question
price elasticity of demand
answer
by how much does quantity demanded change when there is a change in price
Ed
Ed
question
price elasticity of supply
answer
by how much does quantity supplied change when there is a change in price
Es
Es
question
elastic demand/supply
answer
when the percentage change in quantity demanded/supplied is greater than the percentage change in price
Ed or Es > 1
Ed or Es > 1
question
inelastic demand/supply
answer
when the percentage change in quantity demanded/supplied is less than the percentage change in price
Ed or Es < 1
Ed or Es < 1
question
unit elastic demand/supply
answer
when the percentage change in quantity demanded/supplied is equal to the percentage change in price
Ed or Es = 1
Ed or Es = 1
question
perfectly elastic
answer
quantity supplied or demanded changes in infinite amounts when price changes
question
perfectly inelastic
answer
quantity supplied or demanded does not change with price
question
total revenue test
answer
a method of measuring elasticity by comparing total revenues
high price and high total rev = inelastic
high price and low total rev = elastic
high or low price and no changes - unit
TR
high price and high total rev = inelastic
high price and low total rev = elastic
high or low price and no changes - unit
TR
question
income elasticity of demand
answer
a measure of how much the quantity demanded of a good responds to a change in consumers' income
negative value = inferior
positive value = normal
Ei
negative value = inferior
positive value = normal
Ei
question
cross price elasticity of demand
answer
a measure of how much the quantity demanded of one good responds to a change in the price of another good
negative value = complimentary
positive value = substitute
Exy
negative value = complimentary
positive value = substitute
Exy
question
budget constraint line
answer
shows the possible combinations of two goods that are affordable given a consumer's limited income
question
total utility
answer
the total amount of satisfaction obtained from consumption of a good or service
TU
TU
question
marginal utility
answer
what is the added happiness from consuming more units
MU
MU
question
diminishing marginal utility
answer
more consumed = less utility
question
marginal utility per dollar
answer
consumers make choices based on the utility they get per dollar spent on that item
marginal utility per dollar spent = MU / Price
marginal utility per dollar spent = MU / Price
question
consumer equilibrium
answer
when the MU per last dollar spent is equal across all goods consumed (all income has been spent)
question
budget line change in income
answer
new line
question
budget line change in the price of one good
answer
line moves around the axis of the fixed good
question
perfect competition
answer
many buyers and sellers
each firm has small market shares
identical products
no control over price
equal access to info
no barriers to market entry or exit = No long-run economic profits
EX: corn
each firm has small market shares
identical products
no control over price
equal access to info
no barriers to market entry or exit = No long-run economic profits
EX: corn
question
monopolistic competition
answer
many buyers and sellers
each supplier has a small market share
differentiated products
some control over price
possible restrictions on info
no barriers to entry or exit = No long-run economic profits
most products today
EX: toothbrushes
each supplier has a small market share
differentiated products
some control over price
possible restrictions on info
no barriers to entry or exit = No long-run economic profits
most products today
EX: toothbrushes
question
oligopoly
answer
fewer firms
some firms can have large market shares
identical or differentiated products
shared market power and considerable control over price
possible restrictions on info
substantial barriers to entry or exit
potential for long-run economic profits
EX: cell phone providers
some firms can have large market shares
identical or differentiated products
shared market power and considerable control over price
possible restrictions on info
substantial barriers to entry or exit
potential for long-run economic profits
EX: cell phone providers
question
monopoly
answer
one firm
100% of market share
no close substitutes for product
substantial market power and control over price
possible restrictions on info
nearly unbeatable barriers to entry
potential long-run economic profits
EX: patented drug
100% of market share
no close substitutes for product
substantial market power and control over price
possible restrictions on info
nearly unbeatable barriers to entry
potential long-run economic profits
EX: patented drug
question
explicit cost
answer
direct cost of resources
EX: labor, machinery, materials
EX: labor, machinery, materials
question
implicit cost
answer
the opportunity cost of your time, money or resources
question
accounting profit
answer
accounting profits = TR - explicit costs
question
economic profit
answer
economic profit = TR - explicit costs - implicit costs
If a firm is making zero economic profit:
- that firm can cover all of the implicit costs and explicit costs with the total revenue earned
- there is no incentive to enter the industry or leave the industry
- the business owner still earns their implicit opportunity cost (the $ value of their next best place of employment)
If a firm is making zero economic profit:
- that firm can cover all of the implicit costs and explicit costs with the total revenue earned
- there is no incentive to enter the industry or leave the industry
- the business owner still earns their implicit opportunity cost (the $ value of their next best place of employment)
question
fixed cost
answer
a cost that does not change, no matter how much of a good is produced
EX: rent
FC
EX: rent
FC
question
variable cost
answer
a cost that rises or falls depending on how much is produced
EX: materials, labor
VC
EX: materials, labor
VC
question
average total cost
answer
ATC
question
average fixed cost
answer
AFC
question
average variable cost
answer
AVC
question
marginal cost
answer
the cost of producing one more unit of a good
MC
MC
question
marginal average rule
answer
The rule states when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. When marginal cost equals average cost, average cost is at its minimum point.
question
short run
answer
at least one input is fixed
question
long run
answer
no inputs are fixed
question
long run average total cost
answer
The cost per unit of producing each quantity of output in the long run, when all inputs are variable
question
economies of scale
answer
a producer's average cost per unit to fall as output rises
question
constant returns to scale
answer
long-run average total cost stays the same as the quantity of output changes
question
diseconomies of scale
answer
long-run average total cost rises as the quantity of output increases
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