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Elasticity
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how one economic variable responds to changes in another
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price elasticity of demand
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responsiveness of the quantity demanded to a change in price
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Determinants of Price Elasticity of Demand
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availability of close substitutes
necessities vs luxuries
definition of the market
passage of time
necessities vs luxuries
definition of the market
passage of time
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Understand the relationship between price elasticity and total revenue (TR)
answer
- When demand is elastic price and TR move in opposite directions
- When demand is inelastic price and TR move in the same direction
- When demand is inelastic price and TR move in the same direction
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cross-price elasticity of demand
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% change in the quantity demanded of one good divided by % change in the price of another good
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Income Elasticity
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measure of the responsiveness of quantity demanded to changes in income
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price elasticity of supply
answer
responsiveness of quantity supplied to a change in price
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perfectly inelastic described on a graph
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vertical
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perfectly elastic described on a graph
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horizontal
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Technology
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process to turn inputs to outputs
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technological change
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a change in the ability of a firm to produce a given level of output with a given quantity of inputs
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short run
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at least one input is fixed
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long run
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a period of time where a firm can vary all inputs, adopt a new technology, & increase or decrease plant size
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Total cost
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the cost of all the inputs a firm uses in production
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variable costs
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costs that change as output changes
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fixed costs
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costs that remain constant as output changes
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explicit costs
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costs that require a firm to spend money
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implicit costs
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nonmonetary opportunity cost
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production function
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the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
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Law of Diminishing Marginal Returns
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adding more of a variable to the same amount of a fixed input will cause the marginal product of the variable input to decline
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MPL > APL
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APL is increasing
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MPL < APL
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APL is decreasing
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MPL = APL
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APL is at its maximum
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long-run average total cost curve
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shows the lowest cost at which a firm is able to produce a quantity of output in the long run when no inputs are fixed
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economies of scale
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when a firm's long-run average cost falls as it increases the quantity out output it produces
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minimum efficient scale
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the level of output at which all economies of scale are exhausted
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perfectly competitive market
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many buyers and sellers
all firms selling identical products
no barriers to new firms entering the market
all firms selling identical products
no barriers to new firms entering the market
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Price taker
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buyer or seller that is unable to affect market price
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Average Revenue (AR)
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total revenue divided by the quantity of the product sold
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marginal revenue
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the change in total revenue from an additional unit sold
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profit maximization
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- produce where the difference between TR and TC is the largest
- Produce where MR = MC
- Produce where MR = MC
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Price elasticity of demand formula
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% change in quantity demanded / % change in price
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midpoint formula
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(%change Qd good X) / (%change Price good Y)
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Cross-price elasticity of demand formula
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% change in quantity demanded / % change in income
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Income elasticity of demand formula
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% change in quantity supplied divided by % change in price
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price elasticity of supply formula
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TC = FC + VC
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total cost formula
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TC/Q
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Average Total Cost (ATC) formula
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FC/Q
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Average Fixed Cost (AFC) formula
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VC/Q
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Average Variable Cost (AVC) formula
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AFC + AVC
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Average Total Cost (ATC) formula
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change in total cost divided by change in quantity
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Marginal Cost (MC) formula
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total revenue minus total cost
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Profit formula
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TR/Q
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Average Revenue (AR) formula
answer
change in total revenue / change in quantity
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Marginal Revenue (MR) formula
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(ATC - AVC)(# units)
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Total Fixed Cost (TFC) formula
answer
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