Economics 200 Exam 2 Material

Front 1

What is Elasticity?

Back 1

Sensitivity or responsiveness to changes in stimuli

Front 2

Name the four types of Elasticity.

Back 2

1. Price elasticity of supply
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Price Elasticity of Demand

Front 3

Define Price elasticity of supply.
- How do you calculate?

Back 3

Sensitivity of quantity supply to a change in price.

% change QS / % change Price

Front 4

Define Income Elasticity of Demand.
- How do you calculate?

Back 4

Sensitivity of quantity demand to a change in income.

% change QD / % change Income

Front 5

Define Cross Elasticity of Demand.
- How do you calculate?

Back 5

Sensitivity of Quantity Demand to a change in the price of a substitute or a compliment.

% change QD / % change Price

Front 6

*important*
Define Price Elasticity of Demand.
- How do you calculate?

Back 6

Sensitivity of Quantity Demand to a change in the price.

% change in QD / % change Price.

Front 7

What are the 4 determinants of Price Elasticity of Demand?

Back 7

1. Necessity vs. Luxury
2. # of substitutes
3. Fraction of Income
4. Time Elapse

Front 8

What four qualities of an elastic good (in regards to the 4 determinants)?

Back 8

Luxury, with few substitutes, large fraction of income, and has a long term elapse.

Front 9

What four qualities of an inelastic good (in regards to the 4 determinants)?

Back 9

Necessity, with few substitutes, small fraction of income, and has a short term elapse.

Front 10

How do Unit Elastic, Inelastic, and Elastic goods behave after a price raise in regards to revenues?

Back 10

Unit Elastic price raise= same revenues
Inelastic price raise= higher revenues
Elastic price raise= lower revenues

Front 11

Elasticity of Demand = 1 means...

Back 11

Unit Elastic

Front 12

Elasticity of Demand > 1 means...

Back 12

Elastic

(graph looks flat)

Front 13

Elasticity of Demand < 1 means...

Back 13

Inelastic

(graph looks steep)

Front 14

Calculate Elasticity of Demand

Back 14

% change in QD/ % change price

Front 15

Define individual self interest

Back 15

Individuals will act in a self-interested way to maximize their happiness.

Front 16

Define the Law of Demand.

Back 16

Law of demand states that if supply remains constant, increase in demand results in an increased market price.

Front 17

Define the Income Effect.

Back 17

The change in the quantity demand of a good or service caused by a change in real income (purchasing power).

Front 18

Define the Substitution Effect.

Back 18

The change in quantity demand of a good or service caused by a change in its price relative to substitutions.

Front 19

Define Utility

Back 19

a measure of the relative satisfaction from the consumption of a good.

Front 20

Define Total Utility

Back 20

The amount of satisfaction received from all the units of a good or service consumed.

Front 21

Define Marginal Utility

Back 21

The change in total utility from one additional unit of a good or service.

Front 22

Define the Law of Diminishing Marginal Utiltiy

Back 22

The principle that the extra satisfaction of a good or service declines as people consume more in a given period.

Front 23

Define an Indifference Curve

Back 23

A set of points such that a consumer is indifferent between that bundle and any other collection of commodities.

Front 24

Define an indifference map

Back 24

A set of indifference curves.

Front 25

Define a budget line

Back 25

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.

Front 26

Maximum Happiness is subject to what?

Back 26

Budget constrants

Front 27

At what point do individuals maximize happiness?

Back 27

MU1/MU2 = P1/P2
or
When private terms of trade = Public terms of trade

Front 28

Explain the consumer utility theory method of explaining consumer behavior.
Also explain why this method is rejected.

Back 28

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

Front 29

Explain the Income and Substitution effect method of deriving the demand curve. Also explain why this method is rejected.

Back 29

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

Front 30

what is the best method of deriving the individual demand curve and what is the relationship between the point of tangency and self interest.

Back 30

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.

Front 31

How does one derive the market demand from individual demand.

Back 31

Hold prices constant and add across individual demand curves

Front 32

The courts often adjudicate concerns regarding

Back 32

cross elasticity of demand

Front 33

Define firm self interest

Back 33

Firms act in a self interested way to maximize profit.

Front 34

Define the Law of supply

Back 34

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

Front 35

What is the Profit equation?

Back 35

Profit = Total revenue - Total cost

Front 36

Calculate the Elasticity of Demand given:
P1 = 5
P2 = 10
QD1 = 11
QD2 = 10

Back 36

% 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%

Front 37

Economic Profit

Back 37

Economic Profit = Total Revenue (Q x P) - total opportunity costs (Implicit and explicit costs)

Front 38

Accounting Profit

Back 38

Profit = total revenue (QxP) - total cost (explicit costs)

Front 39

Define Fixed input

Back 39

Any resource for which the quantity cannot change during the period of time under consideration.

Front 40

Define Variable input

Back 40

Any resource for which the quantity can change during the period of time under consideration

Front 41

Define Opportunity costs

Back 41

Implicit costs of using resources owned by a firm instead of pursuing other options

Front 42

Define Short Run

Back 42

A period of time so short that there is at least one fixed input

Front 43

Define Long Run

Back 43

A period of time so long that all inputs are variable.

Front 44

Define the Law of diminishing marginal returns

Back 44

The principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor.

Front 45

Define the total physical product

Back 45

AKA total Product. The total production of an output by a firm based on its inputs.

Front 46

Define Marginal physical product

Back 46

The change in the quantity of physical product resulting from a unit change in a variable input.

Front 47

Define Shut down point

Back 47

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.

Front 48

Define the Break Even Point

Back 48

The point at which Marginal costs meets the Average Cost curve

Front 49

Explain the three kinds of Returns to scale

Back 49

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

Front 50

What are the 4 characteristics of perfect competition.

Back 50

1. a large # of small firms
2. A homogeneous product
3. no barrier into or exit from the market
4. Perfect information

Front 51

What is the profit maximizing level of output?

Back 51

MR = MC
Marginal Revenue = Marginal Cost

Front 52

How do you derive the market supply curve from an individual supply curve?

Back 52

Hold prices constant and add across the individual supply curves

Front 53

Explain the No Waste of Resources concept advocated by neoclassical theory.

Back 53

In the long run, firms produce the profit maximizing level of output using the fewest resources. (P = Min AC)

Front 54

Firms will continue to hire workers until?

Back 54

MPP = W
Marginal Physical Product = Cost of employing workers

Front 55

Explain Pareto Optimality.

Back 55

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.

Front 56

What is a Lorenz curve?

Back 56

A graph of the actual distribution of income compared with equal distribution.

Front 57

What is a Gini Coefficient?

Back 57

A mathmatical summary of inequality based on the Lorenz Curve.