Exam Flashcards
Price elasticity of demand
The price elasticity is a measure of the responsiveness of changes in price. Formally, It’s defined as the percentage change in the quantity demanded that results from a 1% change in its price.
Elasticity =
Slope=
= price/quantity * 1/slope
= change in price / change in quantity
unit elastic
Total expenditure is at a maximum
Price elasticity of supply
the percentage change in quantity supplied that occurs in response to a 1% change in price.
cross-price elasticity of demand
the percentage by which the quantity demanded of the first good changes in response to a
1 percent change in the price of the second
Elasiticity
bigger then 1 (over equalibrium), Highly responsive
comparative advantage
one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost
absolute advantage
one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person
law of diminishing returns
a property of the relationship between the amount of a good or service produced and the amount
of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor
the law of supply
relies on the law of diminishing returns. Applies in short run, but not longrun
law of diminishing marginal utility
the tendency for the additional
utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point
The law of demand
people do less of what they want to do as the cost of doing it rises
rational person
someone with well-defined goals who tries to fulfill those goals as best he or she can
cost-benefit principle
an individual should take an action if, and only if, the extra benefits from taking the action or at least as great as the extra costs
scarcity principle
(also called the No-Free-Lunch Principle): Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.
oppertunity cost
the value of what must be forgone to undertake an activity
market power
a firm’s ability to raise the price of a good without losing all its sales
perfectly competative market
market in which no individual supplier has significant influence on the market price of the product
socially optimal quantity
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
Marginal cost/benefit
the increase in total cost/benefit that results from carrying out one additional unit of an activity
Substitution affect
the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes
complements
two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)
economic surplus
the benefit of taking an action minus its cost
profit
the total revenue a firm receives from the sale of its product minus all costs—explicit and implicit—incurred in producing it
imperfectly competative firm
(or price setter) a firm that has at least some control over the market price of its product
Economic surplus
is the benefit of taking an action minus its cost.
rational spending rule
spending should be allocated across goods so that the marginal utility per dollar is the same for each.
The rule that sets the optimal level of consumption
The optimal, or utility maximizing, combination must satisfy the rational spending rule
income elasticity of demand
the percentage by which a good’s quantity demanded changes in response to a 1 percent change in income
inelastic
less then 1 ( below equalibrium), Highly unresponsive
input prices
prices that change to prodution cost as well as the possobilites for supply
perfectky inelastic
demand is perfectly inelastic with
respect to price if price elasticity of demand is zero
perfectly elastic
demand is perfectly elastic with respect to price if price elasticity of demand is infinite
unregulated market
no taxes, subsides or decided prices
total revenue =
(or total expenditure) the dollar amount that consumers spend on a product (P × Q) is equal to the dollar amount that sellers receive
Total cost (TC) =
the sum of all payments made to the firm’s fixed and variable factors of production
rational spending rule
spending should be allocated across goods so that the marginal utility per dollar is the same for each.
