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77 Cards in this Set

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Elasticity
a measure of responsiveness to changes in prices or incomes
Price elasticity of demand
measures the responsiveness of the quantity demanded to price
how do you calculate price elasticity of demand?
% change in quantity
/ % change in price
Calculate the % change in quantity demanded
Change in quantity demanded/
Initial Quantity demanded X 100
How do you calculate % change in price
Change in price/
Initial Price X 100
What does it mean if the price elasticity of demand is a large number?
The product is elastic
midpoint method
a technique for calculating the percent change. In this approach, you calculate changes in a variable compared with the average, or midpoint, of the starting and final values
calculate using the midpoint method, aka the % change in X
Change in X/
Average value of X x100
How do you calculate the average value of X?
Starting value of X + Final Value of X
/ 2
perfectle inelastic demand
zero price elasticity,
when the quantity demanded does not respond at all to changes in the price.
what does a perfectly inelastic demand curve look like?
a vertical line
Perfectly elastic
infinite elasticity
when any price increase will cause the quantity demanded to drop to zero.
What does a perfectly elastic demand curve look like?
A horizontal line
What does it mean if the price elasticity of demand is greater than 1?
It is elastic
What does it mean if the price elasticity of demand is less than 1?
It is inelastic
What does it mean if the price elasticity of demand is equal to 1?
It is unit-elastic
Total Revenue
the total value of sales of a good or service.
Calculate total revenue
Price x quantity sold
price effect
After a price increase, each unit sold sells at a higher price, which tends to raise revenue
quantity effect
after a price increase, fewer units are sold, which tends to lower revenue
What happens to revenue when a good is elastic?
it reduces revenue
What happens to revenue when the demand is inelastic?
it increases revenue
What happens to the revenue when the demand is unit-elastic?
It does not change the revenue
Cross-price elasticity of demand
measures the effect of the change in one good's price on the quantity demanded of the other good.
calculate the cross price elasticity of demand
% change in quantity of A demanded
/ % change in price of B
income elasticity of demand
the measure of how much the demand for a good is affected by changes in consumer's incomes
income-elastic
if the income elasticyity of demand for that good is greater than 1
income-inelastic
if the income elasticity of demand for that good is positive but less than 1
calculate income elasticity of demand
% change in quantity demanded/
% change in income
Price elasticity of supply
measure of the responsiveness of the quantity of a good supplied to the price of that good
calculate price elasticity of supply
% change in quantity supplied/
% change in price
individual consumer surplus
the net gain to an individual buyer from the purchase of a good
total consumer surplus
the sum of the individual consumer surpluses of all the buyers of a good
consumer surplus
used to refer to both individual and to the total consumer surplus
How do you calculate the individual consumer surplus?
the difference between the buyer's willingness to pay, and the actual price payed
Seller's cost
the lowest price at which he or she is willing to sell a good
individual producer surplus
the net gain to a seller from selling a good
calculate individual producer surplus
difference between the price received and the sellers cost
total producer surplus
the sum of the individual producer surpluses of all the sellers of a good
total surplus
the total net gain to consumers and producers from trading in the market
Calculate the total surplus
the sum of the producer and the consumer surplus
explicit tax
a cost that involves actually laying out money
implicit cost
does not require an outlay of money, it is measured by the value, in dollar terms, of the benefits that are forgone
marginal cost
the additional cost incurred by doing one more unit of that activity
increasing marginal cost
when each additional unit of the activity costs more than the previous unit
marginal cost curve
shows how the cost of undertaking one more unit of an activity depends on the quantity of that activity that has already been done
marginal benefit
an activity is the additional benefit derived from undertaking one more unit of that activity
decreasing marginal benefit
when each additional nit of the activity produces less benefit than the previous unit
marginal benefit curve
shows how the benefit from undertaking one more unit of an activity depends on the quantity of that activity that has already been done
optimal quantity
the quantity that generates the maximum possible total net gain
principle of marginal analysis
the optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost
sunk cost
cost that has already been incurred and is nonrecoverable. It should be ignored in decisions about future actions
production function
the relationship between the quantity of inputs a firm uses and the quantity of output it preduces
fixed input
an input whose quantity is fixed and cannot be varied
variable input
an input whose quantity the firm can vary
long run
the time period in which all inputs can be varied
short run
the time period in which at least one input is fixed
marginal product
the additional quantity of output that is produced by using one more unit of that input
calculate marginal product of labor
change in quantity of output
/ change in quantity of labor
diminishing returns to an input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
fixed cost
a cost that does not depend on the quantity of output produced. It is the cost of the fixed input
variable cost
a cost that depends on the quantity of output produced. It is the cost of the variable input
total cost
the sum of the fixed cost and the variable cost of producing that quantity of output
total cost curve
shows how total cost depends on the quantity of output
calculate average total cost
Total cost
/ Quantity of output
average total cost curve
falls at low levels of output, then rises at higher levels
average fixed cost
the fixed cost per unit of output
average variable cost
the variable cost per unit of output
minimum-cost output
the quantity of output at which average total cost is lowest- the bottom of the U-shaped average total cost curve
long-run average total cost curve
the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
Price Effect > Quantity Effect then demand is (elastic or inelastic)
Inelastic
if P goes down and TR goes up then demand is (inelastic or elastic)
elastic
If Demand is _______ then there are many substitutes (inelastic or elastic)
elastic
If demand is _______ then there must be a luxury (elastic or inelastic)
elastic
If demand is _____ then this must mean long run analysis (elastic or inelastic)
elastic
If demand is ______then this good must be Broadly defined (elastic or inelastic)
inelastic
Four factors that determine Price Elasticity of Demand
Availability of close substitutes
luxury, necessity
long run/short run
broadly defined, narrowly defined