Econ 200. Exam 2

Front 1

Substitution Effect

Back 1

The change of quantity demanded of a good or service caused by a change in its price relative to substitutes

Front 2

Income Effect

Back 2

Income Effect

Front 3

Indifference curve

Back 3

is a graph showing different bundles of goods, each measured as to quantity, between which a consumer is indifferent

Front 4

Budget line

Back 4

a line that shows the different combination of two goods a consumer can purchase with a given amount of money and prices for the goods

Front 5

Consumer equilibrium

Back 5

a condition in which total utility can not increase by spending more of a given budget on one good and spending less on another good

Front 6

Elasticity

Back 6

Sensitivity or responsiveness to changes in stimuli

Front 7

Explain the 4 types of elasticity

Back 7

1. Price elasticity of supply - sensitivity of quantity supply to a change in price
Positive curve (law of supply)
2. Income elasticity of demand - sensitivity of quantity demand to a change in income. positive for normal goods and services ; negative for inferior goods and services
3. Cross elasticity of demand - Sensitivity of quantity demand to a change in the price of a substitute or compliment. Positive for subs, negative for compliments
4. Price elasticity of demand - sensitivity of quantity demand to a change in price. |% change of QD/ % change in price|. Negative (law of demand) but take absolute value

Front 8

What are the 4 determinants of price elasticity of demand? (ranked in order of importance)

Back 8

1. Necessity vs. luxury
2. number of substitutes
3. fraction of income
4. time elapse

Front 9

What is a unit of elasticity, what are the units of elastic and inelastic curves and how would they appear graphically?

Back 9

Ed=1, unit elastic. Ed>1 elastic (flat). 0<Ed<1 inelastic (steep)

Front 10

A low price elasticity of demand would give a(n) ___________ curve

Back 10

inelastic

Front 11

Why would firms care about price elasticity of demand?

Back 11

to maximize profit

Front 12

why would governments care about price elasticity of demand?

Back 12

to maximize tax revenue by taxing inelastic demands

Front 13

why would courts care about price elasticity of demand?

Back 13

so they could adjudicate inter-firm conflict

Front 14

what are 3 necessary Conditions for a Successful Illustration of the individual demand curve?

Back 14

1. an adequate way to measure happiness
2. choose between two distinct types of products
3. a budget constraint

Front 15

explain the 1st Illustration of the individual demand curve and the reason for its rejection

Back 15

Income effect and substitution effect. It doesn't meet the budget constraint conditions

Front 16

What is the formula for when individuals maximize happiness?

Back 16

MU1/MU2=P1/P2

Front 17

What is average fixed cost?

Back 17

Average fixed cost (AFC) is an economics term used to describe the total fixed costs (TFC) divided by the quantity (Q) of units produced.

AFC=\frac{TFC}{Q}

Front 18

What is the difference between fixed costs and variable costs?

Back 18

In economics, fixed costs are business expenses that are not dependent on the activities of the business. They tend to be time-related, such as salaries or rents being paid per month. This is in contrast to variable costs, which are volume-related (and are paid per quantity).

Front 19

what is the difference between the long run and short run?

Back 19

The short run is the period of time in which one or more inputs are fixed. The long run is the period in which all inputs are variable

Front 20

What is marginal cost?

Back 20

In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit

Front 21

The sum of all marginal costs equals the _____________

Back 21

variable costs

Front 22

What is meant by economies of scale and diseconomies of scale?

Back 22

Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility, or scale, increases.[1] Diseconomies of scale are the opposite

Front 23

What are returns to scale?

Back 23

In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs. If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)

Front 24

What is the Lorenz curve? What policy issue is it used for?

Back 24

In economics, the Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth. It is used for progressive taxes policy because it shows income distribution.

Front 25

What is the Pareto Optimal Point?

Back 25

Any point along the PPC curve. If an economic system is Pareto efficient, then it is the case that no individual can be made better off without another being made worse of