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145 Cards in this Set
- Front
- Back
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formula for price elasticity of demand
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% change in quantity demanded divided by % change in the price of that product
Q / P |
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perfectly elastic demand curve
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a horizontal demand curve indicating that consumers will purchase all they want at one price
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perfectly inelastic demand curve
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a vertical demand curve indicating that there is no change in the quantity demanded as price changes
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TRUE or FALSE: The terms elastic and inelastic do not refer to a price ranger, but to the entire demand curve
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FALSE, The terms elastic and inelastic refer to a price ranger and not to the entire demand curve
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TRUE or FALSE: Demand is price-elastic at the bottom of the curve and inelastic at the top
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FALSE, Demand is price-elastic at the top of the curve and inelastic at the bottom
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4 determinants of the price elasticity of demand (whether the demand is price-inelastic or price-elastic)
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-how many substitutes there are
-how well a substitute can replace the good or service -the importance of the product in the consumer's budget -the time period |
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TRUE or FALSE: When the price elasticity of demand lies between -1 and -∞, the demand is elastic
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TRUE
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TRUE or FALSE: When the price elasticity of demand is equal to -1, the demand is unit-elastic
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TRUE
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TRUE or FALSE: When the price elasticity of demand lies between -1 and 0, the demand is inelastic
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TRUE
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What does price elasticity of demand depend on?
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how readily and easily consumers can switch their purchases from one product to another
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TRUE or FALSE: The greater the number of close substitutes, the lesser the price elasticity of demand
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FALSE, The greater the number of close substitutes, the greater the price elasticity of demand
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TRUE or FALSE: The greater proportion of a householder's budget that a good constitutes, the greater is the householder's price elasticity of demand for that good
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TRUE
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TRUE or FALSE: The longer the time period, the lesser the price elasticity of demand
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FALSE, the longer the time period, the greater the price elasticity of demand
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formula for total revenue (TR)
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TR = (P) x (Q)
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price discrimination
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charging different customers different prices for the same product
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TRUE or FALSE: If demand is price-elastic, revenue and price changes move in the same direction
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FALSE, they move in opposite directions
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TRUE or FALSE: An increase in price causes a decrease in revenue
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TRUE
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TRUE or FALSE: A decrease in price causes an increase in revenue
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TRUE
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TRUE or FALSE: If demand is price-inelastic, revenue and price move in opposite directions
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FALSE, they move in the same direction
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TRUE or FALSE: If demand is unit-elastic, revenue does not change as price changes
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TRUE
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formula for cross-price elasticity of demand
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% change in demand for GOOD A divided by % change of GOOD B
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formula for income ilasticity of demand
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% change in demand for GOOD A divided by % change in income
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normal goods
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goods for which the income elasticity of demand is positive
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inferior goods
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goods for which the income elasticity of demand is negative
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luxury goods
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goods for which the income elasticity of demand is a large positive number
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TRUE or FALSE: If the cross-price elasticity of demand is positive, the goods are not substitutes
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FALSE, they are substitutes
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TRUE or FALSE: If the cross-price elasticity of demand is negative, the goods are complements
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TRUE
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TRUE or FALSE: Elasticities can be calculated for any determinant of demand, not just money
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TRUE
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formula for price elasticity of supply
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the % change in the quantity supplied divided by the % change in the price
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short run
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a period of time short enough that the quantities of at least one of the resources used cannot be varied
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What is verticle and what is horizontal on the demand and supply curves
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price is verticle and quantity is horizontal
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in a perfectly elastic DEMAND CURVE, demand is...
A. parallel with price B. parallel with quantity |
B. parallel with quantity (horizontal)
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in a perfectly inelastic DEMAND CURVE, demand is...
A. parallel with price B. parallel with quantity |
A. parallel with price (vertical)
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in a perfectly inelastic SUPPLY CURVE, demand is...
A. parallel with price B. parallel with quantity |
A. parallel with price (vertical)
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in a perfectly elastic SUPPLY CURVE, demand is...
A. parallel with price B. parallel with quantity |
B. parallel with quantity (horizontal)
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long run
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a period of time long enough that the quantities of all resources can be varied
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incidence
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a measure of who pays a tax
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TRUE or FALSE: the interaction of demand and supply determines the price and quantity produced and sold
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TRUE
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TRUE or FALSE: the relative size of demand and supply price elasticities determines how the market reacts to changes
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TRUE
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arc elasticity
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price elasticity of dmeand measured over a range of prices and quantities along the demand curve
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point elasticity
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price elasticity of demand measured at a single point on the demand curve
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utility
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a measure of the satisfaction received from goods and services
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the principle of the diminishing marginal utility
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the more of a good that you obtain in a period of time, the less the additional utility yielded by an additional unit of that good
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TRUE or FALSE: individuals behave so as to maximize their utility
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TRUE
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marginal utility definition
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the extra utility derived from consuming one more unit of a good or service
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formula for marginal utility
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change in total utility divided by change in quantity
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disutility
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dissatisfaction
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total utility
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the total satisfaction derived from consuming a quantity of some good or service
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When does total utility stop increasing?
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when diassatisfaction sets in... this is called disutility. anotherwords, the consumer has had enough of this good
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TRUE or FALSE: When marginal utility is zero, total utility is at its minimum
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FALSE, it is at its maximum
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consumer equilibrium or equimarginal principle
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to maximize utility, consumers must allocate their scarse incomes among goods in such a way as to MAKE IT EQUAL the marginal utility per dollar of expenditure on the last unit of each good purchased
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TRUE or FALSE: The marginal utility per dollar obtained from the last unit of all products consumed is the same, the consumer will make income
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FALSE, the consumer is in equilibrium and will not allocate income
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TRUE or FALSE: The demand curve or schedule can be derived from consumer equilibrium by altering the price of one good or service
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TRUE
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the substitution effect
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following a price decrease of a good or service, the individual will purchase more of it and less of others
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the income effect
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the individuals income can buy more of all goods when the price of one good declines
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TRUE or FALSE: The inverse relationship between product price and quantity demanded
is illustrated by the diminishing marginal utility and the equimarginal principle account |
TRUE
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TRUE or FALSE: a price change triggers only the substitution effect but not the income effect
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FALSE, it triggers both effects
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What is the market demand curve the sum of?
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it is the sum of all individual demand curves
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6 determinents that economists use to derive the market demand curve
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-incomes are fixed
-the prices of all goods are constant -tastes are fixed -expectations do not change -the number of consumers is constant -the time period remains unchanged |
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bounded rationality
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the understanding that perfect information is not likely to be available, and as a result, people make irrational decisions, but in reality, the brain is making these decisions to be economic
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behavioral economics
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the study of decision making assuming that people are rational
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neuroeconomics
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the study that attempts to determine how the brain handles economic decisions
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Why does the demand curve slope down?
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because of diminishing marginal utility and consumer equilibrium
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indifferent
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lacking any preference
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indifference curve
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a curve showing all combinations of two goods that the consumer is indifferent among
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indifference map
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a complete set of indifference curves
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budget line
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a line showing all the combinations of goods that can be purchased with a given level of income
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What does the indifference curve show?
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what the consumer is willing to buy
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What does the budget line show?
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what the consumer is able to buy?
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When does consumer equilibrium occur?
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at a point where the budget line touches or comes close to an indifference curve
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law of dimishing marginal returns (the relationship between employees and output
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as successive units of a variable resource are added to the fixed resources, the additional output produced will initially rise but will eventually decline
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Why does the diminishing marginal returns occur?
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the efficiency of variable resources depends on the quantity of fixed resources
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definition of average total cost (ATC)
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the per unit cost
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forumula for average total cost (ATC)
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total cost divided by the quantity of output
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definition of marginal cost (MC)
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the change in cost caused by a change in ouput
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formula for marginal cost (MC)
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the change in total cost divided by the change in the quantity of output
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TRUE or FALSE: Whenever marginal is less than average, the average is rising
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FALSE, the average is falling
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TRUE or FALSE: Whenever marginal is greater than average, the average is falling
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FALSE, the average is rising
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total costs (TC)
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the expenses that a business has in supplying goods and/or services
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total fixed costs (TFC)
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payment to resources whose quantities cannot be changed during a fixed period of time - the short run
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total variable costs (TVC)
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payments for the additional resources used as output increases
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formula for average fixed cost (AFC)
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total fixed cost divided by total output
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formula for average variable cost (AVC)
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total variable cost divided by total output
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formula for short-run average total cost (SRATC)
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total cost divided by the total quantity of output produced when at least one resource is fixed
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definition of costs
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the full opportunity costs of resources used to create and sell goods and services
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fixed costs
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costs that a firm has in creating and/or offering for sale goods and services that do not change as the quanities change
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variabile costs
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costs that change when the quantity of that good or services change
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scale
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size; all resources change when scale changes
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long-run average-total-cost curver (LRATC)
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the lowest-cost combination of resources with which each level of output is produced when all resources are variable
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economics of scale
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the decrease in per unit costs as the quantity of production increases
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diseconomics of scale
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the increase in per unit costs as the quantity of production increases
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constant returns to scale
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unit costs remain constant as the quantity of production is increased
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minimum efficient scale (MES)
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the output level at which the cost per unit of output is the lowest
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Where does the lng-run average-total-cost get its U shape from
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the economies and diseconomies of scale
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TRUE or FALSE: small industries have a large minimum efficient scale (MES) and large industries have a small minimum efficient scale (MES)
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FALSE, large industries have a large MES and small industries have a small MES
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2 reasons for an economy of scale may occur
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-specialization
-technology |
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reason that a diseconomy of scale may occur
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coordination and communication become more difficult as size increases
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What is the difference between the 'long run' and the 'short run' in terms of building up a firm?
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the long run refers to the planning stages and the short run refers to the stages where the plan is put into action
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total physical product (TPP)
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the max output that can be produced when successive units of a variable resource are added to fixed amounts of other resources
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definition of average physical product (APP)
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output per unit of resource
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formula for average physical product (APP)
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total output divided by number of employees
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defintion of marginal physical product (MPP)
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the additional quantity that is produced when one additional unit of a resource is used in combination with the same quantites of all other resources
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forumula for marginal physical product (MPP)
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change in output divided by change in number of employees
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What do the productivity curves total physical product (TPP), average physical product (APP), and marginal physical product (MPP) reflect?
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the law of diminishing marginal returns
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What do the productivity curves total physical product (TPP), average physical product (APP), and marginal physical product (MPP) show in terms of the relationships between variables and outputs?
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as a variable resource is increased, the output initially rises at an accelerating pace, then at a slower pace, and then may eventually decline
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marginal cost
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the additional cost of producing one more unit of output
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marginal revenue
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the additional revenue obtained from selling one more unit of output
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formula for marginal revenue
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change in total revenue divided by change in total output
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TRUE or FALSE: profit is at a minimum when marginal revenue equals marginal cost
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FALSE, it is at a max (profit-maximizing rule)
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formula for marginal cost
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change in cost divided by change in total output
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What is the purpose of comparing marginal cost and marginal revenue?
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to show whether a firm needs to supply more or less to maximize profits
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profit-maximizing rule
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to produce where marginal revenue equals marginal cost
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market structure
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the selling environment in which a firm produces and sells its product
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3 characteristics of a market structure
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-the number of firms that make up the market
-the ease with which new firms may enter the market and begin producing the good or service -the degree to which the products produced by the firms are different |
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4 types of market structures
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-perfect competition
-monopoly -monopolisitc competition -oligopoly |
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3 characteristics of perfect competition
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-a very number of firms, so large that whatever one firm does has no effect on the market
-firms that produce an identical product -ease entry |
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2 characteristics of a monopoly
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-there is just one firm
-entry by other firms is not possible |
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3 characteristics of monopolistic competition
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-large number of firms
-easy entry -differentiated products |
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4 characteristics of obligopolies
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-there are few firms, few enough that each firm alone can effect the market
-product can be either differentiated or identical -entry is more difficult than entry into a perfectly competitive or monoplistically competitive market -firms are interdependent |
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perfect competition
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a market structure in which many firms are producing a nondifferentiated product
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monopoly
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a market structure in which only one firm supplies the product
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monopolistic competition
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a market structure in which many firms are producing differentiated products and entry is easy
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oligopoly
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a market structure in which few firms are producting either standardized or differentiated products
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definition of accounting profit
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net operating income
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formula for accounting profit
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Accounting Profit = PQ - cost of land - cost of labor - cost of capital
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equity capital
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ownership; funds investors or owners put into a firm
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formula for economic profit
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Economic Profit = accounting profit - cost of equity capital
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3 types of economic profits
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-negative economic profit
-zero economic profit -positive economic profit |
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normal profit
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the accounting profit that corresponds to a zero economic profit
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negative economic profit
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total revenue is less than total costs
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zero economic profit
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total revenue equals total costs
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positive economic profit
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total revenue exceeds total costs
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price taker
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a firm in a perfectly competitive market structure
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shutdown price
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the minimum point of the average-variable-cost curve
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break-even price
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a price that is equal to the minium point of the average-total-cost curve
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TRUE or FALSE: When additional firms enter the industry and begin producing the product, the market supply curve shifts in
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FALSE: it moves out
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TRUE or FALSE: When firms leave the industry, the market supply curve shifts in
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TRUE
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TRUE or FALSE: Perfect competition results in economic efficiency
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TRUE
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economic efficiency
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the price of a good or service just covers the marginal cost of producing that good or service and people are getting the goods and services that they want
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relate the terms, zero economic profit, normal profit, and normal accounting profit
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THEY ARE THE SAME THING... ALL EQUAL ZERO PROFIT
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producer surplus
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the difference between the price firms would have been willing to accept for their products and the price they will actually recieve (this is a benifit from engaging in the market)
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TRUE or FALSE: Consumer surplus is the area above equilibrium price and below the demand curve
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TRUE
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TRUE or FALSE: Producer surplus is the area below equalibrium price and above the supply curve
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TRUE
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When does entry occur into perfect competition?
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when firms are earning above-normal profit or positive economic profit
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When may a temporary shutdown occur in perfect competition?
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when firms are not covering their variable costs in the short run. In the long run, exit occurs when firms are not covering all costs
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