Chapter 2-6 Flashcards
What are the three reasons economists assume people are selfish and not self-interested?
- Economists want simpler models
- Even though something may seem to be kind, it actually ultimately benefits them
- Self-interest would be so consistent that it would be useless, it would not be testable.
nonsatiation
Nonsatiation means you are never satisfied, you always want more of something. You may have just aten and do not want more food, therefore you are satiated with respect to food. You are not satiated with respect to lamborghinis though.
scarcity
If the demand of the good exceeds what is available, the good is scarce.
substitution
Everyone is willing to trade some amount of one good for some amount of another.
marginal value
The maximum amount of one good an individual is willing to sacrifice to obtain one more unit of another good.
indifference
Letting someone else choose for you
Why does trade take place?
Trade does not take place just because someone has more than they need of something. It happens when individuals have different marginal values.
diminishing marginal value
The maximum one is willing to sacrifice at the margin for a good, per unit of time, declines the more one has of that good - other things held constant
real income
Real income is a measure of how many goods ones can consume, and is determined by one’s income divided by some price. (M/p2)
relative price
measured by how much we must sacrifice one good to obtain another good. (p1/p2)
behaviour is based on…
real income and relative price, not nominal.
law of demand
There is an inverse relationship between a good’s price and the quantity demanded, other things are held constant.
When is a consumer in equilibrium?
Relative price = Marginal Value. The x position on the graph will be the quantity demanded.
total value
The maximum one is willing to pay for a given quantity rather than have none at all. (Area under graph from 0-Q)
What is the mathematical relationship betwwen total value and marginal value?
Inverse relationship
Explain the difference between change in demand and quantity demanded
Change in demand refers to a shift in the entire demand curve, either outwards or inwards. Change in quantity demanded
What does a leftward shift of a demand graph mean? What about a rightward shift?
Leftward means that there is a decrease in demand. Rightward means there is an increase in demand.
What causes a change in demand?
A change in the exogenous parameters, such as nominal income, nominal price and preferences.
Define normal goods
When income increases, demand for the normal good increases.
Define inferior goods
When income increases, demand for the inferior good decreases.
Define substitute goods
When the price of good 2 increases, the demand for good 1 also increases.
Define complement goods
When the price of good 2 increases, the demand for good 1 decreases.
Explain the difference between change in demand and quantity demanded
Change in demand refers to a shift in the entire demand curve, either outwards or inwards. Change in quantity demanded is a movement along the demand curve.
What causes a change in the quantity demanded?
It results from a change in the relative price.
Formula for elasticity
^Q/^P X P/Q, slope times price/quantity
Conditions for being elastic, inelastic, and unitary elasticity
Elasticity is when the number is smaller than -1, like -10. inelastic is when the elasticity is between 0 and -1, so like -0.5. unitary elasticity is when the elasticity is -1.
Normal good elasticity
Ei > 0
Inferior good elasticity
Ei < 0
Income elasticity formula
Ei = ^Q/^M x M/Q1. ^Q1 is the quantity demanded at the final income - quantity demanded initially. ^M is the final income minus the initial income.
Cross price elasticity
E12 = ^Q1/^P2 x P2/Q1. ^P2 is the difference between the new price and the old price. ^Q is the difference between the old quantity demanded and the new quantity demanded.
Complement good elasticity
E12 < 0
Substitute good elasticity
E12 > 0
The second law of demand
Long-run demand curves are more elastic than short-run demand curves.
Definition of consumers surplus
Total value minus the total expenditure of the consumer
Definition of sellers’ surplus
Total revenue minus the total value of the seller.
Theorem of exchange
All gains from trade are exhausted at the margin.
Define efficiency
Gains from the trade are maximized
Who is the marginal consumer?
The last person to enter the market. They receive no consumer surplus.
marginal cost formula
^TC/^Q
sunk costs
costs that cannot be recovered
avoidable costs
opportunity costs that can be avoided or recovered
variables costs
costs that change with output
fixed costs
costs that do not change with output (lump sum costs)
profit/loss
the difference between benefits and costs
The competitive firm is
a firm that takes the price, ignores rivals decisions and doesn’t engage in strategic behaviour.
Average Revenue Formula
TR/Q
Profit formula
TR - TC
Rent Formula
TR - TVC
When are profits maximized?
Profits are maximized when marginal cost equals price. P = MC
Profit when AC = AVC
Q x [AR-AC]
Break even point
Minimum of the AC curve
Shutdown point
minimum of the AVC curve
Total Revenue Formula
P X Q
