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Price Elasticity of Demand
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Measures the responsiveness by consumers to changes in price (measured as the absolute value = the percent change in quantity demanded divided by the percent change in price)
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Price Elasticity of Supply
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The responsiveness of the quantity supplied to a change in price (measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price)
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Income Elasticity
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Measured by the percent change in quantity demanded divided by the percent change in income
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Cross Price Elasticities
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Measured by the percent change in quantity y divided by the percent change in price x
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Total Revenue Test
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If demand is elastic then as P goes up then quantity goes down a lot so total revenue goes down, if demand is inelastic then as price goes up then quantity goes down a little so total revenue goes up, if demand is unitary then as p goes up then quantity goes down and total revenue remains constant
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Elastic
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Describes demand that is very sensitive to a change in price
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Inelastic
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Describes demand that is not very sensitive to a change in price
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Unitary Elastic
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Describes demand whose elasticity is exactly equal to 1
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Determinants of Elasticity of Demand
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Availability of substitutes (+), Time (+), % Cost of the Good Relative to Your Budget (+), Luxuries vs. Necessities (luxuries = elastic, necessities = inelastic)
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Tax Revenue
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Government income due to taxation
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Tax burden
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A measurement of taxes paid as a proportion of income
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Substitution effect
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As the relative price of a good increases, consumers will substitute away from that good (Qd goes down)
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Income effect
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As the relative price of a good increases, the purchasing power (of the same income) goes down; therefore Qd goes down
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Law of Diminishing Marginal Utility
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As additional units of a good are consumed, the extra satisfaction derived from each additional unit declines
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Water-Diamond Paradox
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Diamonds are more expensive despite water being more valuable, because we have fewer diamonds than water and marginal utility reflects the price of a good in exchange
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Marginal Utility
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the change in total utility derived from the consumption of an additional unit of a good
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Total Utility
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The sum of all marginal utilities
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Marginal Utility per Dollar
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The additional utility from spending one more dollar on that good or service
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Consumer Optimum (equilibrium)
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Total utility is maxed given the budget constraint
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Indifference Curves
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A line that shows combinations of two goods that yield the same TU (slope of this line = marginal rate of substitution)
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Budget Constraints
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A line showing combinations of two goods that a consumer can afford given income and the price of the two goods
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Short Run
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A period of time when some inputs are fixed and others are variable
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Long Run
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A period of time when all costs are variable
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Division of Labor
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Causes there to be an increasing rate of output
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Law of Diminishing Returns
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As additional units of a variable are added to some fixed input, the contribution to output by the additional variable input declines
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Marginal Cost
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Extra cost associated with the extra output
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Economies of Scale
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As output increases then per unit costs decrease
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Constant Returns to Scale
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The property whereby long-run average total cost stays the same as the quantity of output changes
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Diseconomies of Scale
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As output increases then per unit costs increase
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