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66 Cards in this Set
- Front
- Back
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Elasticity |
Responsiveness of buyers and sellers to changes in market conditions |
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Price Elasticity of Demand |
A measure of the responsiveness of quantity demanded to a change in price -This gives us the sensitivity of the relationship between the two variables |
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Demand is ELASTIC if: |
-Quantity demanded changes significantly as the result of the price change -Elastic= "sensitive" or "responsive" |
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Demand is INELASTIC if: |
-Quantity demanded changes a small amount as the result of price change -Inelastic= "insensitive" or "unresponsive" |
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Determinants of Price Elasticity of Demand |
1. Existence of Substitutes 2. Share of Budget Spent on the Good 3. Time and the Adjustment Process 4. Necessities Vs. Luxury Goods |
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Existence of Substitutes |
-Goods with lots of substitutes are more ELASTIC Ex. Canned Veggies, Cereal, Products with many brands -Goods with very few substitutes or no substitutes are more INELASTIC Ex. Broadway Theatre, Rare Coins, Autographs, Electricity, Superbowl Tickets |
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Share of Budget Spent on a Good |
-Demand is more ELASTIC for "big ticket" items or high priced items that make up a large portion of income -Demand is more INELASTIC for inexpensive items
What would you react to more? -20% sale on a new vehicle -20% sale on a candy bar |
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Time and the Adjustment Process |
Generally demand for goods tend to become more ELASTIC over time - Over time consumers are more able to find substitutes or more able to adjust to the price -The longer the time frame, the more elastic -From the Immediate Run to the Long Run, it changes from Inelastic to Elastic |
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Necessities Vs. Luxury Goods |
-Necessities are INELASTIC because you need them Ex. Toothpaste, Soap, Insulin, Electricity -Luxury Goods are ELASTIC because they are not necessary Ex. Big Screen TV, Candy Bar
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Price Elasticity of Demand Formula |
Percentage Change in the Quantity Demanded -------------------------------------------------------------------- Percentage Change in the Price
*Price Elasticity of Demand is assumed to be negative |
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Midpoint Method |
Change in Q/Average Value of Q ------------------------------------------------ Change in P/Average Value of P
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Demand Curves |
-Relatively shallow or flat demand curves are more Elastic -Relatively steep demand curves are relatively inelastic |
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Perfectly Inelastic
Demand |
Ed=0
Price does not matter Ex. Insulin |
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Relatively Inelastic
Demand |
0>Ed>-1 (between -1 and 0)
Price is less important than Quantity Demanded Ex. Electricity |
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Unitary
Demand |
Ed=-1
Price and Quantity Demanded is equally important
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Relatively Elastic
Demand |
-1>Ed>-infinity
(less than negative 1)
Price is more important than Quantity Demanded Ex. An Apple |
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Perfectly Elastic
Demand |
Ed=-infinity
Price is everything |
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Income Elasticity of Demand |
Responsiveness of the change in quantity purchased as a result of a change in income |
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Inferior Goods |
Ei<0
(less than zero)
As income expands, the demand for the good declines Ex. Macaroni and Cheese |
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Normal Goods (Necessity) |
0<Ei>1 (Between 0 and 1)
As income increases ,spending on necessities will expand at a slower rate than the increase in income Ex. Milk |
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Normal Goods (Luxury) |
Ei>1 (Greater than 1)
As income rises, someone can enjoy luxuries easier Ex. Diamond Ring |
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Cross Price Elasticity of Demand |
Measures the responsiveness of the quantity demanded of one good to a change in price of a related good
%change in demand for one good -------------------------------------------------- %change in price for related good |
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Inelastic Supply |
-When supply is not able to respond to a change in price - Es=0 -Supply does not change as the price changes Ex. Oceanfront land (fixed) Perfectly Inelastic
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Elastic Supply |
- Es>1 -Ex. Hot dog vendor (can add another cart in short order if it is needed) |
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Utility |
A measure of relative levels of satisfaction consumers enjoy from consumption of goods and services -Sometimes numerically quantified by a unit of happiness called a "util" |
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Total Utility |
Overall amount of happiness from all consumption; most of the time total utility is directly related to consumption
(Sum of marginals) |
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Marginal Utility |
Additional utility gained from consuming one or more unit of a good or service; for most consumption, marginal utility is positive (change in total utility)
**Marginal Utility is a 0 when Total Utility is MAXIMIZED |
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Diminishing Marginal Utility |
-When Marginal Utility declines as consumption increases -Total Utility will not increase at the same rate and marginal utility starts to diminish |
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Consumer Optimum |
The combination of goods and services that maximizes the consumer's utility for a given income or budget
("most bang for your buck")
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Diamond Water Paradox |
Explains why water, which is essential to life, is inexpensive while diamonds, which do not sustain life, are expensive |
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Profits and Losses |
Determined by calculating the difference between expenses and revenues
Total revenue-total cost |
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Explicit Cost |
A cost paid in money (accountants look at) |
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Implicit Cost |
The opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment (economists look at); Opportunity costs of doing business |
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Normal Profit |
The minimum amount required to keep a firm in its current line of production |
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Abnormal or Supernormal Profit |
Profit made over and above normal profit -may exist in a situation where firms have market power (no competition) |
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Accounting Profit |
Total Revenues-Explicit Costs |
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Economic Profit |
Total Revenues-(Explicit Costs + Implicit Costs) |
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Production Function |
Describes the relationship between inputs a firm uses and the output it creates |
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Short Run |
A time frame in which the quantities of at least one resource is FIXED -"fixed plant"
-To increase output with a fixed plant a firm must increase the quantity of labor it uses |
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Long Run |
A time frame in which the quantities of all resources can be CHANGED -"variable plant"
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Total Product |
Is the quantity of a good produced in an output rate(the number of units produced per unit of time) -total product increases as the quantity of labor employed increases(only to a point) |
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Marginal Product |
-The change in output associated with one additional unit of an input -The change in total product(output)that results from a one unit increase in the quantity of labor employed(input) -tells us the contribution to total product by adding one more worker
Change in TP/Change in quantity of labor |
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Diminishing Marginal Product |
Occurs when successive increases in inputs are associated with a slower rise in output |
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Increasing Marginal Returns |
Occur when the marginal product of an additional worker exceeds the marginal product of a pervious worker |
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Decreasing Marginal Returns |
Occur when the marginal product of an additional worker is less than the marginal product of the pervious worker
-arises from the fact that more and more workers use the same equipment and workspace(fixed) |
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Law of Diminishing Returns |
As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases |
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Variable Costs |
Change with the rate of output |
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Fixed Costs |
Are unavoidable; they do not vary with output in the short run; Stays the same |
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Average Variable Cost (AVC) |
Determined by dividing total variable costs by the output (total product) |
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Average Fixed Cost (AFC) |
Determined by dividing total fixed costs by the output (total product) |
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Total Cost |
The Cost of all factors of production
TC=TFC+TVC |
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Total Fixed Cost (TFC) |
The cost of the firms fixed factors of production used |
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Total Variable Cost (TVC) |
The cost of the variable factor of production used by a firm
*no production=no variable cost |
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Average Total Cost (ATC) |
Sum of the average variable cost and the average total cost |
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Marginal Cost |
The increase in cost that occurs from producing additional output |
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Relationships between Marginal Cost and Average Total Cost |
MC<ATC: average total cost is falling MC>ATC: average total cost is rising MC=ATC: average total cost won't change |
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Economies of Scale |
Occur when costs decline as output expands in the long run |
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Diseconomies of Scale |
Occur when costs rise as output expands in the long run |
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Constant Returns to Scale |
Occur when costs remain constant as output expands in the long run |
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Price Controls |
An attempt to set prices through government involvement in the market -Meant to ease perceived burdens on the population; prevent market from clearing |
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Price Ceilings |
Are legally established MAXIMUM prices for goods or services
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Non Binding Price Ceilings |
When a price ceiling is above the equilibrium price (usually don't sell at this price because the equilibrium is lower than a nonbinding max) |
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Binding Price Ceilings |
When a price ceiling is below the market equilibrium price (must sell at this price because the equilibrium is higher) |
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Price Floor |
Legally established MINIMUM prices for goods or services |
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Non Binding Price Floor |
When a price floor is below equilibrium price (usually don't sell at this price because the equilibrium is higher) |
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Binding Price Floor |
When a price floor is above the equilibrium price (Must sell at this price because the equilibrium is lower) |
