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54 Cards in this Set
- Front
- Back
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What is the formula for the price elasticity of demand?
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% change in QD/ % change in Price
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What does price elasticity of demand measure?
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It measures the different degrees of responses.
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Elastic
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Consumer response is largely relative to a price change
PED>1 |
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Inelastic
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Cosumer response is less relative to a price change.
PED<1 |
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Unitary elastic
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PED=1
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What are the determinants of price elasticity of demand?
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Nececcity vs. Luxury
Availability of Substitutes Price Relative to Income Time |
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Total Revenues & Formula
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TR= Price x Quantity
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What is the different between a normal good and inferior good?
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Normal: IED>0
High Income High Demand Low Income Low Demand Inferior: IED<0 High Income Low Demand Low Income High Demand |
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Income Elasticity of Demand Formula
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IED= % Change in QD/%Change in Income
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Cross Price Elasticity of Demand formula
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CPED- % Change Qd/ % Change P
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Substitute vs. Complement
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CPED >0= Substitute
CPED <0 =Complement |
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Necessity
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price inelastic
less responsive |
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Luxury
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Price elastic
more responsive |
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Greater Availability
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Price Elastic
more responsive |
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Fewer Substitutes
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Price Inelastic
Less responsive |
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High Price/ Income
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Price Elastic
More responsive |
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Low Price/ Income
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Price Inelastic
Less responsive |
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Short- Run
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Price Inelastic
Less responsive |
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Long-Run
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Price Elastic
More responsive |
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What does Total Revenues measure?
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It tells us how price and quanity change revenue and which one dominates over the other.
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Demand
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Ability and willingness to buy a specifc product (qd) at alternative prices.
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Three Important Questions of Demand
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1. What is the responsiveness of Qd to a change in price?
2. By how much does quantity demanded decrease if price increases? 3. By how much does quanitty demanded increase if price decreases? |
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What is the production function?
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Output of a good or service resulting from different combinations of outputs
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what is the formula for marginal physical product?
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Change in Q/ Change in L (labor)
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Explain the Law of Diminishing Marginal Returns
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MPP of labor will diminish as more of it is employed with a fixed quantity of other resources.
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Formula for Marginal Cost
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Change in Total Cost/ Change in output
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What does Marginal Cost measure
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This is how much additional to Total costs from additional output.
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Relationship between MPP and MC
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High Output- As MPP increases MC decreases
Low Output- As MPP decreases MC Increases |
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Total Cost
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Sum of all resource costs for a level of output FC + VC
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Fixed Cost
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Resources that don’t change with output and must be paid
No way to reduce in the short run |
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Variable Cost
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Resources that vary with output
If output = o and variable costs = 0 |
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Average Total Cost
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TC/Q
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Average Fixed Cost
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FC/Q
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Average Variable Cost
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VC/Q
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Relationship between average total cost and marginal cost
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MC<ATC so ATC decreases…. MC>ATC so ATC increases
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Difference between Accounting Costs and Economic Costs
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Accounting- explicit costs
Economic- Explicit + Implicit costs |
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Implicit
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Direct payments to resources
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Explicit
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Value of all of the resources used even without direct payment
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Different between Short run and long run costs of production
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Short-run: labor is variable and all other resources are fixed
Long-run: all resources are variable and no fixed costs |
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Explain constant returns to scale
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Are there cost advantages to the scale of production?
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Economies of scale/increasing returns to scale
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Inputs double and Output more than doubles
ATC decreases |
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Diseconomies of Scale/Decreasing returns to scale
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Inputs double and output less than doubles
ATC increases |
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Constant returns to scale
Market Structure |
Inputs double and output doubles
ATC stays the same |
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Market Structure
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The number and relative size of firms in a market
Degree of competition vs. degree of market power |
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What are the characteristics of perfect competition?
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1. Many many producers
2. Identical/standardized/homogeouns product 3. No/low barriers to entry |
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Why Is a perfectly competitive firm a price-taker?
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All firms accept and charge the market price
They have no market power |
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Why does a perfectly competitive firm produce a small share of market supply?
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They sell all output at the market price
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How does a perfectly competitive firm determine a price and level of ouput?
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1. Produce a level of output that maximizes your total profit
TP= Total rev – total costs 2. Never produce a unit of output that costs more than what it brings in a. Produce q* where total profit is maximized or where MR=MC |
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Total Profit
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Total rev – total costs
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Marginal Revenue Formula
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Change in total revenue/ change in quantity (production)
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Explain intuitvely what income elasticity measures
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measures the responsiveness of the demand for a good to a change in the income of the people demanding the good
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Explain intuitively what cross-price elasticity measures
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measures the responsiveness of the demand for a good to a change in the price of another good.
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Explain intuitvely what marginal physical product measures
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the extra output that can be produced by using one more unit of the input
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Explain intuitively what marginal cost measures
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Measures the increase or decrease in costs as a result of one more or one less unit of output.
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