ECON 2 - 110 Flashcards
what price elasticity of demand measure? (P.E.D.)
- measures how much quantity (Qd) responds to a change in price (P)
– measures the price sensitivity of buyers demand
price elasticity of demand - equation with %’s
Percent change in Qd /(OVER) Percentage change in P
- will be positive
Relationship between P.E.D and slope
- NOT the same but CLOSELY RELATED
- slope is a ratio of 2 changes
- Elasticity is the ratio of 2 PERCENT changes
price elasticity of demand - equation with midpoint method
- End value - Start value /(OVER) midpoint = x
- multiply x by 100
- do 1 & 2 for Q and P
- THEN take Q result divided by P result
- will be positive
- answer form 4 is NOT a percent
How to calculate midpoint for midpoint method
- End value + Start value = x
- divide x by 2
2 RULES OF THUMB - abt curves of elasticity
- the FLATTER the curve, the BIGGER elasticity
- the STEEPER the curve, the SMALLER elascity
Different E. of D. curves - INELASTIC 1/5
- demand curve is relatively steep
- low price sensitivity - quantity will only change a LITTLE bit
- < 1
- price falls by 10%
- quantity rises <10%
Different E. of D. curves - UNIT 2/5
- the % change in Q exactly equals % change in P
- =1
- if P falls 10%, Q rises by 10%
Different E. of D. curves - ELASTIC 3/5
- relatively flat curve, BUT NOT ENTIRELY
- price sensitivity is high - big changes in quantity
- > 1
- p falls 10%
- Q rises by >10%
Different E. of D. curves - PERFECTLY INELASTIC 4/5
- perfectly vertical curve
- NO price sensitivity price can change by whatever BUT Q changes by 0
- 0% / 10%
- elasticity is 0
Different E. of D. curves - PERFECTLY ELASTIC 5/5
- perfectly horizontal curve
- price sensitivity is extreme
- infinity elasticity
- as long as p is the same an infinite amount can be consumed
- BUT if p changes by 1 cent Q drops to 0
- any % / 0%
4 determinant of elasticity of demand
- the availability of subs. - more subs = more elastic ; less subs = less elastic (inelastic)
- necessity or luxury - necessity = inelastic, <1 ; luxury = are elastic
- how broadly or narrowly the good is defined - broad = inelastic, food ; narrowly (specific item) = elastic, sushi
- time horizon - elasticity is higher in the long run than in the short run, long run had more alternatives
ch. 14
how do you calculate profit?
equation
total revenue - total cost = profit
ch. 14
what is total revenue ?
TR - the amount a firm recives from the sale of its output(PxQ)
ch. 14
what is total cost ?
TC - the market value of the inputs a firm uses in production
ch. 14
explicit cost
- requiers a outlay of money
ch. 14
implicent cost
- dont requier a cash layout
ch. 14
how do you calculate accounting profit ?
equation
total revenue - total expliciet cost = acc. p.
ch. 14
how do you calculate economic profit ?
equation
total revenue - total cost = econ. p.
ch 14
whats a firms goal?
in general
- a firms goal is to maximiz profits, not just to make profits
ch 14
profit
formula
= total revenue - total cost
ch 14
total revenue
def. + fromula
- is the amount a firm RECEIVES from sale of output
- price x quantity
ch 14
total cost
def
- the market value of the inputs that are used in production
ch 14 explicit cost VS implicit cost :
explicit cost
def + ex+ also
- requires an outlay of money
- ex. = paying wages to workers
- this ex is EC cuz they are on the books & recorded
ch 14 explicit cost VS implicit cost :
implicit cost
def + ex+ also
- DO NOT require a cash outlay
- ex. = your time, alteratives to what you could have been doing with that time
- they are the OP cost of doing buisnnes or alts
ch 14 explicit cost VS implicit cost :
general info
-both EC and IC are important to a firm
-also both matter in firms disicions
ch 14 Economic profit VS accounting profit
Economic profit
both are Formulas
= total revenue - total cost(tc)
- tc includes BOTH im/explicit cost
ch 14 Economic profit VS accounting profit
accounting profit
both are Formulas
= total revenue - total EXplicit cost
- Ac profit will be higher then eco. profit
- this is because AC prof. IGNORES implicet cost
ch 14 production function
production function
def + note
-> showes us the realtionship btwn the quantity of INPUTS used to produce a good & the quanity of OUTPUT of that good
- basically, if we put so much in how much do we get out
- can be shown by table and graph
ch 14 marginal production
marginal production
note + def.+ formula
- if jack hires 1 more worker, his output will rise by the marginal product (of labor)
- > the change in your output IF and additoinal input is added
- MPL = Delta Q/(OVER) Delta L
- > > delta will apear as greek letter & means change in, so change in output divided by change in labor
ch 14 marginal production
Diminishing MPL
What is it and how it happens
-diminishing marginal product = Mp of an INPUT DECLINES as the Quantity of input increases
- bascially, output per added worker declines the more workers that are hired
- in general MPL diminishes as L rises
ch 14 fixed cost & variable cost + Total cost
fixed cost
-> do NOT change with the quantity of output produced
- even if theres no production you MUST pay
ch 14 fixed cost & variable cost + total cost
variable cost
-> DO change with output
- the 2 VCs are wages paid to workers & cost of raw materials
-
ch 14 fixed cost & variable cost + total cost
total cost
formula
- tc = fc + vc
- fixed cost + variable cost
add pic
Ch 14 aver. fixed cost & aver. variable cost + aver. total cost
aver. fixed cost
formula + notes
- AFC = FC /(OVER) Q
- fixed cost divided by quan of output
- AFC will always be decreasing
- AFC will NEVER be 0, but can be close
- add pic
Ch 14 aver. fixed cost & aver. variable cost + aver. total cost
aver. variable cost
formula + notes
- AVC = VC/(OVER) Q
- variable cost divided by quan of output
- as Q rises AVC may fall initaly, but will event. raise as Q rises
- looks like a small smile
Ch 14 aver. fixed cost & aver. variable cost + aver. total cost
aver. total cost : Formula 1
formula + notes + pic
pic is same for F1 & F2
- ATC = TC/(OVER) Q
- total cost divided by quan of output
Ch 14 aver. fixed cost & aver. variable cost + aver. total cost
aver. total cost : Formula 2
formula + notes + pic
pic is same for F1 & F2
- ATC = AFC + AVC
- aver. fixed cost + aver. variable cost
Ch 14 relationship btwn Marginal cost + Average total cost & eff. scale
marginal cost
aka MC , def + formula + what it tells us
- is the increase in total cost (TC) from producing 1 more unit
- DeltaTC/(OVER)DeltaQ = change in total cost div. by change of quan
- mc answers the question if more ore less should be produced to maximize profit
Ch 14 relationship btwn Marginal cost + Average total cost & eff scale
effiencient scale
- its the lowest point on ATC curve
- aka = effient point
MONOPOLY
what is it & what does it have
-1 firm that is sole seller of a product w/o close sub
- has market power
- ability to influence market price
- price maker
monopoly
barriers of entry - 3
- a single firm owns key resoucese - debeers
- gov gives a single firm the exclusive right to produce good - copyright
- a natural monoply
monopoly
whats a natural monopoly & abt it
- singel firm can produce for entire market at lower cost then several firms
- graph - has a downward sloping ATC curve
- has huge fixed cost and small marginal cost
why does MR slope down & why is MR<P
- to sell larger Q (output), a monoply must lower price
why does monopoly have no S(upply) curve
there is no law of supply in monopoly
