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Microeconomics 201 > Econ Exam 2 March 6 > Flashcards

Econ Exam 2 March 6 Flashcards

1
Q

What does the long run depend on?

A

Returns to scale

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2
Q

What are the three types of returns to scale?

A

Increasing, Constant, and Decreasing

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3
Q

Increasing Returns to Scale

A

When the firm doubles inputs, the resulting output more than doubles

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4
Q

Constant Returns to Scale

A

a doubling of inputs would result in a doubling of outputs

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5
Q

Decreasing Returns to Scale

A

when the firm doubles inputs the resulting output would be less than double

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6
Q

Specialization of Labor

A

a system of organizing the manufacture of an article in a series of separate specialized operations, each of which is carried out by a different worker

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7
Q

Economies of Scale

A

a company can decrease their cost per unit by increasing volume

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8
Q

Example of Economies of Scale

A

9 farms, each with own capital (tractor, combine etc) one person buys out all farms, they can sell excess capital, therefore decreasing cost/unit but maintaining volume

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9
Q

IMPORTANT DATE

A

February 11, 2014, 9*F

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10
Q

Market Equilibrium

A

exists when the amount consumers are willing and able to buy is matched by the amount suppliers are willing and able to supply OR

  • when the market clears
  • when supply equals demand
  • when there are no surpluses or shortages
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11
Q

Market Equilibrium Price

A

the price in which demand for good x c.p. is equal to supply of good x c.p. “OR,OR, OR”

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12
Q

Market Equilibrium Quantity

A

the quantity that exists when supply equals demand

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13
Q

Shoe Surplus Example

A

Shoes=$50, store is full and another shipment coming, so there is a sale. Price lowered to $45 making surplus smaller, and price is lowered to $40 to make surplus even smaller until the market clears

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14
Q

Shoe Shortage Example

A

Shoes=$15, store is out of stock. Price = $20, making shortage smaller, price raised until market clears

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15
Q

Natural Market Adjustment Process

A

process of consumers and suppliers working together to move market towards equilibrium or somewhere in the vicinity of equilibrium

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16
Q

What book did Adam Smith write?

A

“Wealth of Nations”, in the classical school of econ, argument for lasseiz faire econ, which is about self reg markets w/ little gov intervention

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17
Q

Elasticity

A

a measure of how much buyers and sellers respond to changes in market conditions

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18
Q

Price Elasticity of Demand

A

a measure of how much the quantity demanded of a good responds to a change in the price of that good =% change in quantity/ % change in price

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19
Q

Elastic Demand

A

quantity demanded responds substantially to changes in price

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20
Q

Inelastic Demand

A

quantity demanded responds only slightly to changes in price

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21
Q

What can effect elasticity?

A

Avail. of Close substitutes, necessities vs. luxuries, definition of the market, time horizon

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22
Q

Availability of Close substitutes

A

goods with close substitutes tend to have more elastic demand bc it is easier for consumers to switch from that good to others

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23
Q

Necessities vs Luxuries

A

necessities tend to have inelastic demand and luxury items tend to have elastic demands

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24
Q

Definition of the Market

A

Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.

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25
Q

Time horizon

A

goods tend to have more elastic demand over longer time horizons

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26
Q

What does larger price elasticity imply?

A

It implies a greater responsiveness of quantity demanded to changes in price

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27
Q

Total Revenue

A

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

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28
Q

Total Revenue Equation

A

Price x Quantity

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29
Q

What are the total revenue rules?

A

When…

  • price elasticity < 1, P & TR move in same direction
  • price elasticity > 1, P and TR move in opposite directions
  • price elasticity = 1, TR remains constant when price changes
30
Q

Income elasticity of demand

A

a measure of how much the quantity demanded of a good responds to a change in consumers’ income

31
Q

Income elasticity of demand =

A

% change in quantity demanded/ % change in income

32
Q

Relationships between goods and income elasticity?

A

Inferior goods: negative IE
Necessities: small IE
Luxuries: large IE

33
Q

Cross Price Elasticity of Demand

A

a measure of how much the quantity demanded of one good responds to the change in price of another good

34
Q

Cross Price Elasticity of Demand =

A

% change in Q demanded of good 1 / % change in P of good 2

35
Q

What is the relationship between substitutes and complements and cross elasticity?

A

Substitutes: positive cross-elasticity
Complements: negative cross-elasticity

36
Q

Price Elasticity of Supply

A

a measure of how much the quantity supplied of a good responds to a change in the price of a good

37
Q

Price Elasticity of supply =

A

% change in Q supplied / % change in price

38
Q

Elasticity

A

designed to measure the responsiveness of a dependent variable to an independent variable

39
Q

Elasticity Equation

A

(Dep2-Dep1/Dep2+Dep1)/(Ind2-Ind1/Ind2+Ind1)

40
Q

How many decimal places should you round to?

A

3 Decimal Places! after every calculation

41
Q

Price Elasticity of Demand

A

the relative or percentage change in quantity demanded which is brought about by a percentage or relative change in price

42
Q

EPD=

A

% change Qx/ % change Px

43
Q

EPD greater than one

A

relatively elastic

44
Q

Relatively Elastic

A

a decrease (increase) in price will bring about a larger percentage increase (decrease) in the quantity demanded than the original price

45
Q

Examples of goods with elastic demand

A

snowmobile, baseball cards, phone app (luxury goods)

46
Q

EPD less than one

A

relatively inelastic

47
Q

Relatively Inelastic

A

a decrease (increase) in price will bring about a smaller percentage increase (decrease) in the quantity demanded than the original change in price

48
Q

Goods with inelastic demand

A

milk, gas, eggs, (necessities)

49
Q

EPD=0

A

Unitary Elastic

50
Q

Unitary Elastic

A

a percentage change in price will bring about an equal percentage change in quantity demanded

51
Q

What does the midpoint represent on a demand curve? above midpoint? below midpoint?

A

Midpoint: unitary elastic
Above: elastic
Below: inelastic

52
Q

What does the TRT tell you about the price if it is in the elastic portion of the demand curve?

A

Total revenue can be increased by lowering price

53
Q

What does the TRT tell you about the price if it is in the inelastic portion of the demand curve?

A

Total revenue can be increased by raising the price

54
Q

What does the TRT tell you about the price at the unitary point?

A

Total revenue is maximized at the unitary point

55
Q

Why does the gov tax inelastic goods instead of elastic goods?

A

the gov taxes inelastic goods so they don’t kill industry

56
Q

What two real world items are unitary elastic?

A

Beer and Beef

57
Q

Cross Price Elasticity

A

shows the responsiveness of the quantity demanded of good (x) to the price change of some other good (w)

58
Q

ECD (cross price elasticity)

A

% change Qx/ % change Pw

59
Q

What is the significant of the ECD value?

A

Negative: complements
Positive: substitutes

60
Q

Income Elasticity of Demand

A

shows the responsiveness of consumers to changes in income

61
Q

What is the significance of the EYD?

A 
positive = normal good
negative = inferior good
62
Q

Price Elasticity of Supply

A

show the responsiveness of quantity supplied to price changes

63
Q

Significance of EPS

A

EPS > 1 : relatively elastic
EPS < 1 : relatively inelastic
EPS = 1 : unitary elastic
sign will always be positive

64
Q

Price Ceiling

A

a maximum price placed on the market below the equilibrium price, because the price is too high, so the gov wants to lower the price to protect consumers

65
Q

Why does the gov place a price ceiling on a good?

A

1) good is a necessity to society
2) to increase the well being of society
3) to slow down inflation

66
Q

Price Floor

A

a minimum price placed on the market above the equilibrium price. the gov wants to protect suppliers by raising the price

67
Q

Consumer Surplus

A

the difference between the maximum price that consumers are willing to pay and the price that they actually pay

68
Q

Who benefits when the shelf price is lower than the buyers reservation price?

A

Everyone!

69
Q

What happens if there is no scarcity?

A

consumers will keep buying a good until marginal utility = 0

70
Q

Equal Marginal Rule

A

consumers will consume each good in their bundle of consumption such that the marginal utility per dollar spent is equal for all goods

71
Q

What do we assume about consumers under the equal marginal rule?

A

1) each consumer has one budget
2) consumers are rational
3) consumers are consistent
4) consumers are maximizers
5) consumers have info
6) cost of info is zero
7) consumers tastes and preferences are given

72
Q

To maximize total utility, what must be equal?

A

Marginal utilities must be equal!

Microeconomics 201 (9 decks)

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