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Things that can effect a change in supply

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prices of inputs, prices of substitues in production, # of firms, technology, and expecting future prices.

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A change in quantity demanded/ supplied can only happen when...

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There is a change in the price of that good

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Things that effect a change in demand

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Income, prices of related goods, tastes/ preferences, population/ demographics, expected future prices

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Define Elasticity

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A measure of how much one thing changed in reaction to something else.

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Types of Elasticity

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Price Elasticity of Demand

Price Elasticity of Supply

Cross Price Elasticity of demand

Income elasticity of demand

Price Elasticity of Supply

Cross Price Elasticity of demand

Income elasticity of demand

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Types of Costs

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Opportunity Cost

Marginal Cost (MC)

Total Cost (TC)

Average total cost (ATC)

Variable Cost (VC)

Average Variable Cost (AVC)

Fixed Cost (FC)

Average Fixed Cost (AFC)

Marginal Cost (MC)

Total Cost (TC)

Average total cost (ATC)

Variable Cost (VC)

Average Variable Cost (AVC)

Fixed Cost (FC)

Average Fixed Cost (AFC)

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Opportunity Cost

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the best alternative given up in a decision

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Marginal Cost (MC)

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The cost of the last unit produced/consumed

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Total Cost (TC)

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overall cost of production

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Average total cost (ATC)

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The cost of production per unit

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Variable cost (VC)

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the cost that changes based on the number of inputs ex (wages/salaries)

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Average variable cost (AVC)

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variable cost per unit

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Fixed Cost (FC)

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the cost that does not change based on the number of inputs, ex) rent

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Average Fixed Cost (AFC)

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FC per unit

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Long Run vs Short Run

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LR- All costs are VC

SR- All costs are FC

SR- All costs are FC

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The 4 Market Structures

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Perfect comp

Monopolistic comp

Dligopoly

Monopoly

Monopolistic comp

Dligopoly

Monopoly

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Define Perfect Comp

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Many Firms

Identical Goods

No/low Barriers to entry

Identical Goods

No/low Barriers to entry

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Monopolistic Comp

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Many firms

Differentiated goods

Medium barriers to entry

Differentiated goods

Medium barriers to entry

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Dligopoly

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2-5 dominant firms

Identical or differentiated

high barriers to entry

Identical or differentiated

high barriers to entry

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Monopoly

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1 Firm

Unique good

Extremely high barriers to entry

Unique good

Extremely high barriers to entry

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Some key economic assumptions

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People are rational

People respond to incentives

Optimal decisions are made at the margin

People respond to incentives

Optimal decisions are made at the margin

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What does it mean for preferences to be rational?

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Consumer preferences must be complete

Consumer preferences must be transitive

Consumer preferences must be continuous

Consumer preferences must be transitive

Consumer preferences must be continuous

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Define Utility and Utility Function

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Utility- Satisfaction (from an economic activity)

Utility Function- a mathematical equation that maps preferences into utility numbers/ levels such that

Utility Function- a mathematical equation that maps preferences into utility numbers/ levels such that

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4 Examples of Utility Functions

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Cobb- Douglas Function

CES Function

Perfect Substitutes

Perfect Complements

CES Function

Perfect Substitutes

Perfect Complements

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Marginal Utility

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The satisfaction gained from the last bit/unit of consumption.

It is found by taking a partial derivative of a utility function

It is found by taking a partial derivative of a utility function

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marginal rate of substitution (MRS)

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This is the ration at which X and Y can be treated while staying at the same level of utility.

MRS= MUx/MUy

Graphically, MRS is the negative slope of the indifference curve

MRS= MUx/MUy

Graphically, MRS is the negative slope of the indifference curve

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Define Budget Constraint

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Equation that represents the scarcity of money

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What is Max Utility?

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Plug X and Y into U(X,Y)

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Define Demand Function

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A mathematical equation with variables that show how much of a good a consumer will consume under various conditions

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2 Types of Demand Function

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Marshallion

Hicksion

Hicksion

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Marshallion Demand Function

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Alfred Marshall

Uncompinsated demand

normal demand function

demand that depends on prices and income

Uncompinsated demand

normal demand function

demand that depends on prices and income

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Hicksion Demand Function

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John Hicks

Compensated demand

specialized demand function

demand that depends on prices and utility

Compensated demand

specialized demand function

demand that depends on prices and utility

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3 Steps of Marhsallion Demand

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1. Calculate MRS, set it equal to Px/Py, and solve for either x or y in term of everything else

2. Plug result from step 1 into the budget constraint, and solve for the remaining variable (x or y)

3. Plug step 2 into step 1, simplify

2. Plug result from step 1 into the budget constraint, and solve for the remaining variable (x or y)

3. Plug step 2 into step 1, simplify

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3 Steps of Hicksion Demand

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1. Take Marshallion demand for x and y and plug them into the original utility function to find the, indirect utility function (V)

2. Solve the Indirect Utility Function for I in terms of everything else to find the, Expenditure Function (E)

3. Take the partial derivative of the Expenditure Function with respect to the price of the good you want demand for.

2. Solve the Indirect Utility Function for I in terms of everything else to find the, Expenditure Function (E)

3. Take the partial derivative of the Expenditure Function with respect to the price of the good you want demand for.

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Indirect Utility Function (V)

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- an equation that measures consumer satisfaction through income and prices rather than quantities of goods.

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Expenditure Function (E)

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An equation that measures spending of the consumer while they are maximizing their utility.

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3 Types of Elasticity of demand

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(Own) Price Elasticity of demand

Cross Price Elasticity of demand

Income Elasticity of demand

Cross Price Elasticity of demand

Income Elasticity of demand

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For Direct Effect for X or Y

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Basically take the double derivative of what is given for X or Y and then take the derivative again for the direct effect of it.

The answer means that a 1 unit change in price of good (x or y) will cause a (the answer) unit change in quantity demanded.

The answer means that a 1 unit change in price of good (x or y) will cause a (the answer) unit change in quantity demanded.

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In terms of graphs, the more inelastic the ___________ and the more elastic the _________

answer

Steeper the curve

flatter the curve

flatter the curve