8: Supply & Demand Flashcards
How do you solve for the price elasticity of demand, given a demand function?
new price/ Qd function * slope coefficient
How do you solve for the cross-price elasticity of good A and good B?
Slope of good B * (price of good B/ Q demanded of good A)
The cross-elasticities of compliments and substitutes are:
negative for compliments, as one good’s price goes up, the other good’s quantity demanded goes down
positive for substitutes, as one good’s price goes up, the other’s good’s quantity demanded goes up
In the case of normal goods, the income and substitution effects are ______, leading to:
reinforcing
an increase in the quantity purchased after a drop in price
Giffen good:
The _____ substitution effect is ___ than the _____ income effect, causing a _____ demand curve, where an ____ in price causes a _____ in demand.
The positive substitution effect < negative income effect, causing a positively sloped demand curve, where a drop in prices decreases consumption
A normal profit is best described as:
Zero economic profit;
Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero
Marginal revenue=
(New TR- Old TR) / (New units - old units)
Change in TR/ Change in quantity sold
Under perfect competition, a firm breaks even when:
MR= ATC
& MR = Price
A company will stay in the market in the long term if:
A company will stay in the market in the short term if:
Total revenue (price) >= total costs
the company is exceeding it’s variable costs
Revenue > variable costs
Profit is maximized when:
marginal revenue equals marginal cost
the difference between total revenue and total cost is maximized
Output increases in the same proportion as input increases occur at:
constant returns to scale
A good that responds to the substitution effect the same way as a normal good:
inferior good
substitution effect: when there is an decrease in price, it pushes consumption toward that good
Involves charging each customer their reservation price:
First-degree price discrimination (perfect price discrimination)
