question
income elasticity
answer
-responsiveness of demand with respect to income
-tells us how normal or how inferior a good is
-tells us how normal or how inferior a good is
question
what is the formula for income elasticity
answer
% change in demand / % change in income
question
what does an income elasticity >1, <1, and =1 tell us?
answer
-E>1, good is elastic, 1% change in income leads to greater than 1% change in demand
-E<1, good is inelastic, 1% change in income leads to a less than 1% change in demand.
-E=1, unit elastic, 1% change in income leads to 1% change in demand
-E<1, good is inelastic, 1% change in income leads to a less than 1% change in demand.
-E=1, unit elastic, 1% change in income leads to 1% change in demand
question
what does a positive income elasticity tell us?
answer
-as income goes up, demand goes up
-normal good
-normal good
question
what does a negative income elasticity tell us?
answer
-as income goes up, demand goes down
-inferior good
-inferior good
question
cross price elasticity of demand
answer
-the percentage change in the demand for A given a percentage change in the price of B
question
what is the formula for the cross price elasticity of demand
answer
-% change of demand good A / % change in price of good B
question
what does cross price elasticity of demand >1,<1,=1 tell us
answer
-Eab>1, elastic, 1% change in price of B, greater than 1% change in demand for A
-Eab<1, inelastic, 1% change in price of B, less than 1% change in demand for A
-Eab=1, unit elastic, 1% change in price of B, 1% change in demand for A
-Eab<1, inelastic, 1% change in price of B, less than 1% change in demand for A
-Eab=1, unit elastic, 1% change in price of B, 1% change in demand for A
question
what does a positive cross price elasticity of demand tell us?
answer
-these goods are substitutes
-as price of B goes up, demand of A goes up
-as price of B goes up, demand of A goes up
question
what does a negative cross price elasticity of demand tell us?
answer
-these goods are complements
-as price of B goes us, demand of A goes down
-as price of B goes us, demand of A goes down
question
elasticity of supply
answer
-the percentage change in quantity supplied given percentage change in price
- % change quantity supplied / % change price
- % change quantity supplied / % change price
question
what does elasticity of supply >1,<1, =1 tell us
answer
-Es>1, elastic, 1% change in price, greater than 1% change in quantity supplies
-Es<1, inelastic, 1% change in price, less than 1% change in quantity supplied
-Es=1, unit elastic, 1% change in price, 1% change in quantity supplied
-Es<1, inelastic, 1% change in price, less than 1% change in quantity supplied
-Es=1, unit elastic, 1% change in price, 1% change in quantity supplied
question
what are the two types of sales taxes?
answer
-per unit tax (gas, liquor, tobacco)
-ad valorum (to the value, to the total value of the purchase)
-responsibility for paying a sales tax is on producer/seller
-ad valorum (to the value, to the total value of the purchase)
-responsibility for paying a sales tax is on producer/seller
question
sales tax graphs (see graph 1)
answer
before tax: consumer surplus is A, B and C. producer surplus is D, E and F
after tax: Consumer surplus is A. producer surplus is F
-B,C,D,E are dead weight loss, lost because of the tax
-B and E are tax revenue, this has both a consumer and producer impact. B is the consumer impact, E is the producer impact
after tax: Consumer surplus is A. producer surplus is F
-B,C,D,E are dead weight loss, lost because of the tax
-B and E are tax revenue, this has both a consumer and producer impact. B is the consumer impact, E is the producer impact
question
How does elasticity change the impact of a tax on consumers and producers
answer
-impact of a tax is dependent upon price elasticity of demand
-the more inelastic the demand, the more the tax impacts the consumer
-the more elastic the demand, the more the tax impacts producers
-the more inelastic the demand, the more the tax impacts the consumer
-the more elastic the demand, the more the tax impacts producers
question
what are the two important assumptions about an economic agent?
answer
1. they're rational
2. they're self-interested
2. they're self-interested
question
rational
answer
-doing only those things you believe will make you better off
-economic agents weigh probability of failing vs. being successful. leads to economics of crime and terrorism
-economic agents weigh probability of failing vs. being successful. leads to economics of crime and terrorism
question
utility
answer
-the general happiness, something's usefulness.
-economics wants to measure utility, how much someone enjoys that thing. (fun meter)
-economics wants to measure utility, how much someone enjoys that thing. (fun meter)
question
utility function for two goods that are substitutes
answer
- U(m,n)= m+n
-these goods don't have to be perfect substitutes, ex. U=m+4n
-these goods don't have to be perfect substitutes, ex. U=m+4n
question
utility function for two goods that are complements
answer
=U(m,n)=m x n
-you have to have m in order to make n useful
-you have to have m in order to make n useful
question
cardinal utility
answer
-way or measuring utility. order AND magnitude of numbers matters
-if the utility of good 1 is 6 and the utility of good 2 is 3, we can say that good 1 has more utility than good 2 AND that good 1 has twice the utility of good 2
-if the utility of good 1 is 6 and the utility of good 2 is 3, we can say that good 1 has more utility than good 2 AND that good 1 has twice the utility of good 2
question
ordinal utility
answer
-way of measuring utility. ORDER ALONE matters.
-if the utility of good 1 is 6 and the utility of 2 is 3, we can say that good 1 has more utility than good 2 and THATS IT
-if the utility of good 1 is 6 and the utility of 2 is 3, we can say that good 1 has more utility than good 2 and THATS IT
question
total utility
answer
-how much utility from some bundle of goods
question
marginal utility
answer
-the additional utility from an additional unit of a good
-MU= change in U / change in x
-slope of utility function. assume decreasing marginal utility, with each additional good the utility decreases
-MU= change in U / change in x
-slope of utility function. assume decreasing marginal utility, with each additional good the utility decreases
question
optimal spending rule
answer
-two ways of writing this
1. MU1/P1 = MU2/P2. we maximize utility btw 2 goods where the price weighted marginal utilities are equal- the marginal utility of the last dollar spent on both goods is equal.
2. MU1/MU2 = P1/P2. Mental tradeoff of one good for another equals market tradeoff of one good for another. Use this equation when comparing prices to mental tradeoff, income is fixed. This is demand curve
1. MU1/P1 = MU2/P2. we maximize utility btw 2 goods where the price weighted marginal utilities are equal- the marginal utility of the last dollar spent on both goods is equal.
2. MU1/MU2 = P1/P2. Mental tradeoff of one good for another equals market tradeoff of one good for another. Use this equation when comparing prices to mental tradeoff, income is fixed. This is demand curve
question
Sole proprietorship/partnership
answer
-firm owned by one or a few people
-liability is attached to those who own the firm, all risk and money are attached to them
-easy to set up and shut down
-liability is attached to those who own the firm, all risk and money are attached to them
-easy to set up and shut down
question
corporation
answer
-legal entity, owners are determined by those who hold shares in the corporation, stock.
-liability is separated from the owner, stockholders are only liable for the money they put into the corporation
-difficult to set up and take down
-liability is separated from the owner, stockholders are only liable for the money they put into the corporation
-difficult to set up and take down
question
what is a firm's one goal?
answer
-to make profit, baby
-P(q)=p x q - C(q)
-P(q)=p x q - C(q)
question
what is the difference between economic costs and accounting costs?
answer
-both include visible costs, such as payroll, materials, capital, rent, electricity etc.
-economic costs include opportunity cost, time, rate of return your investors need
-economic costs are always more than accounting costs
-a lemonade stand is pure accounting profit b/c 0 costs, however sometimes you want to shut down the stand because the economic costs are too high (it gets hot, you'd rather watch tv)
-positive economic profit is great 🙂
-negative economic profit is bad 🙁
-0 economic profit is fine because you're covering all your costs and you want to come in and work
-economic costs include opportunity cost, time, rate of return your investors need
-economic costs are always more than accounting costs
-a lemonade stand is pure accounting profit b/c 0 costs, however sometimes you want to shut down the stand because the economic costs are too high (it gets hot, you'd rather watch tv)
-positive economic profit is great 🙂
-negative economic profit is bad 🙁
-0 economic profit is fine because you're covering all your costs and you want to come in and work
question
what is the short run?
answer
-the time period in which one input is fixed, but others can change
question
what is the long run?
answer
-the time period in which all inputs can change.
-this time frame is unknown
-this time frame is unknown
question
marginal productivity (graph 2)
answer
-the additional productivity gained from an additional worker.
-graph has increasing marginal productivity in labor, than it slows down until it hits maximum production and then eventually production begins to fall
-graph has increasing marginal productivity in labor, than it slows down until it hits maximum production and then eventually production begins to fall
question
costs in the short run
answer
-costs have two components:
-cost of the fixed input
-cost of the changing or variable input
-total cost is fixed cost + variable cost
-cost of the fixed input
-cost of the changing or variable input
-total cost is fixed cost + variable cost
question
Average costs
answer
- ATC=AFC+AVC
aka: TC/q = FC/q + VC/q
aka: TC/q = FC/q + VC/q
question
Marginal costs
answer
-the change in costs given a change in output (q)
-MC= change in total costs / change in quantity
-MC= change in total costs / change in quantity
question
variable costs graph (graph 3)
answer
-a goofy sideways S shape
-changes from concave down to concave up at the inflection point, same as one from short-run productivity curve
-changes from concave down to concave up at the inflection point, same as one from short-run productivity curve
question
Fixed costs graph (graph 4)
answer
-a horizontal line, fixed costs remain the same whether we sell 10 units or 10,000,000
question
Total cost graph (graph 5)
answer
-same shape as variable cost curve but shifted up to where fixed cost curve starts
question
marginal costs graph (graph 6)
answer
-J shape
-change in total cost / change in quantity
-change in total cost / change in quantity
question
marginals and averages
answer
-think of GPA, if I have a 3.0 gpa, if I get a C then my gpa will go down, if I get an A then my gpa will go up and if I get a B then my GPA will stay the same
question
Costs in the short run graph (graph 7)
answer
-3 parts, average variable costs, marginal costs and average total costs
-ATC starts above MC, but once they intersect, ATC increases at slower rate than MC
-AVC starts below ATC but gets closer and closer to ATC
-AFC is the vertical distance between AVC and ATC
-ATC starts above MC, but once they intersect, ATC increases at slower rate than MC
-AVC starts below ATC but gets closer and closer to ATC
-AFC is the vertical distance between AVC and ATC
question
Costs in the long run graph (graph 8)
answer
-only average costs, no more variable and fixed costs because all costs are variable in the long run
question
what are the assumptions of perfect competition?
answer
1. many buyers and sellers
2. free entry and exit (easy to enter and leave)
3. perfect information (buyers know all prices of all sellers)
4. product homogenaity (all goods are exactly the same)
-the only thing that matters in perfect competition is price
2. free entry and exit (easy to enter and leave)
3. perfect information (buyers know all prices of all sellers)
4. product homogenaity (all goods are exactly the same)
-the only thing that matters in perfect competition is price
question
price takers (graph 9)
answer
-firms are price takers, they have no control over price
-the firm demand curve is perfectly elastic.
-P is the highest price that a firm can change for a product or else they won't sell anything. driven by market price
-the firm demand curve is perfectly elastic.
-P is the highest price that a firm can change for a product or else they won't sell anything. driven by market price
question
marginal revenue
answer
-additional revenue from selling an additional unit of a good
-MR= change in revenue / change in quantity
-demand curve for firm in perfect competition
-MR= change in revenue / change in quantity
-demand curve for firm in perfect competition
question
how do we maximize profit?
answer
-ensure that marginal cost is equal to marginal revenue
-if marginal revenue is higher than marginal cost, then you have less costs but also losing out on some revenue.
-if marginal revenue is lower than marginal cost, then you lose money
-if marginal revenue is higher than marginal cost, then you have less costs but also losing out on some revenue.
-if marginal revenue is lower than marginal cost, then you lose money
question
costs vs. revenue vs. profits conclusions (graphs 10,11,12,13, 14)
answer
-A is where MC=MR, B is where q hits ATC, C is where q hits AVC
-If A is above B, then revenue is higher than cost and the firm profits and operates (graph 11)
-If A is the same as B, then revenue is the same and costs and this is fine because we cover economic costs (graph 12)
-If A is below B, then costs are higher then revenue and the firm doesn't profit (graph 10),HOWEVER:
-if revenue is higher than the variable costs, then firm operates. (graph 13, revenue covers part of fixed costs and all of variable costs
-If revenue is lower than the variable costs, then the firm shuts down (graph 14, revenue covers only part of variable costs and none of fixed costs if you chose to operate. But if you shut down, then you only have to pay fixed costs.)
-If A is above B, then revenue is higher than cost and the firm profits and operates (graph 11)
-If A is the same as B, then revenue is the same and costs and this is fine because we cover economic costs (graph 12)
-If A is below B, then costs are higher then revenue and the firm doesn't profit (graph 10),HOWEVER:
-if revenue is higher than the variable costs, then firm operates. (graph 13, revenue covers part of fixed costs and all of variable costs
-If revenue is lower than the variable costs, then the firm shuts down (graph 14, revenue covers only part of variable costs and none of fixed costs if you chose to operate. But if you shut down, then you only have to pay fixed costs.)
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