Chapter 2 Flashcards
Market
The Market for a given good or service is the set of
all the consumers and suppliers who are willing to
buy and sell that good or service at a given price
Market Equilibrium
Market Equilibrium occurs when the price and the
quantity sold of a given good is stable.
OR
Market
equilibrium occurs when the equilibrium price is
such that the quantity that consumers want today is
the same as the quantity that suppliers want to sell.
Marginal Benefit
The Marginal Benefit of producing a certain unit
of a given good is the extra benefit accrued by
producing that unit.
Marginal Cost
The Marginal Cost of producing a certain unit of
a given good is the extra cost of producing that
unit. (!!! The relevant cost is the “opportunity
cost” and not just the “absolute cost” of
producing the good.)
Cost-Benefit Principle
The Cost-Benefit Principle states that an action
should be taken if the marginal benefit is greater
than the marginal cost.
Economic Surplus
The Economic Surplus of a certain action is the
difference between the marginal benefit and the
marginal cost of taking that action.
Quantity Supplied
The Quantity Supplied by a supplier represents
the quantity of a given good or service that maximizes the profit of the supplier.
Supply Curve
The Supply Curve represents the relationship
between the price of a good or service and the
quantity supplied of that good or service.
Law of Supply
The tendency for a producer to offer more of a
certain good or service when the price of that
good or service increases.
Sunk Cost
A Sunk Cost is a cost that once paid cannot be
recovered.
If a Factor of Production is Fixed…
then its cost
does not vary with the quantity produced.
Fixed Cost
A Fixed Cost is a cost associated with a fixed
factor of production.
If a Factor of Production is Variable…
then its cost
tends to vary with the quantity produced.
Variable Cost
A Variable Cost is a cost associated with a
variable factor of production.
Short Run supply curve
The Short Run is a period of time during which at
least of one factor of production is fixed
Long Run supply curve
The Long Run is a period of time during which all
factors of production are variable.
Profit
The Profit represents the difference between the total revenues (TR) and the total costs (TC).
Shut Down Condition (Short Run)
In the short run, the entrepreneur should shut down production if π production < - FC.
**Price below min(AVC)
Otherwise, she should hire the optimal number of
workers and continue operations
Shut Down Condition (Long Run)
In the long run, the entrepreneur should exit the
industry if π production < 0.
**Price below min(ATC)
Otherwise, she should hire the optimal number of
workers and continue operations
What shifts the supply curve to the right (5)
- Drop in the price of (variable) inputs
- Advancements in technology (via its impact
on productivity) - Expectations (on future prices/demand ^)
- Drop in the price/demand of other products
- ^ in the number of suppliers
Price Elasticity of Supply
The Price Elasticity of Supply represents the
percentage change in the quantity supplied resulting
from a very small percentage change in price. It also
measures the responsiveness of the supply to
changes in price
Law of Supply
Supply curves have the tendency of being
upward sloping.
Elastic Supply
Supply is elastic when the price elasticity of supply is greater than 1
Unit Elastic Supply
Supply is unit elastic when the price elasticity of supply is equal to 1.
