question
Things that can effect a change in supply
answer
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...
answer
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
answer
A measure of how much one thing changed in reaction to something else.
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Types of Elasticity
answer
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
answer
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
answer
Many Firms
Identical Goods
No/low Barriers to entry
Identical Goods
No/low Barriers to entry
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Monopolistic Comp
answer
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?
answer
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?
answer
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
answer
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
answer
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
answer
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)
answer
- an equation that measures consumer satisfaction through income and prices rather than quantities of goods.
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Expenditure Function (E)
answer
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
answer
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.
question
In terms of graphs, the more inelastic the ___________ and the more elastic the _________
answer
Steeper the curve
flatter the curve
flatter the curve
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