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35 Cards in this Set

  • Front
  • Back
Price elasticity of demand
Measures responsiveness of the quanitity demanded to a change in price. Ratio of percentage changes (always negative)
Elastic Demand
Change of more than 1% of quantity in response to 1% price change. Revenue goes down when price goes up.
Unelastic Demand
Change of less than 1% of quantity when price changes 1%. Change in same direction, ie. Prices rise and total revenue rises
Unitary Elastic Demand
Changes are direct, 1% change in price = 1% change in quantity. Revenue remains unchanged as price changes.
Perfectly Elastic Demand
Decline in quantity demand to ZERO as response to any price increase
Perfectly Inelastic Demand
No change in quantity demanded in response to price changes
Determinants of Price Elasticity of Demand
1. Availability of substitutes
2. Proportion budget spent
3. Time allowed for adjustment
Income Elasticity of Demand
Measure of responsiveness of quantity demanded to change in income. Shown as %age change.
Cross-elasticity of Demand
Measure of responsiveness of qty demanded to change in related good/service. %age change in one good caused by 1% change in price of another good.
Price Elasticity of Supply
The ratio of %age change in quantity supplied to the %age change in price
Tax Incidence
Share of a tax paid by buyer and seller.
Marginal Product
Change in total output as result of 1 unit change in variable input (ie. labour)
Law of Diminsihing Returns
After a level of product in the short run, each additional unit imput will yield smaller outputs.
Fixed Costs
Costs that do not vary with the level of output (Insurance, rent...)
Variable Costs
Costs that vary with the level of output
Total Cost
Is the sum of total fixed cost & total variable cost
Explicit Costs
Payments to non-owners of a firm for their resources.
Implicit Costs
The opportuntiy costs of using resources owned by a firm.
Economic Profit
Equals total revenue - (explicit+implicit costs)
Short run
Time period during which a firm has at least one fixed input (ie. a factory)
Long run
Time period when all inputs are variable.
Production function
Relationship between inputs and outputs.
Marginal cost
Change in total cost associated with 1 additional unit at output
Average Fixed Cost
Total fixed cost / total output at each level of production
Marginal average rule
When marginal cost is less than average cost, the average cost falls. When marginal cost more it rises
Marginal cost & marginal product are inversely related
Increasing returns cause marginal cost to fall and diminishing returns cause it to rise
Economies of Scale
When costs decrease as output increases
Diseconomies of Scale
Long run cost curve increases as output increases
Constant returns to Scale
Long run Avg cost curve unchanged as output increases
Market structure
Three market characteristics;
1. Number of sellers
2. Nature of the product
3. Ease of entry/exit to market
Perfect competition
Individual firm cannot affect the price if the product it produces. Very open industry with similar products
Competition policy
Increasing competition in industry. Regulate business behaviour.
Price-taker in perfectly elastic market
Can sell all it produces at market determined price, nothing above that price as there lots of competition.
Total revenue-Total cost method
Profit reaches maximum when vertical diff. between revenue & cost at maximum.
Marginal revenue = marginal cost method
Firm maximises profit by producing the outout where marginal revenue = marginal cost