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Percent Change/Demand Elasticity Formula
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%Δ = (new - old)/old
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Demand Elasticity
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Measure of responsiveness relating change in quantity demanded to a change in price.
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Point Elasticity
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Allows us to calculate elasticity at any point, without the need to compare percentage changes.
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Supply Elasticity
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Measures the responsiveness to the supply of a good or service after a change in its market price.
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Income Elasticity
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The relative change in the quantity demanded of a good in response to a change in income.
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Cross Price Elasticity
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The relative change in the quantity demanded of a good in response to change in price of another good.
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Total Utility
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Total satisfaction resulting from consumption.
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Marginal Utility
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The additional satisfaction obtained by consuming one more unit of a good.
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Optimal Consumption
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For each dollar spent, it will result in highest total utility in the end.
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Mistakes in probability and value.
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People can miscalculate (over or underestimate) probability and payoff.
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Sunk Cost Fallacy
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A cost in the past and unrecoverable. However, many people consider these costs when making decisions about the future.
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Explicit Costs
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A direct payment like writing a check or paying someone.
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Implicit Costs
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Represent opportunity costs.
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Implicit Costs of the Firm
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Expenses that managers do not have to pay out of pocket.
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Accounting Profits
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The income entrepreneurs earn.
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Economic Profits
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The opportunity costs.
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Normal Rate of Return
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The opportunity cost of not doing another business/the accounting profit we could've earned elsewhere.
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Theory of the Firm
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The goal of profit maximization and the idea that profit is easier to numerically quantify than utility.
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Production Function
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The technological relationship between maximum physical output and the quantity of capital and labor used in the production process. AKA: Given a certain # of inputs, how much output can we make?
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Inputs
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Labor (L) and Capital (K)
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Output
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A function of inputs.
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Average Product of Labor (APL) Formula
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TP/L
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Marginal Product of Labor (MPL) Formula
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change in total product/change in labor
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Relationship between product and costs.
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It's an inverse relationship. The harder it is to produce something, the more labor it takes, the higher the cost of producing it and vice versa.
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Shape of product and cost curves in short run.
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U-Shaped
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Average and Margin
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The average follows the margin.
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Short Run
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A time period when at least one input cannot be changed. Capital is fixed, but labor is variable.
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Long Run
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The time period in which all factors of production are variable.
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Economies of Scale
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Average cost falls when production increases. Happens when: specialization of all inputs, improved capital input and larger volume equipment.
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Diseconomies of Scale
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Average costs increase with increases in production. Happens when: limited ability of management, the costs of coordination, communication and technology increase and the "bureaucracy" in HR.
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Minimum Efficient Scale (MES)
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The lowest output level at which long run average cost is at a minimum.
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Demand and Supply for Health Care
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Scarce resource. High demand, lower supply.
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Intermediaries in Health Care
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Insurance Companies:
1) Sharing risk
2) Insurance can change behavior
3) When insurance pays we don't care about price
1) Sharing risk
2) Insurance can change behavior
3) When insurance pays we don't care about price
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Adverse Selection
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A high-risk person benefits more from insurance, so is more likely to purchase it. This causes too much risk in the insurance pool and expenses and premiums go up. It causes healthy people to exit insurance market.
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Moral Hazard
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Occurs when a party that is protected from risk (by insurance) behaves differently from the way it would behave if it were fully exposed to the risk.
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U.S. Health Care System
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Rationed by prices and ability to pay.
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Marginal Cost (MC)
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The change in total costs due to increase in output.
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Average Variable Cost (AVC) Formula
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TVC/Q
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Average Fixed Cost (AFC) Formula
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TFC/Q
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Canada's Health Care System
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Rationed by long wait times and limited availability of certain drugs and doctors.
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Elasticity
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Sensitivity between two variables.
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Demand is elastic when...
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the quantity demanded is relatively responsive to a change in the product's price.
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Demand is inelastic when...
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the quantity demanded is relatively unresponsive to a change in the product's price.
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The 3 Determinants of Price Elasticity of Demand
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Number of substitutes, share of income spent on a good and passage of time.
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If price increases...
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demand decreases
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If price decreases...
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demand increases
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Point Elasticity Formula
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1/slope x P/Q
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Point elasticity formula for a downward sloping linear demand function written in the form Q=f(P)
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ED = (Coefficient on Price) x P/Q
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Revenue will increase if...
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demand is elastic
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Revenue will decrease if...
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demand is inelastic
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What do the income elasticity and cross-price elasticity formulas measure?
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This roughly measures how far the demand curve horizontally shifts when income changes.
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Income Elasticity of Demand Formula
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EI = % change in quantity demanded / % change in income at a given price <,>,= 0
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Normal Good
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A good consumers buy more of as income rises, holding other things constant. (Ceteris Paribus)
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Inferior Good
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a good that consumers purchase less of when their incomes increase. (Ceteris Paribus)
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Supply Elasticity Formula
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ES = % change in quantity supplied / % change in price > 0
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The 2 Determinants of Supply Elasticity
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How costly it is to produce more output units when more inputs are needed and time.
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Cross-Price Elasticity Formula
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Exy = (% change in quantity demand for good X) / (% change price Y)
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If two goods are substitutes...
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the cross-price elasticity will be positive.
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If two goods are complements...
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the cross-price elasticity will be negative.
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If two goods are unrelated...
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the cross-price elasticity will be zero.
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The goal of a consumer is to...
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maximize utility.
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Marginal utility is...
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diminishing. It increases our happiness at first. But ends up decreasing as we consume more and more of a good.
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Examples of negative marginal utility:
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Too much food and/or alcohol
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Can total utility be negative?
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Yes, if you really overdo it.
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Could marginal utility ever be increasing?
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It's possible, but only at first and briefly.
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What is the relationship between total and marginal utility?
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As long as marginal utility is positive, the total utility increases with an increase in the consumption of a commodity. As marginal utility from each successive unit diminishes, at that time total utility increases but at a diminishing rate. When total utility is maximum, the marginal utility reaches zero.
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Accounting Profits Formula
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total revenue - explicit costs
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Economic Profits Formula
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accounting profits - implicit costs
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Diminishing Marginal Product
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After some point, successive increases in a variable factor of production, like labor, added to fixed factors of production will result in smaller increases in output.
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Marginal Product
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The physical output that is due to the addition of one more unit of a variable factor of production.
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Marginal Cost (MC) Formula
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change in TC/change in Q
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Total Cost (TC) Formula
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TFC + TVC
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Average Total Cost (ATC) Formula
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TC/Q
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Numbers and Costs
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big, getting bigger, skewed, old people
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