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57 Cards in this Set

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  • Back
What is Elasticity?
Sensitivity or responsiveness to changes in stimuli
Name the four types of Elasticity.
1. Price elasticity of supply
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Price Elasticity of Demand
Define Price elasticity of supply.
- How do you calculate?
Sensitivity of quantity supply to a change in price.

% change QS / % change Price
Define Income Elasticity of Demand.
- How do you calculate?
Sensitivity of quantity demand to a change in income.

% change QD / % change Income
Define Cross Elasticity of Demand.
- How do you calculate?
Sensitivity of Quantity Demand to a change in the price of a substitute or a compliment.

% change QD / % change Price
*important*
Define Price Elasticity of Demand.
- How do you calculate?
Sensitivity of Quantity Demand to a change in the price.

% change in QD / % change Price.
What are the 4 determinants of Price Elasticity of Demand?
1. Necessity vs. Luxury
2. # of substitutes
3. Fraction of Income
4. Time Elapse
What four qualities of an elastic good (in regards to the 4 determinants)?
Luxury, with few substitutes, large fraction of income, and has a long term elapse.
What four qualities of an inelastic good (in regards to the 4 determinants)?
Necessity, with few substitutes, small fraction of income, and has a short term elapse.
How do Unit Elastic, Inelastic, and Elastic goods behave after a price raise in regards to revenues?
Unit Elastic price raise= same revenues
Inelastic price raise= higher revenues
Elastic price raise= lower revenues
Elasticity of Demand = 1 means...
Unit Elastic
Elasticity of Demand > 1 means...
Elastic

(graph looks flat)
Elasticity of Demand < 1 means...
Inelastic

(graph looks steep)
Calculate Elasticity of Demand
% change in QD/ % change price
Define individual self interest
Individuals will act in a self-interested way to maximize their happiness.
Define the Law of Demand.
Law of demand states that if supply remains constant, increase in demand results in an increased market price.
Define the Income Effect.
The change in the quantity demand of a good or service caused by a change in real income (purchasing power).
Define the Substitution Effect.
The change in quantity demand of a good or service caused by a change in its price relative to substitutions.
Define Utility
a measure of the relative satisfaction from the consumption of a good.
Define Total Utility
The amount of satisfaction received from all the units of a good or service consumed.
Define Marginal Utility
The change in total utility from one additional unit of a good or service.
Define the Law of Diminishing Marginal Utiltiy
The principle that the extra satisfaction of a good or service declines as people consume more in a given period.
Define an Indifference Curve
A set of points such that a consumer is indifferent between that bundle and any other collection of commodities.
Define an indifference map
A set of indifference curves.
Define a budget line
A line that represents all combinations of two goods that a consumer can purchase with a fixed amount of money given the price of each good.
Maximum Happiness is subject to what?
Budget constrants
At what point do individuals maximize happiness?
MU1/MU2 = P1/P2
or
When private terms of trade = Public terms of trade
Explain the consumer utility theory method of explaining consumer behavior.
Also explain why this method is rejected.
consumers purchase goods based upon their Marginal utility which is added to the total utility in a decreasing fashion.
This method is rejected because there is no way to measure happiness
Explain the Income and Substitution effect method of deriving the demand curve. Also explain why this method is rejected.
Consumers will purchase combinations of goods base upon their purchasing power in relation to the cost of goods.
This method is rejected because it only measures budget constrants
what is the best method of deriving the individual demand curve and what is the relationship between the point of tangency and self interest.
Indifference Curves and Budget lines. The point of tangency between these two lines (MU1/MU2 = P1/P2) represents where individuals can maximize their happiness and purchasing power.
How does one derive the market demand from individual demand.
Hold prices constant and add across individual demand curves
The courts often adjudicate concerns regarding
cross elasticity of demand
Define firm self interest
Firms act in a self interested way to maximize profit.
Define the Law of supply
The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, certeris paribus
What is the Profit equation?
Profit = Total revenue - Total cost
Calculate the Elasticity of Demand given:
P1 = 5
P2 = 10
QD1 = 11
QD2 = 10
% change in QD/ % change in P

(QD2 - QD1)/ ((QD2 + QD1)/2)/
(P2 - P1)/ ((P2 + P1) / 2) /x 100

(10 - 11)/ ((10 + 11)/ 2) /
(10 - 5)/ ((10 + 5)/ 2) x 100

(1/10.5)/ (5/ 7.5) x 100 =
14.2857%
Economic Profit
Economic Profit = Total Revenue (Q x P) - total opportunity costs (Implicit and explicit costs)
Accounting Profit
Profit = total revenue (QxP) - total cost (explicit costs)
Define Fixed input
Any resource for which the quantity cannot change during the period of time under consideration.
Define Variable input
Any resource for which the quantity can change during the period of time under consideration
Define Opportunity costs
Implicit costs of using resources owned by a firm instead of pursuing other options
Define Short Run
A period of time so short that there is at least one fixed input
Define Long Run
A period of time so long that all inputs are variable.
Define the Law of diminishing marginal returns
The principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor.
Define the total physical product
AKA total Product. The total production of an output by a firm based on its inputs.
Define Marginal physical product
The change in the quantity of physical product resulting from a unit change in a variable input.
Define Shut down point
The firm will shut down if it cannot cover its variable costs. So long as it can cover the variable costs, it will continue to produce.
Define the Break Even Point
The point at which Marginal costs meets the Average Cost curve
Explain the three kinds of Returns to scale
1. Increasing returns to scale (Economies of scale) Double inputs, More than double outputs
2. Constant returns to scale
Double inputs, Exactly Double outputs
3. Decreasing Returns to scale (Economies of disscale) Double inputs, Less than double outputs
What are the 4 characteristics of perfect competition.
1. a large # of small firms
2. A homogeneous product
3. no barrier into or exit from the market
4. Perfect information
What is the profit maximizing level of output?
MR = MC
Marginal Revenue = Marginal Cost
How do you derive the market supply curve from an individual supply curve?
Hold prices constant and add across the individual supply curves
Explain the No Waste of Resources concept advocated by neoclassical theory.
In the long run, firms produce the profit maximizing level of output using the fewest resources. (P = Min AC)
Firms will continue to hire workers until?
MPP = W
Marginal Physical Product = Cost of employing workers
Explain Pareto Optimality.
How to Produce? Private property firms will offer the maximum possible amout of goods and services.
What to Produce? Firms will offer the goods and services that people want.
For whom to produce? People make choices and get what they want.
What is a Lorenz curve?
A graph of the actual distribution of income compared with equal distribution.
What is a Gini Coefficient?
A mathmatical summary of inequality based on the Lorenz Curve.