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price elasticity of demand
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measure of the sensitivity or responsiveness of quantity demanded to a change in price
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demand elastic
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average change in quantity demanded is greater than average change in price - price and total revenue change in different directions
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demand inelastic
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average change in quantity demanded is less than the average change in price - price and total revenue change in the same directions
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unit elastic
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price changes and quantity demanded stays the same - price and total revenue move in a constant direction - equal to one
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determinants of elasticity
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nature of the good, possibility of substitution, percentage of income spent on the good, passage of time.
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cross price elasticity
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measure how much the demand for product x is affected by a change in the price of good y
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profit maximization
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rational firm
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output maximization
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holding level of input costs constant and the firm maximizes output to maximize profit
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cost minimization
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hold the level of output constant and the firm produces that level of output at the lowest possible price
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marginal average value
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marginal is greater than average then average increases, marginal is less than average then average decreases, marginal revenue = average then the average is at a minimum or maximum
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technology
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the sum of societies knowledge concerning the science of industrial and agricultural arts
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input
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anything a firm uses during production process
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fixed input
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input whose quantity cannot change during the time under consideration (land or factory)
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variable input
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input whose quantity can be changed during the period under consideration (labor)
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short run
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when at least one of firm's inputs is fixed
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long run
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period when all inputs are variable
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marginal product
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addition to output that comes from adding one more unit of the variable input, holding constant the quantity of other inputs
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average product
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the total amount of output per the quantity - productivity
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short run technology assumptions
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monotonic, technical division of labor, assumption of the law of diminishing marginal return
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monotonic
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dependent variable always increases if the input variable always increases - marginal product is always positive
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technical division of labor
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human laboring activity is divided into smaller separate tasks, so each task is assigned to a particular worker who becomes an expert at that task - marginal product increases
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assumption of the law of diminishing marginal return
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if equal increments of an input are added, quantities of other inputs held constant, the resulting increments of product will decrease beyond some point - marginal product will diminish
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production function
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relationship between total output and the variable input, starts at origin, positive slope because production is monotonic dependent variable is total output independent variable is labor
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marginal and average product curve
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relationship between labor and marginal product of labor, never touches the horizontal axis because production is monotonic, independent is labor dependent is marginal product, when marginal = average is the most ideal point
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isoquant line
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curve showing all possible efficient combinations of input that can produce a certain quantity of output, independent labor and capital, dependent units of output, isoquant map, farther from the origin represents greater output because production is monotonic, negative slope
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marginal rate of technical substitution
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labor for capitaal=delta k/ delta L (slope of isoquant line), about of capital that technology makes the firm give up gaining one more unit of labor and keep the output constant
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isocost line
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independent variable: total variable input spending or price of capital and price of labor, dependent variable: quantity of capital and labor that the firm purchases. Curve that shows all possible combinations of capital and labor that a firm can purchase given total variable input spending. properties: negative slope, positive y-intercept, parallel shift due to increase or decrease in total variable inout spending
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isoquant and isocost
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P=producer equilibrium, slopes are equal, firm is on the isoquant farthest from the origin given the restriction of the isocost line
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long run technology
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all inputs are variable, three possibilities: increasing returns to scale, constant returns to scale, decreasing returns to scale
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social surplus
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the part of a societies material production that is left over after the necessary material costs of production have been deducted
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exploitation
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one class lives off the labor of another class
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historical cost
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the amount the firm actually paid for it
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alternative cost of output
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other outputs that inputs used in its production could have produced instead
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alternative cost of input
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its value and its valuable alternative use
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social cost
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the costs to society when its resources are employed to make a tie commodity
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private cost
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the costs to the individual producer
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explicit cost
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costs that accounts include in a firm's expenses
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implicit cost
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cost of resources owned and used by the firm's owner
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total fixed cost
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total input spending
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accounting profit
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total revenue - total explicit cost
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total fixed cost curve
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relationship between total fixed cost and output, zero slope, positive y-intercept, total fixed cost is dependent, output is independent
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total variable cost curve
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the relationship between output and total variable cost, output is independent, total variable cost is dependent. properties: starts at origin, positive slope because production is monotonic, shape
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total cost curve
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relationship between output and total cost, TC=TFC+TVC, output is independent, total cost is dependent. properties: positive y intercept, shape, postdate slope
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marginal cost curve
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relationship between output and marginal cost, independent is output, dependent is marginal cost. properties: shape due to technical division of labor and assumption of the law of diminishing marginal return
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average variable cost curve
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relationship between output and average variable cost, independent is output, dependent is average variable cost. Properties: shape due to average product
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average fixed cost curve
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relationship between average fixed cost and output, independent is output, dependent is average fixed cost. properties: negative slope, rectangular hyperbola
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combination of MC, ATC, AVC graph
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follows marginal average rule, at any out the vertical distance is average fixed cost, accounting profit is in each average total cost curve, each ATC corresponds to a given amount of fixed input
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perfect competition
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numerous small firms and customers, homogeneous products, freedom of entry and exit, perfect information
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total revenue curve
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the amount of money that the firms takes in, independent is quantity, dependent is total revenue. Properties: positive slope, starts at origin
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define the profit maximizing level of output
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use the total revenue and total cost curve and find the distance where the level of output is greater, find the level of output where the marginal revenue is equal to marginal cost, use the total economic profit curve, find the level of output where marginal revenue is equal to zero
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decide if firm should produce or shit down
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firm can minimize its total economic losses by shutting down TR<TVC, TR+TVC the firm will continue to produce, TR>TVC firm will produce
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supply and demand curve
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dependent is price, independent is quantity. Properties: positive y-intercept, horizontal line, parallel shift based on equilibrium price
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total economic profit curve
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relationship between output and total economic profit, independent is output, dependent is total economic profit. Property: shape, slope of tangent is marginal economic profit
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