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Demand Function

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tells you how many cc that a consumer is willing to and can afford to buy for each price ceteris paribus (answer to UMP)

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what are the two types of ways for demand function?

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Forward way and Inverse way

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tangency condition

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on the graph, the budget line and the indifference curve will have the same slope at the solution

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Law of Demand

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when price goes down the quantity demanded goes up ceteris paribus

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what are the two reasons LOD holds?

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Income effect and Substitution effect

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income effect

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when price goes down the quantity demanded goes up because a consumer will use the money that they would've spent on the cheesecakes to buy more. It looks as if they gain more money from the price dropping but the income did not change.

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Substitution Effect

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when price goes down the quantity demanded goes up. with two items in discussion (i.e. cheesecakes and donuts) if one like cheesecakes goes down in price then consumers will buy more cheesecakes than donuts

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what are two major demand curve shifters

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income and price of related goods

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normal goods

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when income goes up and demand shifts to the right

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income inferior goods

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when income goes up, the demand declines

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Substitute

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cheesecakes and birthday cakes are (this) if when the birthday cake price increases then the cheesecake demand shifts right

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Compliment

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cheesecake and whipped cream are said to be (this) if when whipped cream price increases, the cheesecake demand shifts inward

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change in quantity demanded

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change triggered by the change in cc price alone ceteris paribus

on the graph it slides up and down the same demand function

on the graph it slides up and down the same demand function

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change in demand

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change triggered by anything (such as income, price of whipped cream, consumer preferences) other than the price of cheesecake

on the graph, the entire demand function shifts itself (even when price stays out, demand changes)

on the graph, the entire demand function shifts itself (even when price stays out, demand changes)

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consumer surplus

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the sum of the gap b/w MWTP and what consumers actually pay

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accounting profit

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total revenue (price *quantity) - explicit costs

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economic profit

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total revenue - all opportunity costs(explicit + implicit)

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explicit costs

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factors of production that you don't own and requires a cash outley

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implicit costs

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factors of production that you do own and do not require a cash outley

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production function

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tells you how much output you can produce at a given input level ceteris paribus

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marginal product

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the increase in output that arises from an additional unit of input

appears as slope of the production function

appears as slope of the production function

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average product

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the number of units of output produced per unit of input (output/input)

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R2S ( Return to Scale)

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splits production function into 3 categories

1- Constant Returns to Scale:

doubling your input doubles your output

2- Increasing R2S:

doubling your input more than doubles your output

3- Decreasing R2S:

doubling our input less than doubles your output

**output to input**

splits production function into 3 categories

1- Constant Returns to Scale:

doubling your input doubles your output

2- Increasing R2S:

doubling your input more than doubles your output

3- Decreasing R2S:

doubling our input less than doubles your output

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Perfect Competitive Market (characteristics-3)

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1. there are lots of sellers and buyers

2. Homogeneous goods

3. buyers and sellers are price takers

2. Homogeneous goods

3. buyers and sellers are price takers

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total revenue

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Price x Quantity

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marginal revenue

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the additional income from selling one more unit of a good; if you're a price taker then MR is equal to price

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total cost

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fixed cost + variable cost

fixed- does not vary (i.e. store space)

FC=TC when Y=0

variable- does vary(chefs)

fixed- does not vary (i.e. store space)

FC=TC when Y=0

variable- does vary(chefs)

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On a graph, Marginal cost appears as...

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the slope of total cost

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Average Cost

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Total Cost/Y*

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Marginal Condition

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you maximize your profit when (price) =MR=MC

or equivalent to marginal profit = MR-MC = 0

or equivalent to marginal profit = MR-MC = 0

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Profit Maximization Problem- what are the two steps?

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1. Find y* where MR=MC (marginal condition)

2. Is AC > Price @ Y*?

yes- accept y*

no- replace y

2. Is AC > Price @ Y*?

yes- accept y*

no- replace y

**with y**= 0question

Fixed Cost (FC)

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equal to Total Cost when Y=0

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Marginal Cost

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It cost bakers _______ to produce an additional cheesecake