Exam 2 Flashcards
A measure of how responsive one variable is to a change in another variable
elasticity
All elasticities are
percentage changes
Elasticity general formula
Percent Change in Quantity / Percent Change in Price
Elasticity formula for Consumers (demand)
Percentage change in Quantity / Percentage change in Price
Calculated as the percentage change of quantity demanded divided by the percentage change in price
Price of Elasticity of Demand
Price of Elasticity of Demand formula
%△Qd = ((Q2 - Q1) / Q1) * 100 %△P = ((P2-P1)/P1) * 100
If the price decreases by 1% the quantity demanded will
increase by -2.5%
The price elasticity of demand will
always be negative
Elastic Demand
Ed > 1
Change in Qd > Change in Price
Inelastic demand
Ed < 1
Percent change in Qd < Percent change in Price
Perfect inelastic demand curve means
prices change will not cause demand changes at all
Unit Elastic Demand
Ed = 1
Total Revenue
Price * Quantity
In elastic regions of the demand curve
% change Quantity > % Change Price
>
If price goes up…..
quantity goes down
A way to tell the elasticity based on how the price and total revenue are changing
Total Revenue Test
elastic demand
If you increase the price..
total revenue will decrease
elastic demand
If you decrease the price..
total revenue will increase
In inelastic regions of the demand curve
Percent change in Quantity > Percent change in Price
inelastic demand
if you increase the price
total revenue will increase
if you decrease the price
total revenue will decrease
At unit-elasticity…
total revenue is maximized
Demand is more elastic when (2)
substitutes are available
proportion of income is larger
The more a good considered to be a luxury,
the more elastic the demand is
The more time one has to adjust,
the most elastic the demand curve becomes
a measure of the effect of a change in the price of one product on the quantity demanded of another
Cross-Price elasticity of Demand
Formula for Cross elasticity of Demand
(Percentage change in Quantity Demanded of Product X/(Percentage Change in Price of Product Y)
Cross-Price elasticity of demand measures responsiveness of
purchases of one good to change in the price of another good
___ goods if elasticity is positive
Substitute
___ goods if elasticity is negative
Complement
___ goods if elasticity is 0
Independent
A measure of how responsive demand is to a change in consumer income
Income elasticity of Demand
Normal goods if elasticity is
positive
Inferior goods if elasticity is
negative
Elasticity of Supply formula
Es = (Percentage Change in Quantity Supplied of Product X)/(Percentage Change in Price of Product X)
Primary determinant of elasticity of supply
Time
No time to adjust
Immediate market period
Some time to adjust
Short run
Enough time to adjust
Long run (Most elastic)
Elasticity formula
% Change Quantity / % Change in Price
The satisfaction or happiness received from the consumption of goods and services
Utility
Why do people make the choices they do?
Decision making
To maximize utility
The additional satisfaction or happiness received from the consumption of goods and services
Marginal Utility
Marginal utility of consumption of a good or service becomes smaller with each extra unit that is consumed in a given time period
The Law of Diminishing Marginal Utility
The process by obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to consumers preferences, incomes, and prices
Utility Maximization
Decision making process assumptions
Rational behavior
Ranked preferences
Limited income
Prices
The idea that consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundle is equal
Equal Marginal Principle
Equal Marginal Principle formula
MUa/Pa = MUb/Pb
A monetary payment made by individuals, firms, and government for the goods of others
Explicit
2 types of inputs we use
capital
labor
opportunity costs of using an owned resource, the cost for which no monetary payment is explicitly made
Implicit
Economic cost
Explicit and implicit
Economic profit is lower than
accounting profit because there are more costs
Accounting profit
total revenue - explicit costs
Economic profit
total revenue - all costs
a time period in which one input is fixed but the other inputs can be changed
Short-run
the total amount of output produced with a given amount of resources
total product
the change in total product divided by the change in labor
Marginal Product
the total product divided by the number of units of labor, the average amount produced per unit of resource
Average product
a characteristic of production whereby the MP of the next unit of a variable resource utilized Is greater than that of the previous variable resource. when we increase labor…
Increasing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource
Diminishing marginal returns
constant horizontal line
total fixed cost
costs that change who the amount of output produced, increasing as production increases and decreasing as production decreases. Increase on graph
Variable costs
the sum of fixed and variable costs of production. Increasing
Capital is fixed and labor can change
Total costs
total product/labor
Average product
change in total product/change in labor
marginal product
Total fixed cost divided by the amount of output produced
average fixed costs
total variable cost divided by the amount of output produced
Average variable costs
AFC curve is always diminishing as we
increase total output (quantity)
AVC will
decrease then increase again
Perfect competition characteristics
large number of sellers large number of buyers standardized product price takers easy entry and exit
Examples of perfect competition
agriculture
gas stations
dry cleaning
Firms take or accept the market price and have no ability to influence that price
Price takers
The change in a firm’s total revenue that results from a 1 unit change in output
Marginal Revenue
Marginal Revenue formula
Change in Total Revenue/Change in Output
Revenue per unit sold
Average Revenue
average revenue formula
total revenue/quantity
Only in perfect competition
__ = ___ = __
Price
Marginal Revenue
Average Revenue
Set their output level where marginal revenue = marginal cost, where the curves intersect, profit maximizing point
Operations in the short run
What happens if we increase the demand curve?
Price goes up, new price set in the market, marginal revenue will go up because each unit can be sold at a higher price
the level of profit that occurs when total revenue is greater than total cost
Economic Profit
Economic profit when
TR > TC
Normal profit when
TR = TC
How to find the profit amount
(P-ATC)*Q
As long as you are covering your variable costs then
you should stay in business
the price below which a firm will choose not to operate in the short-run
Shutdown point
A supply curve that represents the short-run relationship between price and quantity supplied
Short-run supply curve
An industry in which the firms’ cost structure do not vary with changes in production
Constant-Cost Industry
A supply curve that represents the long-run relationship between price and quantity supplied
Long-run supply curve
In increasing cost industry, long run supply curve slopes
upward
in increasing cost industry, the cost of production
rises with expanded output
in decreasing cost industry, long run supply curve slopes
downward
in decreasing cost industry, the cost of production
falls with expanded output
Pure Monopoly characteristics
Single seller
Product has no close substitutes
Price makers
Barriers to entry
The ability of a monopoly to influence prices by controlling the quantities that it produces in a market
Monopoly Power
Monopolies get their power from
a variety of sources
barriers to entry
copyright, patents, location, ownership of resources
The change in total revenue that results from 1-unit change in output
Marginal Revenue
Marginal Revenue formula
change in total revenue / change in quantity
If a monopoly wants to increase its quantity, it must
lower the price for every unit it sells
Do pure monopolies always make an economic profit?
no
The idea that a monopolist can increase its revenue by charging different people different prices
Price Discrimination
An industry in which economies of scale are so extensive that the market is better served by a single firm
Regulation
The profit-maximizing price that will result from an unregulated monopolistic market
Unregulated Monopoly Price
A regulated price that is equal to the average total cost of production
Regulated Normal Profit Price
A regulated price that is equal to the marginal cost of production
Regulated Competitive Price
