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Elasticity
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A measure of how much one economic variable responds to changes in another economic variable.
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Own Price Elasticity
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a measure of the responsiveness of quantity demanded to a change in price
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Cross Price Elasticity
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the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B
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Income Elasticity
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% change in quantity demanded / % change in income
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Price Elasticity of Demand
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the responsiveness of the quantity demanded to a change in price.
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Price Elasticity of Demand Formula
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% change in quantity demanded / % change in price
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Elastic
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The price elasticity of demand will be greater than 1 in absolute value (For Example, if a 10 percent decrease in the price of bagels results in a 20 percent increase in the quantity of bagels demanded; 20/-10=-2)
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Inelastic
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the percentage change in quantity demanded is less than the percentage change in price and less than 1 in absolute value. (5%/-10%=-0.5)
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Unit Elastic
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the percentage change in quantity demanded is equal to the percentage change in price demanded (E=1)
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midpoint formula
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Q2-Q1/ (Q1+Q2/2) / P2-P1/ (P1+P2/2)
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Demand curve with smaller slope
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more elastic
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Demand curve with larger slope
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less elastic
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perfectly inelastic
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vertical line; completely unresponsive to price.
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perfectly elastic demand curve
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horizontal line; infinitely responsive to price.
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Determinants of Price Elasticity of Demand
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availability of close substitutes, passage of time, luxuries versus necessities, definition of the market, share of a good in a consumer's budget
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Technology
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The processes a firm uses to turn inputs into outputs of goods and services.
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positive technological change
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able to produce more output using the same inputs or the same output using fewer inputs
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negative technological change
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the quantity of output it can produce from a given quantity of inputs may decline
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short run
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the period of time during which at least one of a firm's inputs is fixed
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Long run
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the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
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Total Cost
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the market value of the inputs a firm uses in production (Fixed+Variable)
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Fixed Cost
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Costs that do not vary with the quantity of output produced
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Variable Cost
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a cost that varies with changes in the level of output
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Implicit Cost
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a non-monetary opportunity cost
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Explicit Cost
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a cost that involves spending money
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Production Function
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the relationship between quantity of inputs used to make a good and the quantity of output of that good
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Average Total Cost
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total cost divided by the quantity of output (TC/Q)
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Marginal Product of Labor
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the change in output from hiring one additional unit of labor (Change in Total/Change in Quantity
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Law of Diminishing Returns
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When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
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Average Product of Labor
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the total output produced by a firm divided by the quantity of workers
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Marginal Cost
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the cost of producing one more unit of a good
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Marginal Cost Formula
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change in total cost / change in quantity
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Average Fixed Cost AFC)
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fixed cost/quantity
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Average Variable Cost (AVC)
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variable cost/quantity
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How do you calculate Average Total Cost
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average fixed cost + average variable cost (AFC+AVC)
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long-run average cost curve
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a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
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Economies of Scale
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factors that cause a producer's average cost per unit to fall as output rises
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Characteristics of Perfect Competition
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Many buyers and sellers, identical products, High ease of entry
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Characteristics of Monopolistic Competition
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many buyers and sellers, product differentiation, high ease of entry
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Characteristics of Oligopoly
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A few large firms, Differentiated or standardized products, Entry barriers
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Characteristics of Monopoly
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One seller, unique product, entry is blocked
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Can a perfectly competitive firm affect the market price?
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No
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Price taker
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a buyer or seller that is unable to affect the market price (price taker)
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What is the demand curve of a perfectly competitive firm?
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Horizontal
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Profit Formula
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(Price - Average Total Cost) x Quantity
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If P > ATC
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the firm is making a profit
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If P=ATC
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the firm is breaking even
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If P<ATC
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the firm is making a loss
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Sunk cost
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a cost that has already been committed and cannot be recovered
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What should be the main deciding factor on whether a firm shuts down or not?
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If Total Revenue is greater than or less than variable cost. (If VC>TR, then a firm should shut down)
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Shutdown point
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the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
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economic loss
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the situation in which a firm's total revenue is less than its total cost, including all implicit costs
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long-run competitive equilibrium
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the situation in which the entry and exit of firms has resulted in the typical firm breaking even
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long-run supply curve
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a curve that shows the relationship in the long run between market price and the quantity supplied
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productive efficiency
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a situation in which a good or service is produced at the lowest possible cost
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allocative efficiency
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when the mix of goods being produced represents the mix that society most desires
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monopolistic competition
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a market structure in which many companies sell products that are similar but not identical
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