Econ Exam 2 March 6 Flashcards
What does the long run depend on?
Returns to scale
What are the three types of returns to scale?
Increasing, Constant, and Decreasing
Increasing Returns to Scale
When the firm doubles inputs, the resulting output more than doubles
Constant Returns to Scale
a doubling of inputs would result in a doubling of outputs
Decreasing Returns to Scale
when the firm doubles inputs the resulting output would be less than double
Specialization of Labor
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
Economies of Scale
a company can decrease their cost per unit by increasing volume
Example of Economies of Scale
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
IMPORTANT DATE
February 11, 2014, 9*F
Market Equilibrium
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
Market Equilibrium Price
the price in which demand for good x c.p. is equal to supply of good x c.p. “OR,OR, OR”
Market Equilibrium Quantity
the quantity that exists when supply equals demand
Shoe Surplus Example
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
Shoe Shortage Example
Shoes=$15, store is out of stock. Price = $20, making shortage smaller, price raised until market clears
Natural Market Adjustment Process
process of consumers and suppliers working together to move market towards equilibrium or somewhere in the vicinity of equilibrium
What book did Adam Smith write?
“Wealth of Nations”, in the classical school of econ, argument for lasseiz faire econ, which is about self reg markets w/ little gov intervention
Elasticity
a measure of how much buyers and sellers respond to changes in market conditions
Price Elasticity of Demand
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
Elastic Demand
quantity demanded responds substantially to changes in price
Inelastic Demand
quantity demanded responds only slightly to changes in price
What can effect elasticity?
Avail. of Close substitutes, necessities vs. luxuries, definition of the market, time horizon
Availability of Close substitutes
goods with close substitutes tend to have more elastic demand bc it is easier for consumers to switch from that good to others
Necessities vs Luxuries
necessities tend to have inelastic demand and luxury items tend to have elastic demands
Definition of the Market
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.
Time horizon
goods tend to have more elastic demand over longer time horizons
What does larger price elasticity imply?
It implies a greater responsiveness of quantity demanded to changes in price
Total Revenue
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Total Revenue Equation
Price x Quantity
What are the total revenue rules?
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
Income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers’ income
Income elasticity of demand =
% change in quantity demanded/ % change in income
Relationships between goods and income elasticity?
Inferior goods: negative IE
Necessities: small IE
Luxuries: large IE
Cross Price Elasticity of Demand
a measure of how much the quantity demanded of one good responds to the change in price of another good
Cross Price Elasticity of Demand =
% change in Q demanded of good 1 / % change in P of good 2
What is the relationship between substitutes and complements and cross elasticity?
Substitutes: positive cross-elasticity
Complements: negative cross-elasticity
Price Elasticity of Supply
a measure of how much the quantity supplied of a good responds to a change in the price of a good
Price Elasticity of supply =
% change in Q supplied / % change in price
Elasticity
designed to measure the responsiveness of a dependent variable to an independent variable
Elasticity Equation
(Dep2-Dep1/Dep2+Dep1)/(Ind2-Ind1/Ind2+Ind1)
How many decimal places should you round to?
3 Decimal Places! after every calculation
Price Elasticity of Demand
the relative or percentage change in quantity demanded which is brought about by a percentage or relative change in price
EPD=
% change Qx/ % change Px
EPD greater than one
relatively elastic
Relatively Elastic
a decrease (increase) in price will bring about a larger percentage increase (decrease) in the quantity demanded than the original price
Examples of goods with elastic demand
snowmobile, baseball cards, phone app (luxury goods)
EPD less than one
relatively inelastic
Relatively Inelastic
a decrease (increase) in price will bring about a smaller percentage increase (decrease) in the quantity demanded than the original change in price
Goods with inelastic demand
milk, gas, eggs, (necessities)
EPD=0
Unitary Elastic
Unitary Elastic
a percentage change in price will bring about an equal percentage change in quantity demanded
What does the midpoint represent on a demand curve? above midpoint? below midpoint?
Midpoint: unitary elastic
Above: elastic
Below: inelastic
What does the TRT tell you about the price if it is in the elastic portion of the demand curve?
Total revenue can be increased by lowering price
What does the TRT tell you about the price if it is in the inelastic portion of the demand curve?
Total revenue can be increased by raising the price
What does the TRT tell you about the price at the unitary point?
Total revenue is maximized at the unitary point
Why does the gov tax inelastic goods instead of elastic goods?
the gov taxes inelastic goods so they don’t kill industry
What two real world items are unitary elastic?
Beer and Beef
Cross Price Elasticity
shows the responsiveness of the quantity demanded of good (x) to the price change of some other good (w)
ECD (cross price elasticity)
% change Qx/ % change Pw
What is the significant of the ECD value?
Negative: complements
Positive: substitutes
Income Elasticity of Demand
shows the responsiveness of consumers to changes in income
What is the significance of the EYD?
positive = normal good negative = inferior good
Price Elasticity of Supply
show the responsiveness of quantity supplied to price changes
Significance of EPS
EPS > 1 : relatively elastic
EPS < 1 : relatively inelastic
EPS = 1 : unitary elastic
sign will always be positive
Price Ceiling
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
Why does the gov place a price ceiling on a good?
1) good is a necessity to society
2) to increase the well being of society
3) to slow down inflation
Price Floor
a minimum price placed on the market above the equilibrium price. the gov wants to protect suppliers by raising the price
Consumer Surplus
the difference between the maximum price that consumers are willing to pay and the price that they actually pay
Who benefits when the shelf price is lower than the buyers reservation price?
Everyone!
What happens if there is no scarcity?
consumers will keep buying a good until marginal utility = 0
Equal Marginal Rule
consumers will consume each good in their bundle of consumption such that the marginal utility per dollar spent is equal for all goods
What do we assume about consumers under the equal marginal rule?
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
To maximize total utility, what must be equal?
Marginal utilities must be equal!
