Studying For Econ

Front 1

Formula for elasticity of demand

Back 1

dQ/dP x P/Q or (change in quantity demanded/change in price)

Front 2

Inelasticity of demand

Back 2

when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded.

Front 3

Elasticity of demand

Back 3

when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Front 4

Maximizing revenue using elasticity

Back 4

Revenue is maximised when price is set so that the PED is exactly one.

Front 5

Perfect Inelasticity

Back 5

No matter what the price is, the demand will be the same (usually for a needed resource like water). Represented by a vertical line

Front 6

Perfect Elasticity

Back 6

Demand is represented by a horizontal line, where the slope is infinity.

Front 7

Cross price elasticity of demand

Back 7

Cross price elasticity of demand measures the percentage change in demand for a particular good caused by a percent change in the price of another good. Goods can be complements, substitutes or unrelated. A change in the price of a related good causes the demand curve to shift reflecting a change in demand for the original good. Cross price elasticity is a measurement of how far, and in which direction, the curve shifts horizontally along the x-axis. A positive cross-price elasticity means that the goods are substitute goods.

Front 8

Income elasticity of demand

Back 8

Income elasticity of demand measures the percentage change in demand caused by a percent change in income. A change in income causes the demand curve to shift reflecting the change in demand.

Front 9

Short Run v. Long Run elasticities. Which is more elastic and why?

Back 9

Demand is more elastic in the long run than in the short run. Dene SR as less than one year, long run as longer. Then gasoline demand
elasticity in SR is about -0.2 and in LR is about -0.5 to -1.5. For electricity,
SR is -0.1 and LR is about -1.9.

Front 10

Is PED constant?

Back 10

PED for a good is not necessarily constant; as explained below, PED can vary at different points along the demand curve, due to its percentage nature

Front 11

Income elastic goods

Back 11

sometimes called \luxury" goods. Examples include restaurant
meals, cars, and even housing in some markets.

Front 12

In a perfect competition:

Back 12

All firms produce a homogenous product. No firm can impact price (firms are \price takers")
Free entry and exit.

Front 13

Profit

Back 13

Revenue - Cost

Front 14

Total Revenue

Back 14

Profit * Quantity

Front 15

Marginal Revenue

Back 15

dTR/dQ or how much does a change in quantity affect a change in revenue

Front 16

Average Revenue

Back 16

Total Revenue/Quantity or (P*Q)/Q or just Price

Front 17

In a perfectly competitive market, price is equal to what?

Back 17

Average Revenue

Front 18

What is the demand curve in a perfectly competitive market?

Back 18

The demand curve is perfectly elastic.

Front 19

What does Marginal revenue equal in a competitive market?

Back 19

MR =@(P *Q)/@Q=
(P@Q + Q@P)/@Q
where @ stands for derivative.
but @P = 0, so MR = P. Hence AR = MR for firm in a perfectly competitive market.

Front 20

Short run profit maximization formula

Back 20

Profit= Total Revenue - Total Costs
@Profit/@Q= @TR/@Q-@TC/@Q
0=Marginal Revenue-Marginal Cost
Marginal Revenue = Marginal Cost

Front 21

Marginal Revenue

Back 21

@TR/@Q

Front 22

Marginal Costs

Back 22

@TC/@Q

Front 23

what is MR for perfectly competitive firm?

Back 23

MR= P so MC = P with perfect
competition.

Front 24

How does the long run average cost curve compare to the short run?

Back 24

Long run AC cure must lie below the SR AC curve. (It's the outer envelope.) The intuition
is that freeing up a constraint by allowing firms to adjust what were fixed costs can only
lower or hold constant AC.

Front 25

Why is there a depressing effect on profits as firms stays in the market long term?

Back 25

A key dierence between LR and SR is entry and exit.If there are prots, we'd expect to see entry. More entry shifts the market supply out which
leads to lower price and price falls till prots are zero.

Front 26

Define the long run equilibrium

Back 26

 All rms maximize prots.
 Prots are zero, so no entry or exit.
 At p, market supply equals market demand
Why operate at zero economic prots? It's not the same as zero accounting prots. Fixed
factors are paid their opportunity cost.

Front 27

What is market supply in a long run competitive market?

Back 27

To get market supply in SR, we just added rms' supply curves horizontally.
 In LR, there is entry and exit, so an issue arises{ which firms do we add up and at
what output level? It's not straightforward.

Front 28

If total costs = 25 + q^2 then what are MC and AC?

Back 28

AC =TC/Q= 25/q +q

MC =
@TC/@q
= 2q

Front 29

If demand increases and supply remains unchanged?

Back 29

then it leads to higher equilibrium price and quantity.

Front 30

If demand decreases and supply remains unchanged?

Back 30

then it leads to lower equilibrium price and quantity.

Front 31

If supply increases and demand remains unchanged

Back 31

then it leads to lower equilibrium price and higher quantity.

Front 32

If supply decreases and demand remains unchanged

Back 32

then it leads to higher price and lower quantity.

Front 33

Under the assumption of perfect competition, supply is determined by?

Back 33

Marginal cost. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive.

Front 34

What are the determinants of supply?

Back 34

Production costs, how much a good costs to be produced
The technology used in production, and/or technological advances
The price of related goods
Firms' expectations about future prices
Number of suppliers

Front 35

Why is the long run supply curve flatter than the short term one?

Back 35

In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.

Front 36

What are the determininants of demand?

Back 36

In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.

Front 37

What prompts a supply curve shift?

Back 37

When technological progress occurs. The producer is willing to sell more product at the same cost, because its now cheaper for him.

Front 38

When does the equilibrium change?

Back 38

will tend not to change unless demand or supply change.

Front 39

How do you solve for the equilibrium price?

Back 39

To solve for the equilibrium price, one must either plot the supply and demand curves, or solve for their equations being equal.

Front 40

How does the equilibrium get out of balance?

Back 40

t any price above P supply exceeds demand, while at a price below P the quantity demanded exceeds that supplied. In other words, prices where demand and supply are out of balance are termed points of disequilibrium, creating shortages and oversupply.

Front 41

Consumer Surplus

Back 41

the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.

Front 42

Producer Surplus

Back 42

the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for.

Front 43

How do you calculate the consumer surplus?

Back 43

consumer surplus is the area (triangular if the supply and demand curves are linear) above the equilibrium price of the good and below the demand curve. This reflects the fact that consumers would have been willing to buy a single unit of the good at a price higher than the equilibrium price, a second unit at a price below that but still above the equilibrium price, etc., yet they in fact pay just the equilibrium price for each unit they buy.

Front 44

How do you calculate the producer surplus?

Back 44

producer surplus is the area below the equilibrium price but above the supply curve. This reflects the fact that producers would have been willing to supply the first unit at a price lower than the equilibrium price, the second unit at a price above that but still below the equilibrium price, etc., yet they in fact receive the equilibrium price for all the units they sell.

Front 45

How can you can calculate consumer surplus?

Back 45

CS=1/2(Qmkt)(Pmax-Pmkt)
Where Pmkt is the equilibrium price (where supply equals demand), Qmkt is the total quantity purchased at the equilibrium price and Pmax is the price at which the quantity purchased would fall to 0 (that is, where the demand curve intercepts the price axis)

Front 46

What is deadweight loss

Back 46

either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product.

Front 47

What are causes of deadweight loss?

Back 47

Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), externalities, taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the "excess burden" of monopoly or taxation.

Front 48

How do monopolies contribute to deadweight loss?

Back 48

When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition.

Front 49

What is a Cournot competition?

Back 49

A competition where firms compete on amount produced.

Front 50

What defines the Cournot

Back 50

There is more than one firm and all firms produce a homogeneous product, i.e. there is no product differentiation;
Firms do not cooperate, i.e. there is no collusion;
Firms have market power, i.e. each firm's output decision affects the good's price;
The number of firms is fixed;
Firms compete in quantities, and choose quantities simultaneously;
The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors' decisions.

Front 51

What is the impact of a tax?

Back 51

when other things remain equal, this will increase the price paid by the consumers (which is equal to the new market price), and decrease the price received by the sellers.

Front 52

What is the impact of a subsidy?

Back 52

when other things remain equal, this will decrease price paid by the consumers (which is equal to the new market price) and increase the price received by the producers. Similarly, a marginal subsidy on consumption will shift the demand curve to the right; when other things remain equal, this will decrease the price paid by consumers and increase the price received by producers by the same amount as if the subsidy had been granted to producers. However, in this case, the new market price will be the price received by producers.

Front 53

What will a tax do the equilibrium?

Back 53

After a tax is imposed, the price consumers pay will shift to Pc and the price producers receive will shift to Pp. The consumers' price will be equal to the producers' price plus the cost of the tax. Since consumers will buy less at the higher consumer price (Pc) and producers will sell less at a lower producer price (Pp), the quantity sold will fall from Qe to Qt.

Front 54

What is the Cobb-Douglas production function?

Back 54

used to represent the relationship of an output to inputs.
Q = ALαKβ,
where:

Q = total production (the monetary value of all goods produced in a year)
L = labor input
K = capital input
A = total factor productivity
α and β are the output elasticities of labor and capital, respectively. These values are constants determined by available technology.

Front 55

Define returns to scale

Back 55

. It refers to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale (CRS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportional change, there are increasing returns to scale (IRS). Thus the returns to scale faced by a firm are purely technologically imposed and are not influenced by economic decisions or by market conditions.

Front 56

Returns to scale:
α + β = 1,

Back 56

the production function has constant returns to scale. That is, if L and K are each increased by 20%, Y increases by 20%

Front 57

Returns to scale:
α + β < 1,

Back 57

returns to scale are decreasing.

Front 58

Returns to scale:
α + β > 1

Back 58

returns to scale are increasing

Front 59

Marginal revenue-marginal cost method

Back 59

aximum profit is achieved where the producer has collected positive profit up until the intersection of MR and MC (where zero profit is collected), but would not continue to after, as opposed to vice versa, which represents a profit minimum.
(@MR/@Q)<(@MC/@Q)
if marginal revenue is greater than marginal cost, marginal profit is positive, and if marginal revenue is less than marginal cost, marginal profit is negative. When marginal revenue equals marginal cost, marginal profit is zero.[1] Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue

Front 60

Isoquant

Back 60

an isoquant (derived from quantity and the Greek word iso, meaning equal) is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs.

Front 61

Indifference Curve

Back 61

An indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]

Front 62

Perfect substitute Isoquant

Back 62

A linear diagonal line
the resulting isoquant map generated is represented in fig. A; with a given level of production Q3, input X can be replaced by input Y at an unchanging rate. The perfect substitute inputs do not experience decreasing marginal rates of return when they are substituted for each other in the production function.

Front 63

Perfect Compliment Isoquant

Back 63

and L shaped curved
Isoquants are typically combined with isocost lines in order to solve a cost-minimization problem for given level of output. In the typical case shown in the top figure, with smoothly curved isoquants, a firm with fixed unit costs of the inputs will have isocost curves that are linear and downward sloped; any point of tangency between an isoquant and an isocost curve represents the cost-minimizing input

Front 64

Perfect Substitute Indifference Curve

Back 64

two goods are perfect substitutes then the indifference curves will have a constant slope since the consumer would be willing to switch between at a fixed ratio. The marginal rate of substitution between perfect substitutes is likewise constant.

Front 65

Perfect Compliment Indifference Curve

Back 65

If two goods are perfect complements then the indifference curves will be L-shaped. Examples of perfect complements include left shoes compared to right shoes: the consumer is no better off having several right shoes if she has only one left shoe - additional right shoes have zero marginal utility without more left shoes, so bundles of goods differing only in the number of right shoes they includes - however many - are equally preferred. The marginal rate of substitution is either zero or infinite.

Front 66

Indifference Curve Shapes

Back 66

The different shapes of the curves imply different responses to a change in price as shown from demand analysis in consumer theory. The results will only be stated here. A price-budget-line change that kept a consumer in equilibrium on the same indifference curve:

(Line) in Fig. 1 would reduce quantity demanded of a good smoothly as price rose relatively for that good.
(curve) in Fig. 2 would have either no effect on quantity demanded of either good (at one end of the budget constraint) or would change quantity demanded from one end of the budget constraint to the other.
(L shaped) in Fig. 3 would have no effect on equilibrium quantities demanded, since the budget line would rotate around the corner of the indifference curve.[nb 2]

Front 67

Weakly dominated Strategy

Back 67

A strategy for which playing another strategy in the same situation will always lead to an equal or better outcome

Front 68

Strictly Dominated Strategy

Back 68

A strategy for which playing another strategy in the same situation will always lead to a better outcome

Front 69

Nash Equilibrium

Back 69

An outcome in which both players cannot have played a different strategy and got a better outcome.

Front 70

What is price in a long run equilibrium in a competitive market?

Back 70

Price=Avg. Cost=Marginal Cost

Front 71

Indifference Curve

Back 71

An indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]

Front 72

Perfect substitute Isoquant

Back 72

A linear diagonal line
the resulting isoquant map generated is represented in fig. A; with a given level of production Q3, input X can be replaced by input Y at an unchanging rate. The perfect substitute inputs do not experience decreasing marginal rates of return when they are substituted for each other in the production function.

Front 73

Perfect Compliment Isoquant

Back 73

and L shaped curved
Isoquants are typically combined with isocost lines in order to solve a cost-minimization problem for given level of output. In the typical case shown in the top figure, with smoothly curved isoquants, a firm with fixed unit costs of the inputs will have isocost curves that are linear and downward sloped; any point of tangency between an isoquant and an isocost curve represents the cost-minimizing input

Front 74

Perfect Substitute Indifference Curve

Back 74

two goods are perfect substitutes then the indifference curves will have a constant slope since the consumer would be willing to switch between at a fixed ratio. The marginal rate of substitution between perfect substitutes is likewise constant.

Front 75

Perfect Compliment Indifference Curve

Back 75

If two goods are perfect complements then the indifference curves will be L-shaped. Examples of perfect complements include left shoes compared to right shoes: the consumer is no better off having several right shoes if she has only one left shoe - additional right shoes have zero marginal utility without more left shoes, so bundles of goods differing only in the number of right shoes they includes - however many - are equally preferred. The marginal rate of substitution is either zero or infinite.

Front 76

Indifference Curve Shapes

Back 76

The different shapes of the curves imply different responses to a change in price as shown from demand analysis in consumer theory. The results will only be stated here. A price-budget-line change that kept a consumer in equilibrium on the same indifference curve:

(Line) in Fig. 1 would reduce quantity demanded of a good smoothly as price rose relatively for that good.
(curve) in Fig. 2 would have either no effect on quantity demanded of either good (at one end of the budget constraint) or would change quantity demanded from one end of the budget constraint to the other.
(L shaped) in Fig. 3 would have no effect on equilibrium quantities demanded, since the budget line would rotate around the corner of the indifference curve.[nb 2]

Front 77

Weakly dominated Strategy

Back 77

A strategy for which playing another strategy in the same situation will always lead to an equal or better outcome

Front 78

Strictly Dominated Strategy

Back 78

A strategy for which playing another strategy in the same situation will always lead to a better outcome

Front 79

Nash Equilibrium

Back 79

An outcome in which both players cannot have played a different strategy and got a better outcome.

Front 80

What is price in a long run equilibrium in a competitive market?

Back 80

Price=Avg. Cost=Marginal Cost

Front 81

marginal product of labor

Back 81

the change in output from hiring one additional unit of labor

Front 82

Who bears the greater burden of a tax?

Back 82

It can be the producer or the consumer, depending on who has the least elastic curve.

Front 83

What is the long term equilibrium price in a competitive market?

Back 83

Price=marginal costs=average costs

Front 84

1st degree price discriminiation

Back 84

price varies by customer's willingness or ability to pay (cf. Value-based pricing). This arises from the fact that the value of goods is subjective. A customer with low price elasticity is less deterred by a higher price than a customer with high price elasticity of demand

Front 85

second degree price discrimination

Back 85

price varies according to quantity sold. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts.

Front 86

third degree price discrimination

Back 86

price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay.

Front 87

Why is a tariff better than a quota?

Back 87

Because it raises funds for the gov't even as it raises prices for the consumer

Front 88

- "Adding" demand and supply curves

Back 88

add horizontally, not vertically. This requires that the equations be articulated as Q = f(P). Intuition: add quantities at a given price, not prices at a given quantity.

Front 89

shadow price

Back 89

In constrained optimization in economics, the shadow price is the change in the objective value of the optimal solution of an optimization problem obtained by relaxing the constraint by one unit.