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81 Cards in this Set
- Front
- Back
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Elasticity
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measure of sensitivity between two variables
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Price elasticity of demand
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sensitivity of the change in quantity demanded of a good in response to a change in the price of good
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When is Demand Elastic?
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When quantity demanded is sensitive to products's price
Ed<-1 |
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When is Demand Inelastic?
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When quantity demanded is insensitive to changes in price
-1<Ed>0 |
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Percent Change Formula
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% change in Qd/ %change in Price
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Elasticity Formula for 1 point
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1/slope * P/Q
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Elasticity Formula for 2 points
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(Q2-Q1/ Q1+Q2)/ (P2-P1/ P1+P2)
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Why do we use Point Elasticity?
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To find the elasticity of data at a certain point
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What is income elasticity?
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Change in demand of a good due to the income
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Income Elasticity Formula
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% change Qd/ % change of income
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3 types of Demand curves
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Perfectly elastic (infinitely elastic), Perfectly inelastic(zero elasticity), Non-linear (-1 elasticity at all points)
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Describe a Perfectly elastic demand curve
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Perfectly elastic- demand for product will change with an increase in price. will only buy at one price(horizontal slope)
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Describe an perfectly inelastic demand curve
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price does not change the demand. will buy product no matter the price. (vertical slope)
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Describe non-linear demand curve
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elasticity is -1 at all points on the curve (hyperbola shape)
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Cross Price Elasticity
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change in demand of a good due to another good's price.
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Cross Price Elasticity Formula
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%change in Qdx/ % change in Qdy
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Name determinants of price elasticity of Demand
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# of Substitutes, income spent, Time
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Supply Elasticity Formula
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% change in Qs/ % change in Price >0
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Determinants of Supply Elasticity
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Time, production,
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What is a Normal good
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A good which ppl purchase more of when income increases
(income elasticity of demand is positive EaI>0) |
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What is an Inferior good
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A good which ppl purchase less when income increases, or what ppl buy when income is low
(income elasticity of demand is negative<0) |
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What does an Income Elasticity of demand of 0 mean?
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consumption is independent of income
no matter how much you make youll purchase the same amount of the product. Ex: insulin |
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If two goods are substitutes, cross elasticity will be?
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Positive
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If two goods are complements, cross elasticity will be?
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Negative
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if two goods are unrelated, cross elasticity will be?
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0
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Another Demand Elasticity formula?
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Ed = (new-old)/ old
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What is Utility?
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Ability of a good or service to satisfy one or more needs or wants of a consumer
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What is Total Utility (TU)?
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Total satisfaction resulting form the consumption of a product
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What is Marginal Utility (MU)?
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Additional satisfaction obtained by consuming one more unit of a good.
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Describe what Marginal Utility is?
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Diminishing
As we consume more a product our satisfaction increases but not as much as the previous use of the product |
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Diminishing Marginal Utility?
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The more we have of something, the less marginal utility each unit of that good brings us
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Can Marginal Utility be negative?
Ex? |
Yes
Drinking |
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What is util?
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unit of happiness.
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What is Optimal Consumption?
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consuming to your highest marginal utility
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What is Economic Rent?
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A payment for the use of any resource over and above its opportunity cost.
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What are Factors of production?
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Inputs used in the creation of goods.
*Labor, Capital, Human Capital, Entrepreneurial skill |
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What is Accounting Profit?
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Total revenue- total explicit costs.
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What are Explicit costs?
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Cost managers must take account of.
Ex: wages, taxes, raw materials, insurance |
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What are Implicit Costs?
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Expenses that managers do not have to pay out of pocket
Ex: opportunity costs capital, owner op cost of labor, |
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What is Profit?
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income entrepreneurs earn
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What are Economic Profits?
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Accounting profits- implicit costs
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What is Production
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Any activity that results in the conversion of resources into products that can be used in consumption
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Production Function
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The relationship between maximum physical output and the quantity of capital and labor used in the production process
Q= F(K,L,M) |
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What are inputs?
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Labor (L)
Capital (K) |
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Output
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What is produced. (Q)
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Short Run
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A time period when at least one input cannot be changed.
has One fixed input( most of the time capital) |
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Long Run
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The time period in which all factors of production can be varied
Labor and capital can change |
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Total Product(TP)
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total amount of output produced by a firm
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Average Product (AP)
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total product divided by the number of units of the variable
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Average Product of Labor (APL)
Formula |
Total Product(TP)/ Labor(L)
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Average Product of Capital(APK)
Formula |
Total product (TP)/ Capital(K)
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Marginal Product(MP)
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The physical output that is due to the addition of one more unit of a variable factor of production
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Marginal Product of Labor(MPL)
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change of Total Product (TP)/ change of Labor (L)
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Marginal Product of Capital(MPK)
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change of Total Product(TP)/ change of Capital(K)
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Explain the Law of Diminishing Marginal Product
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after some point, successive increases in a variable factor of production, such as labor, added to fixed factors of production, will result in smaller increases in output
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Fixed costs (FC)
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Costs that do not vary with output(Q)
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Total Fixed Costs (TFC)
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same no matter what Q is
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Variable Costs (VC)
Total Variable Costs(TVC) |
costs that vary directly with output(Q)
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Total Costs (TC)
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The sum of the total fixed costs and total variable costs
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Average Total Costs(ATC)
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cost per unit
Total cost/ # of units produced |
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Marginal Cost(MC)
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the change in total cost due to increase in output
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TC Formula
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TC= TVC + TFC
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ATC Formula
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ATC= TC/Q
ATC= AVC + AFC |
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AFC Formula
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TFC/Q
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AVC Formula
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AVC = TVC/Q
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MC Formula
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change TC/ change Q
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As MPL up, what happens to MC
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MC goes down
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When MPL is down, what happens to MC
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MC goes up
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Shape of MC and AVC curves
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U shaped
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Why are short run curves U-shaped
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Diminishing Marginal Product
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Why is the Long Run Average Curve U-shaped( LRAC)
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economies of scale
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What happens in the Very Long Run
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Advances in technology and resources
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Which direction does the LRAC shift when there is an increse in technology or resources
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Downward shift (lower cost for all units)
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What is MES?
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Minimum Efficient Scale
The lowest output level at which LRAC is at a minimum |
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Economies of scale?
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happens at smaller levels of production.
ATC decreases when Q increases slows down as Q goes up |
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Diseconomies of scale?
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ATC increases when Q increases
happens @ largest levels of production |
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What is the percentage of Government revenues on Medicare and Medicaid
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25%
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How does insurance work?
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people share the cost of medical care with others
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What is Moral Hazard?
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an individual has both incentive and the ability to shift costs of an activity to another party.
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What is Ex ante Hazard?
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When people begin to participate in reckless or risky behavior just because they have insurance
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Ex Post Hazard
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Asking insurance to cover expenses you would have never incurred in you werent insured.
*leads to overconsumption |
