question
Total Costs
answer
fixed costs + variable costs
This is C(Q) / cost function
This is C(Q) / cost function
question
average costs
answer
Average Total Cost = Total Cost / Q
Average Fixed Cost = Fixed Cost / Q
Average Variable Cost = Variable Cost / Q
Average Total Cost = Average Fixed Cost + Average Variable Cost
Average Fixed Cost = Fixed Cost / Q
Average Variable Cost = Variable Cost / Q
Average Total Cost = Average Fixed Cost + Average Variable Cost
question
AFC, AVC, & ATC behavior
answer
AFC starts high & declines as Q increases (more products are made)
AVC & ATC are generally U shaped
AVC & ATC are generally U shaped
question
MC equation
answer
change in TC/change in Q
or change in VC/change in Q
or change in VC/change in Q
question
MC behavior
answer
MC is U shaped and starts to rise rather quickly once we get to high levels of production
question
MC & ATC/AVC relationship
answer
MC = AVC at minimum AVC, MC = ATC at minimum ATC
MC crosses both AVC + ATC at an inflection point
MC crosses both AVC + ATC at an inflection point
question
solving the firm's problem
answer
Problem: Maximize profit subject to constraints
Firm controls its own output quantity - it chooses Q in order to maximize profits, while both market prices and technology are given
choose Q so that marginal profit = 0
the market tells the firm what the prices is, and the firm adjusts Q so that its MC = MR = P
Firm controls its own output quantity - it chooses Q in order to maximize profits, while both market prices and technology are given
choose Q so that marginal profit = 0
the market tells the firm what the prices is, and the firm adjusts Q so that its MC = MR = P
question
shutdown point
answer
Produce only where Marginal Cost > Average Variable Cost
We know that MC = AVC at minimum AVC, so that minimum AVC is the "shutdown point."
We know that MC = AVC at minimum AVC, so that minimum AVC is the "shutdown point."
question
market supply curve
answer
The Market Supply Curve is the market's MC curve
question
supply function variables
answer
Price of the Product, P: as P rises, firms choose higher Q
Input Prices: these raise or lower the MC of products
Price of related products also produced by the firms: opportunity cost
Technology: affects the MC of production
Number of Suppliers: more suppliers, more quantity supplied
Expected future price of the product: firms may change their quantity supplied in reaction to changes in expected future prices (opportunity cost)
Expected future input prices: for STORABLE outputs, changes in expected future input prices may create profit opportunities that affect quantity supplied today
Input Prices: these raise or lower the MC of products
Price of related products also produced by the firms: opportunity cost
Technology: affects the MC of production
Number of Suppliers: more suppliers, more quantity supplied
Expected future price of the product: firms may change their quantity supplied in reaction to changes in expected future prices (opportunity cost)
Expected future input prices: for STORABLE outputs, changes in expected future input prices may create profit opportunities that affect quantity supplied today
question
changes in supply
answer
Changes in almost all of these variables will shift the supply curve
The one variable that will not shift the supply curve is a change in the product price itself
If P changes, the supply Curve won't shift (change in Quantity Supplied)
But changes in the OTHER variables in the Supply Function are Changes in Supply and will shift the Supply Curve
The one variable that will not shift the supply curve is a change in the product price itself
If P changes, the supply Curve won't shift (change in Quantity Supplied)
But changes in the OTHER variables in the Supply Function are Changes in Supply and will shift the Supply Curve
question
demand function variables
answer
price of the product
prices of related products: can be a complement or substitute
income: normal or inferior products
preferences/tastes
number of demanders
expected future prices
expected future income
prices of related products: can be a complement or substitute
income: normal or inferior products
preferences/tastes
number of demanders
expected future prices
expected future income
question
price of related products
answer
Complement = product you like to consume with the product we focus on
ex: smokes & joe are complements
If the price of a complement goes up, you may want to produce less of that product
Substitutes = products you consume instead of the product we focus on
ex: coffee is a sub for joe
If the price of a substitute goes up, you may want more of the original product
ex: smokes & joe are complements
If the price of a complement goes up, you may want to produce less of that product
Substitutes = products you consume instead of the product we focus on
ex: coffee is a sub for joe
If the price of a substitute goes up, you may want more of the original product
question
income
answer
Normal products = the demand for these rises as income goes up
Inferior products = the demand for these FALLS as income goes up
ex. starchy, cheap foods like flour, rice, potatoes
Inferior products = the demand for these FALLS as income goes up
ex. starchy, cheap foods like flour, rice, potatoes
question
changes in demand function
answer
every change in a variable in the Demand Function EXCEPT the price of the product itself will shift the Demand Curve
question
elasticity
answer
Measure the sensitivity of the relationship between any 2 variables
The more elastic the relationship, the more sensitive one variable is to changes in the other variable
Inelastic: a change in one variable doesn't affect the other variable much
unit free
% change in quantity demanded / % change in price
The more elastic the relationship, the more sensitive one variable is to changes in the other variable
Inelastic: a change in one variable doesn't affect the other variable much
unit free
% change in quantity demanded / % change in price
question
measuring elasticity
answer
When the resulting number is greater than 1 (in absolute value), we say the relationship is elastic in this region
when the resulting number is less than 1, we say the relationship is inelastic
A sensitive relationship is more elastic
A less sensitive relationship is less elastic
when the resulting number is less than 1, we say the relationship is inelastic
A sensitive relationship is more elastic
A less sensitive relationship is less elastic
question
slope & elasticity
answer
a steeper slope is associated with a lower elasticity, and a flatter slope is associated with a higher elasticity
question
vertical / horizontal demand curve & elasticity
answer
Vertical demand curve → price inelastic (vertical elasticity = 0)
Horizontal demand curve → price infinitely elastic (horizontal elasticity = 1)
Horizontal demand curve → price infinitely elastic (horizontal elasticity = 1)
question
linear relationships & elasticity
answer
even linear relationships have changing elasticity!
Though the slope is constant, the elasticity still changes (ratio of % changes)
The top half of this demand curve is high price & low quantity, so this is very elastic as % changes in price are high & % changes in quantity are low
The bottom half is low price & high quantity, so this is going to be inelastic as % changes in price are low & % changes in quantity are high
Though the slope is constant, the elasticity still changes (ratio of % changes)
The top half of this demand curve is high price & low quantity, so this is very elastic as % changes in price are high & % changes in quantity are low
The bottom half is low price & high quantity, so this is going to be inelastic as % changes in price are low & % changes in quantity are high
question
Cross-Price Elasticity of Demand
answer
% change in quantity demanded for product X / % change in price of product Y
we can use this elasticity to see whether X + Y are complements or substitutes
If the cross-price elasticity is positive, X + Y are substitutes
If the cross-price elasticity is negative, X + Y are complements
we can use this elasticity to see whether X + Y are complements or substitutes
If the cross-price elasticity is positive, X + Y are substitutes
If the cross-price elasticity is negative, X + Y are complements
question
income elasticity of demand
answer
% change in quantity demanded / % change in income
If elasticity > 0, the product is a normal good
If elasticity < 0, the product is an inferior good
If elasticity > 0, the product is a normal good
If elasticity < 0, the product is an inferior good
question
price elasticity of supply
answer
% change in quantity supplied / % change in price
question
input price elasticity of supply
answer
% change in quantity supplied / % change in one input price
question
Relationship Between Price Elasticity & Revenue
answer
If price elasticity of demand > 1 (absolute value), the firm can increase revenues by cutting price.
You cut the price, but the increase in quantity demand is going to be a greater proportion/percentage than the cut on price. In net, the revenues will go up.
If price elasticity of demand <1 (absolute value), the firm can increase revenues by raising prices.
The firm will raise the price, but the quantity demand will fall by less than that raise. On net, the overall revenues will increase.
You cut the price, but the increase in quantity demand is going to be a greater proportion/percentage than the cut on price. In net, the revenues will go up.
If price elasticity of demand <1 (absolute value), the firm can increase revenues by raising prices.
The firm will raise the price, but the quantity demand will fall by less than that raise. On net, the overall revenues will increase.
question
stopping rule
answer
For many economic models, the stopping rule is a set of equilibrium conditions
In the supply & demand model, the equilibrium condition is supply = demand
In the background, we're making sure that firms & households have solved their (profit maximization & utility maximization) problems
In the supply & demand model, the equilibrium condition is supply = demand
In the background, we're making sure that firms & households have solved their (profit maximization & utility maximization) problems
question
shift in demand only
answer
shifts equilibrium, shifts price, shifts quantity, does not affect supply
question
shift in supply only
answer
shifts equilibrium, shifts price, shifts quantity, does not affect demand
question
supply & demand move in the same direction
answer
shifts equilibrium, shifts quantity, effect on price is ambiguous
question
supply & demand move in opposite directions
answer
shifts equilibrium, shifts price, effect on quantity is ambiguous
question
supply curve & MC curve relationship
answer
The supply curve for an individual firm is equal to the MC curve above minimum AVC
question
supply function graph: increase in wages
answer
increase in wages raises MC, so supply falls
a lower quantity is produced at each price
decrease in supply: supply curve shifts up and to the left
a lower quantity is produced at each price
decrease in supply: supply curve shifts up and to the left
question
supply function graph: increase in number of suppliers
answer
increase in number of suppliers should increase quantity supplied at every price
increase in supply: supply curve shifts down and to the right
increase in supply: supply curve shifts down and to the right
question
demand function graph: increase in price of substitute
answer
increase in price of substitute should increase the demand at every price
increase in demand: demand curve shifts up and to the right
increase in demand: demand curve shifts up and to the right
question
demand function graph: recession
answer
a fall in income reduces the quantity demanded at every price
a fall in demand: demand curve shifts down and to the left
a fall in demand: demand curve shifts down and to the left
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