING supply curver
question
Cost increase means the firm has less incentive to produce which means what for which curve?
answer
the supply curve shifts to the left
question
There is a _______ when the quantity supplied is greater than the quantity demanded at the market price.
answer
Surplus
question
In an efficient market, the gains from trade are maximized at ____
answer
equilibrium
question
Marginal Revenue (for a firm) is
answer
marginal benefit of producing and selling one more unit
question
For a perfectly competitive firm, marginal revenue is
answer
the market price (P*)
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