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perfectly inelastic
answer
quantity does not respond at all to changes in price (E=0), vertical line
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Endowment effect
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the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it
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behavioral economics
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the study of situations in which people make choices that do not appear to be economically rational
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oppotunity cost
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The value of what is given up when you choose one option over another.
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long-run average total cost curve
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a curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm's inputs are variable
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diseconomies of scale
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the situation in which a firm's long-run average costs rise as the firm increases output
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economies of scale
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the property whereby long-run average total cost falls as the quantity of output increases
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implicit costs
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a non-monetary opportunity cost
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marginal product of labor
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the change in output from hiring one additional unit of labor
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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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sunk cost
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a cost that has already been paid and cannot be recovered
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income elasticity of demand
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a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income
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Cross-price elasticity of demand (XED)
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The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
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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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price elasticity of demand
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a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
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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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marginal utility
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The change in total utility a person receives from consuming one additional unit of a good or service
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law of diminishing marginal utility
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the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
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Pitfalls in decision making
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1. They take into account monetary costs but ignore non monetary opportunity costs that don't involve explicitly spending money
2. They fail to ignore sunk costs
3. They are unrealistic about their future behavior
2. They fail to ignore sunk costs
3. They are unrealistic about their future behavior
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Social influence on decision making
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Consumers decide which place to eat based on the restaurant's popularity. People receive utility from being seen eating at a popular restaurant because they think it makes them appear knowledgeable and fashionable. When consumption takes place publicly, consumers base their purchase on what others are purchasing.
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Technology: An Economic Definition
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Whenever a firm experiences positive technology change, it is able to produce more output using the same inputs or the same output using fewer inputs.
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formula for marginal cost
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change in total cost / change in quantity
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long-run average cost curve
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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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implicit costs versus explicit costs
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The rules of accounting generally require that only explicit cost be used for purposes of keeping the company's financial records and paying taxes. Therefore, explicit cost are sometimes called accounting cost. Economic costs include both accounting cost and implicit cost.
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Consumer choice and behavioral economics
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Economists usually assume that people act in a rational, self-interested way. Economists believe make choices that will leave them satisfied as possible, given their taste, incomes, and the price of the goods or services. Sociologists and Anthropologists have argued that social factors such as culture, customs, and religion are very important in explaining the choices people make.
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perfectly inelastic
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equal to 0 (vertical) (an increase of or decrease in price causes no change in the quantity supplied)
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perfectly elastic
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equal to infinity, horizontal line
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Relationship between QS and price
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If the price elasticity of supply is less than 1, then supply is inelastic.
If the price elasticity of supply is greater than 1, then supply is elastic.
If the price elasticity of supply is equal to 1, then supply is unit elastic.
If the price elasticity of supply is greater than 1, then supply is elastic.
If the price elasticity of supply is equal to 1, then supply is unit elastic.
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formula for price elasticity of supply
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percentage change in quantity supplied/percentage change in price
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Polar Cases of Elasticity and Constant Elasticity
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Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all. Zero elasticity refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. Constant unitary elasticity in either a supply or demand curve refers to a situation where a price change of one percent results in a quantity change of one percent.
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Relationship between QS and price
answer
because supply curves are upward sloping, the price elasticity of supply will be a positive number.
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perfectly elastic demand curve
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a horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity
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perfectly inelastic demand curve
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a vertical line reflecting a situation in which any price change has no effect on the quantity demanded; the elasticity value equals zero
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Determinants of Price Elasticity of Demand
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availability of close substitutes, passage of time, luxuries vs. necessities, definition of the market, share of a good in a consumer's budget
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economic model of consumer behavior
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Predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.
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Utility
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utility is a difficult concept to measure because there is no way of knowing exactly how much enjoyment or satisfaction someone receives from consuming a product.
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cross-price elasticity of demand
answer
an increase in the price of a substitute will lead to an increase in the quantity demanded, so the cross-price elasticity of demand will be positive.
an increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative.
an increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative.
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rule of equal marginal utility per dollar spent
answer
spending should be allocated across goods so that the marginal utility per dollar spent is the same for each good
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