AGEC Test 2 - Chapters 5,6,7,8 Flashcards
Define elasticity
the ability of an object or material to resume its normal shape after being stretched or compressed
What are the major forms of elasticity?
- price elasticity of demand
- income elasticity of demand
- Cross-price elasticity of demand
Define price elasticity of demand
a measurement of the change in demand for a good or service in relation to a change in its price
Price elasticity in relation to supply and demand
- When prices rise, demand usually drops. When prices drop, demand usually rises.
- When supply rises, prices usually drop. when supply drops, prices usually rise.
The formula for price elasticity of demand
% change in quantity demanded divided by % change in price
Define Giffen Good
a non-luxury product for which demand increases as the price increases and vice versa, thus defying standard laws of demand
Define normal good
a good that consumers demand more of as their income increases
Define inferior good
a good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed
An example of a giffen good would be?
bread, rice or wheat
Income elasticity of demand formula
% change in quantity demanded divided by % change in consumers real income
Define cross-price elasticity of demand (XED)
measures the relationship between two goods when the price of one changes
What is cross price elasticity for?
Cross-price elasticity measures how sensitive the demand
of a product is over a shift of a corresponding product
price.
What is an example of cross price?
A cross-price elasticity example could include two goods
such as coffee and tea. If the price of coffee were to
increase, the quantity of tea demanded would also
increase. This indicates that the two products are
substitutes for one another.
What are the determinants of the elasticity of demand
Availability of substitutes for the commodity
▪ Alternative uses for the commodity
▪ Type of market
▪ Farm level vs. retail level
▪ Domestic vs. export market
▪ Time frame
▪ The percentage of the income spent on the
commodity
▪ Luxury vs. necessity
The formula for cross price elasticity of demand
% change in quantity demanded of product A divided by % change in price of Products B
Define complementary goods
goods that we normally use together
ex. as the price of one goes up, the demand for the other goes down
Types of price elasticity of demand
- Perfectly elastic demand (Ed = infinity)
- Perfect inelastic demand (Ed = 0)
- Unitary elastic demand (Ed = 1)
- Relatively elastic demand (Ed > 1)
- Relatively inelastic Demand (Ed < 1)
Define perfectly elastic demand
a demand where any price increase would cause the quantity demanded to fall to zero & reducing the price of a good or service will not increase sales
What is the perfectly elastic demand curve? Why is that its curve?
Perfectly elastic demand curve
is horizontal straight line. This is because at the given price
the quantity demanded is infinite, even if there is a slight
change in the price the demand
becomes infinity & hence the curve is flat.
Marginal Revenue Formula
change in total revenue divided by change in quantity sold
Revenue formula
Quantity x Price
Marginal Cost Formula
Change in total cost divided by change in quantity
Average variable cost formula
variable cost divided by output
Average fixed cost formula
total fixed cost divided by output
Fixed cost formula
total cost of production - variable cost per unit X number of units produced
total variable cost formula
quantity of output X variable cost per unit of output
Total cost formula
fixed cost + variable cost
Marginal Product Formula
increase in production output divided by change in variable input
Define law of diminishing marginal returns
“As successive units of a variable
input are added to a production
process with the other inputs held
constant, the marginal physical
product (MPP) eventually declines”
Average physical product (APP) formula
APP = TPP/ amount of input
Define production function
Relationship between output and the factors of production (labor, capital, land, and management).
Y=f(x)
Output = f(labor, capital, land, & management)
Define monopsony
a market in which there is a single buyer
Define oligopsony
a market with only a few buyers
Define monopsony power
the ability of the buyer to affect the price of the good or pay less than the price that would exist in a competitive market
Define perfect competition
a theoretical market structure in which there are no monopolies
Define resources
A service or other asset used to produce goods & services that meet human needs & wants.
Market
a place where parties can gather to facilitate the exchange of goods and services
Define economic good
goods which involve opportunity cost as they are scarce
Define free good
goods which have no opportunity cost
Define price
the amount of money that has to be paid to acquire a given product.
Firm’s Supply Curve
The firm’s supply curve begins at the point on the marginal cost curve where the price of the firm’s product exceeds the shut down price (PSD). As the price rises, the firm equating MC with price will produce more.
Define producer surplus
Represents the profit realized by firms in the market for specific quantities supplied.
When does market surplus exist?
when the quantity supplied exceeds the the quantity demanded.
When does market shortage exists?
when the quantity demanded exceeds the quantity supplied.
