question
Elasticity
answer
A measure of how much one economic variable responds to changes in another economic variable.
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Price elasticity of demand
- Calculate
- Calculate
answer
The responsiveness of the quantity demanded to a change in price.
- % change of Q demanded DIVIDED by % change of P
-
- % change of Q demanded DIVIDED by % change of P
-
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Price elasticity of demand
- Identify when demand is elastic, inelastic, or unit-elastic
- Identify when demand is elastic, inelastic, or unit-elastic
answer
- Elastic = Number is greater than 1, meaning demand changes a lot based on change in prices
- Inelastic = Number is less than 1, but greater than 0, meaning that the demand doesn't change much based on a change in price
- Unit-elastic = Number is 0, both demand and price change the exact same amount
- Inelastic = Number is less than 1, but greater than 0, meaning that the demand doesn't change much based on a change in price
- Unit-elastic = Number is 0, both demand and price change the exact same amount
question
Price elasticity of demand
- Identify when demand is perfectly elastic or perfectly inelastic
- Identify when demand is perfectly elastic or perfectly inelastic
answer
- Perfectly elastic = Horizontal line
- Perfectly inelastic = Vertical line
- Perfectly inelastic = Vertical line
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Price elasticity of demand
- Calculate using the midpoint formula
- Calculate using the midpoint formula
answer
Midpoint Formula
- New MINUS old DIVIDED by average of old
- Quarter Pounder
- New MINUS old DIVIDED by average of old
- Quarter Pounder
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Determinants of price elasticity of demand
answer
- Availability of close substitutes, i.e. gasoline
- Passage of time, i.e. outdated technology
- Necessities versus luxuries, i.e. milk & eggs, vs. chips and candy
- Definition of the market, i.e. Kraft -> Mac n Cheese -> Pasta
- Share of a good in a consumer's budget, i.e. toothpicks
- Passage of time, i.e. outdated technology
- Necessities versus luxuries, i.e. milk & eggs, vs. chips and candy
- Definition of the market, i.e. Kraft -> Mac n Cheese -> Pasta
- Share of a good in a consumer's budget, i.e. toothpicks
question
Understand the relationship between price elasticity and total revenue (TR)
answer
Total Revenue is the area between the 1st price set and the entire area below, and after the price cut, it is below the new price
- Inelastic = TR and Price move together
- Elastic = TR and Price move in opposite directions
- Inelastic = TR and Price move together
- Elastic = TR and Price move in opposite directions
question
Understand how the price elasticity of demand changes along a demand curve
answer
Big hump curve
- At the top of the hump, it is unit elastic
- Anywhere to the left is elastic, anywhere to the right is inelastic
- At the top of the hump, it is unit elastic
- Anywhere to the left is elastic, anywhere to the right is inelastic
question
Cross-price elasticity of demand
- Calculate
- Identify when two goods are substitutes or complements
- Calculate
- Identify when two goods are substitutes or complements
answer
The percentage change in quantity of one good divided by the percentage change in the price of another good.
- Quarter Pounder but of one good vs another
- If number is POSITIVE, they are substitutes
- If number is NEGATIVE, they are complements
- Quarter Pounder but of one good vs another
- If number is POSITIVE, they are substitutes
- If number is NEGATIVE, they are complements
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Income elasticity
- Calculate
- Identify when a good is a normal good (positive), necessity (positive and <1), luxury (positive and >1), or an inferior good (negative)
- Calculate
- Identify when a good is a normal good (positive), necessity (positive and <1), luxury (positive and >1), or an inferior good (negative)
answer
A measure of the responsiveness of quantity demanded to changes in income.
- Quarter Pounder but P is % income changed
- Normal (Positive number)
- Necessity (Positive number < 1)
- Luxury (Positive number but > 1)
- Inferior (Negative number)
- Quarter Pounder but P is % income changed
- Normal (Positive number)
- Necessity (Positive number < 1)
- Luxury (Positive number but > 1)
- Inferior (Negative number)
question
Price elasticity of supply
- Calculate
- Identify when supply is elastic, inelastic, or unit-elastic
- Calculate
- Identify when supply is elastic, inelastic, or unit-elastic
answer
The responsiveness of the quantity supplied to a change in price.
- Elastic = Greater than 1
- Inelastic = Greater than 0 but less than 1
- Unit-elastic = Equal to 0
- Elastic = Greater than 1
- Inelastic = Greater than 0 but less than 1
- Unit-elastic = Equal to 0
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Technology
answer
The processes a firm uses to turn inputs into outputs of goods and services.
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Technological change
answer
A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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Short-run vs. long-run
answer
- Short-run: The period of time during which at least one of a firm's inputs is fixed.
- Long-run: The period of time during which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
- Long-run: The period of time during 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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Explicit vs. implicit costs
answer
- Explicit Cost: A cost that involves spending money
Ex. Price of paper
- Implicit Cost : A non-monetary opportunity cost
Ex. Scaring employees away cause you're Michael Scott
Ex. Price of paper
- Implicit Cost : A non-monetary opportunity cost
Ex. Scaring employees away cause you're Michael Scott
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Total cost (TC)
answer
The cost of all the inputs a firm uses in production.
TC = VC + FC
TC = VC + FC
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Variable cost (VC)
answer
Costs that change as output changes.
question
Fixed cost (FC)
answer
Costs that remain constant as output changes.
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Accounting vs. economic costs
answer
- Accounting costs: Explicit costs
Ex. More money spent, budgets could be ruined.
- Economist costs: Explicit + Implicit costs
Ex. Finding what is the best economic decisions, based on all factors of what is being spent.
Ex. More money spent, budgets could be ruined.
- Economist costs: Explicit + Implicit costs
Ex. Finding what is the best economic decisions, based on all factors of what is being spent.
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Accounting profit vs. economic profit
answer
- Accounting profits: Only the monetary benefits of a decision.
- Economist profits: All of the profits that will be made off a decision, including opportunity costs.
- Economist profits: All of the profits that will be made off a decision, including opportunity costs.
question
Production function
answer
The relationship between the inputs employed by a firm and the maximum output the firm can produce with those inputs.
question
Production costs (FC, AFC, VC, AVC, TC, ATC, MC)
- Calculate each of the above costs
- Calculate each of the above costs
answer
FC - Cost of pizza ovens
VC - Cost of workers
TC - Cost of both FC & VC
Average of cost is the number divided by the output
MC - The change in firm's TC after producing one more unit. Average of TC / Average of Q
MPL - The additional output a firm produces as a result of one more worker
VC - Cost of workers
TC - Cost of both FC & VC
Average of cost is the number divided by the output
MC - The change in firm's TC after producing one more unit. Average of TC / Average of Q
MPL - The additional output a firm produces as a result of one more worker
question
Law of diminishing marginal returns (short-run concept)
answer
The principle that, at some point, adding more of a variable input (milk), such as labor, to the same amount of a fixed input (pancake mix), such as capital, will cause the marginal product (pancakes) of the variable input to decline.
Ex. Pancake mix example
Ex. Pancake mix example
question
Relationship between Marginal and Average Product of Labor
answer
- When Marginal PL is greater than Average PL, APL must increasing.
- When MPL is less than APL, APL must be decreasing
- When MPL is less than APL, APL must be decreasing
question
Total product, marginal product, average product (of labor)
answer
- Total is the actual amount of product that is being produced
- Marginal is the EXTRA amount of product that each extra "worker" adds based on how many they already have.
- Average calculates the AVERAGE units of output that each extra "worker" produces.
- Marginal is the EXTRA amount of product that each extra "worker" adds based on how many they already have.
- Average calculates the AVERAGE units of output that each extra "worker" produces.
question
Shapes of cost curves
- Understand why each curve is shaped as it is
- Be able to draw
- Understand why each curve is shaped as it is
- Be able to draw
answer
- MC, ATC, AVC are all U shaped
- MC curve crosses through the BOTTOM of the ATC and AVC curves
- As output grows, AFC gets smaller
- As output grows, the gap between ATC and AVC shrinks
- MC curve crosses through the BOTTOM of the ATC and AVC curves
- As output grows, AFC gets smaller
- As output grows, the gap between ATC and AVC shrinks
question
Understand the relationship between ATC and AVC as output increases
answer
As output increases, the difference between ATC and AVC decreases
question
Long-run average total cost curve (LRATC)
answer
The lowest cost a firm is able to sell a product for, while the cost to produce it in the future are unpredictable.
question
Economies of scale
answer
When a firm's LRAC falls, it will increase the quantity of the product sold
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Minimum efficient scale
answer
The level of output when all resources are being used up at the lowest possible cost.
question
Constant returns to scale
answer
The situation in which a firm's long-run average costs remain unchanged as output increase
question
Diseconomies of scale
answer
The situation in which a firm's long-run average costs rise as the firm increases output
question
Perfectly competitive market
answer
-Many buyers and sellers
- All firms sell identical products
- No barriers to entry
- All firms sell identical products
- No barriers to entry
question
perfect competition market structure
answer
- many firms
- identical products
- high ease of entry
- examples include growing wheat and poultry farming
- identical products
- high ease of entry
- examples include growing wheat and poultry farming
question
monopolistic competition market structure
answer
- many firms
- differentiated products
- high easy of entry
- examples include clothing stores and restaurants
- differentiated products
- high easy of entry
- examples include clothing stores and restaurants
question
oligopoly market structure
answer
- few firms
- identical or differentiated products
- low ease of entry
- examples are manufacturing computers and automobiles
- identical or differentiated products
- low ease of entry
- examples are manufacturing computers and automobiles
question
monopoly market structure
answer
- one firm
- unique product type
- entry blocked
- examples are first class mail delivery or providing tap water
- unique product type
- entry blocked
- examples are first class mail delivery or providing tap water
question
Price taker
answer
A buyer or seller that is unable to affect the market price, because they can't ask for a higher price, they must accept.
question
Average revenue (AR)
answer
Total revenue divided by the quantity of the product sold
TR/Q
TR/Q
question
Marginal revenue (MR)
answer
Change in total revenue from selling one more unit of a product change in total revenue/change in quantity
question
Profit maximization
answer
- If MR is greater than MC, profit is increasing.
- If MR is less than MC, then profits are decreasing.
- If MR is less than MC, then profits are decreasing.
question
Be able to graphically show a firm in perfect competition
- Earning a profit (P>ATC)
- Earning a profit (P>ATC)
answer
ATC hits Q below the market price
question
Be able to graphically show a firm in perfect competition:
- Suffering a loss (P<ATC)
- Suffering a loss (P<ATC)
answer
ATC hits Q above the market price
question
Be able to graphically show a firm in perfect competition
- Breaking even (P=ATC)
- Breaking even (P=ATC)
answer
ATC hits Q right at the market price
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