cost curves, equilibrium, and curve movers in microeconomics Flashcards
the average total cost falls when….
marginal cost is lower than average total cost
why does marginal cost fall when average total cost falls?
because the fixed cost remains constant while the variable costs per quantity decrease, lowering the average total cost
The intersection occurs because the fixed cost element causes the
average total cost curve to react slower than the marginal cost curve.
explainn the substitution effect
As the cost of a good rises, you will increasingly look to find substitutes to replace that good that is cheaper than the new, higher priceAs the cost of a good rises, you will increasingly look to find substitutes to replace that good that is cheaper than the new, higher price
what are the 2 variables that cause a change in the quantity demanded
income effect and substitution effect
explain the income effect
a change in the quantity demanded as a result in a change in the consumers purchasing poower
what variables shift the demand curve
Income
Prices of related goods
Tastes
Population and demographics
Expected future prices
An increase in income (normal good) will shift the demand curve to the _______ because….
right
because consumers spend more of their income on the good
An increase in income (inferior good) will shift the demand curve to the _______ because….
left
because consumers spend less of their higher income on the good
an increase in the price of a substitute will shift the demand curve to the ______ because…
right
consumers buy less of the substitute good and more of this good
an increase in the price of a complimentary good will shift the demand curve too the ____ because…
left
consumers buy less of the complementary good and less of this good
an increase in the expected price of a good will cause the demand curve to shift to the ____ because
consumers buy more of the good today to avoid the higher price in the future
what variables shift the supply curve?
Prices of inputs
Technological change
Prices of substitutes in production
Number of firms in the market
Expected future prices
an increase in the price of an input will cause the supply curve to shift to the _______ because…..
left
the costs of producing the good rise
an increase in productivity will cause the supply curve to shift to the _______ because…..
right because the cost of producing goods falls
an increase in the price substitute in production will cause the supply curve to shift to the _______ because…..
left
because more of the substitute is produced and less of the good is produced
an increase in the number of firms in the market will cause the supply curve to shift to the _______ because…..
right
additional firms result in a greater quantity supplied at every price
an increase the expected future price of the product will cause the supply curve to shift to the _______ because…..
left
less of the good will be offered for sale today to take advantage of the higher price in the future
what is the formula for the price elasticity of demand using the mid-point formula
(Q2-Q1)/(Q1+Q2/2) / (P2-P1)/ (P1+P2/2)
IF DEMAND IS elastic than the absolute value of price elasticity is______
greater than 1
IF DEMAND IS inelastic than the absolute value of price elasticity is______
less than 1
IF DEMAND IS unit-elastic than the absolute value of price elasticity is______
equal to 1
IF DEMAND IS perfectly elastic than the absolute value of price elasticity is______
infinite
IF DEMAND IS perfectly inelastic than the absolute value of price elasticity is______
0
list the determinaNTS OF THE PRICE ELASTICITY OF DEMAND
Availability of close substitutes
Passage of time
Whether the product is a luxury or a necessity
Definition of the market
Share of expenditure on the good in the consumer’s budget.
product has more substitutes available, it will have a ________ demand. If a product has fewer substitutes available, it will have a _______ demand.
more elastic
less elastic
The demand curve for a luxury is _________ than the demand curve for a necessity.
more elastic
The more narrowly we define a market, the ________ demand will be.
more elastic
the demand for a good or service will be ______if purchasing the good or service involves a small share of the average consumer’s budget.
less elastic
When demand is inelastic, a reduction in price will ________ total revenue
decrease
reducing price when demand is elastic will _____ total revenue
increase
if demand is elastic an increase in price reduces revenue because
the decrease in quantity demanded is proportionally greater than the increase in price
if demand is elastic a decrease in price increases revenue because
the increase in quantity demanded is proportionally greater than the decrease in price
if demand is inelastic a decrease in price reduces revenue because
the increase in quantity demanded is proportionally smaller than the decrease in price
if demand is inelastic an increase in price increases revenue because
the decrease in quantity demanded is proportionally smaller than the increase in price
if demand is unit-elastic an increase price does not affect revenue because
the decrease in quantity demanded is proportionally the same as the increase in price
if demand is unit-elastic a decrease price does not affect revenue because
the increase in quantity demanded is proportionally the same as the decrease in price
if the products are substitutes then the cross price elasticity of demand will be….
positive
if the products are complements then the cross price elasticity of demand will be….
negative
if the products are unrelated then the cross price elasticity of demand will be….
0
what is the formula for cross-price elasticity of demand
cross price elasticity of demand= (%change in quantity demanded of one good)/(% change in price of another good )
what is the formula ffor income elasticity of demand
income elsaticity of demand= (% change in quantity demanded)/(% chang in income )
what is the formula for price elasticity of supply
price elasticity of supply=(%change in quantity supplied)/(% change in price )
if the income elasticity of demand is positive but less than 1 it is
normal and a necessity
if the good is a luxury the income elasticity of demand is
positive and greater than 1
an inferior good has a _____ income elasticity
negative
The key determinants of the price elasticity of supply are:
Passage of time
Type of industry
Availability of inputs
Existing capacity
Inventories held.
if supply is elastic the absolute value of price elasticity is
greater than 1
if supply is inelastic the absolute value of price elasticity is
less than 1
if supply is unit elastic the absolute value of price elasticity is
1
if supply is perfectly elastic the absolute value of price elasticity is
infinite
if supply is perfectly inelastic the absolute value of price elasticity is
0
The additional output produced by a firm as a result of hiring one more worker is called the
marginal product of labour
The marginal product of labour tells us how much
total output changes as the quantity of workers hired changes
________ is the change in a firm’s total cost from producing one more unit of a good or service.
marginal cost
how do you calculate marginal cost
MC = (change in total cost)/(change in quantity)
When the marginal product of labour is rising, the marginal cost of output will be
falling
When the marginal product of labour is falling, the marginal cost of production
will be rising.
We can conclude that the marginal cost of production falls and then rises—producing a U-shape—because
the marginal product of labour rises and then falls.
As long as marginal cost is below average total cost, average total cost will
fall.
When marginal cost is above average total cost, average total cost will
rise
Marginal cost will equal average total cost when average total cost is at
its lowest point
As output increases, average fixed cost ____ because
in calculating average fixed cost we are dividing something that gets larger and larger—output—into something that remains constant—fixed cost
The marginal cost (MC), average total cost (ATC) and average variable cost (AVC) curves are all
u-shaped
the MC curve intersects the AVC and ATC curves at their
minimum points
As output increases, the difference between average total cost and average variable cost_____ because ______
decreases
the difference between average total cost and average variable cost is average fixed cost, which gets smaller as output increases.
The long-run average cost curve shows the
lowest cost at which the firm is able to produce a given level of output in the long run, when no inputs are fixed
ong-run average costs fall as it
increases its scale of production and the quantity of output it produces
the effects of economies of scale in, which shows the relationship between
short-run and long-run average cost curves
Diminishing returns applies only to the short run, when
at least one of the firm’s inputs, such as the quantity of machinery it uses, is fixed.
Diseconomies of scale explain why
long-run average cost curves eventually slope upwards.
Diseconomies of scale Exist when
a firm’s long-run average costs rise as it increases its scale of production and the quantity of output it produces.
