Micro Quiz/Test #2 Flashcards
- Price Elasticity
- Income Elasticity
- _____________
Cross-price elasticity of demand
Symbol of cross-price elasticity of demand
Exy
What is Exy
Looks at how responsive the demand for good x is to change in the price of good y
Define Exy
% change in demand for good x over % change in price of good y
A(n) ____ in the price of good y leads to a(n) ____ in the demand for good x
Exy > 0
increase, increase
or
decrease, decrease
When Exy > 0 tells us that goods x and y are _____ goods.
substitute
A(n) ____ in the price of good y leads to a(n) _____ in the demand for good x
Exy < 0
decrease, increase
or
increase, decrease
When Exy < 0 tells us that goods x and y are _____ goods.
complementary
A(n) ____ in the price of good y leads to _____
Exy = 0
increase or decrease, no change
When Exy = 0 tells us that goods x and y are _____ goods.
unrelated
Consumer Theory
Maximum Total utility
Total Utility
The total happiness or the total satisfaction from consuming a given quantity of a good
Marginal Utility
The change in total utility from consuming an additional unit of a good
Law of Diminishing Utility
The more of a good consumed at some point, total utility will rise by less and less.
Production Theory
maximize profits
How can producers maximize profits
- Productivity of Inputs
- Costs of Production
Total Product
the total amount of output produced by a firm
Productivity of Inputs: 2 factors
Labor and Capital
Symbols of Labor and Capital
L and K
Function of Total Product
A firm’s output is a function of the amount of labor and capital that it employs
TP F(L,K)
Marginal Product of Labor (MPL)
the change in a firm’s output from employing an additional unit of labor
Marginal Product of Capital (MPK)
the change in a firm’s output from employing an additional unit of capital
Short Run
a period of time that is not long enough for a firm to change all of its inputs
3 points of short run:
- it takes a longer period of time to change capital than it does to change labor.
- in the short run a firm has enough time to change labor
- in the short run the firm does not have enough time to change capital
Short-run production formula
TP = F(L *K)
capital amount is changed in the short run
Long Run
a period of time that is long enough for a firm to change all of its inputs.
Labor and capital can change in the long run
Long-run production function formula
TP = F(L*K)
Costs of production Equation
Total Cost = Explicit Costs + Implicit Costs
Explicits Costs (EC)
Any money spent by a firm.
Examples of EC
labor costs, capital costs, training, materials, etc.
Implicit Costs (IC)
opportunity costs of any money spent by the firm
The value of the best thing given up whenever the firm spends money
Objective of Firm is to ______
maximize profits
Define profit
Profit = Total revenue - total cost
π = TR - TC
When π > 0 the firm has earned ________
an economic profit
When π = 0 the firm has earned ________
a normal profit
When π < 0 the firm has incurred ________
an economic loss
Total Fixed Costs (TFC)
costs that do not change as a firm either increases or decreases its output. costs that are not a function how much output the firm produces
What does AFC stand for and formula?
Average Fixed Costs
TFC/TP (total fixed costs/total product)
What does AVC stand for and formula?
Average Variable Costs
TVC/TP (total variable costs/total product)
What does ATC stand for and formula?
TC/TP (total costs/total product)
or
AFC + AVC (average fixed costs + average variable costs)
What does TVC stand for and mean?
Total variable costs
Costs that are direct function of how much output the firm produces
What happens to TVC between 0 and TP1
- labor decreases more productive MPL increases
- TVC increases at a decreasing rate
What happened to TVC beyond TP1
- labor is less productive
- MPL decreases, TVC increases at increasing rate
What does MC stand for and mean
Marginal Cost
The change in total cost from producing an additional unit of output
Relation between AVC to ATC
ATC = AFC + AVC
- any output ATC > AVC by the amount of AFC
- output increases, AFC decreases
- output grows the distance between ATC and AVC gets smaller minimum ATC occurs at a greater output
Relation between MC to AVC and ATC
- MC intersects AVC at minimum AVC
- MC intersects ATC at minimum ATC
- If MC<AVC, then AC decreases
- If MC>AVC, then AC increases
Four types of competition
- Perfect Competition
- Monopoly
- Monopolistic Competition
- Oligopoly
What defines perfect competition?
- many small firms
- firms produce homogeneous output
- price is known by all consumers and all producers
- no barriers to entry/exit
In a perfectly competitive market, the forces of ____ and _____ determine _____.
demand, supply, price
What is represented by Uppercase X
total market output of all firms
What is represented by Lowercase x
output of a single firm
Each firm determines how much ____ to sell at the ______
output, market price
perfectly competitive firms are “_____”
price takers
TR
Total Revenue
Formula of TR
TR = Price * Total Product
AR
Average Revenue
Formula of AR
AR = Total Revenue / Total Product
(TR/TP)
What does MR stand for and what does it mean
Marginal Revenue
The addition to total revenue from selling an additional unit of output
For a perfectly competitive firm,
Price ___ AR ____MR
=,=,=
In a perfectly competitive firm TR is shaped as an
linear upward sloping function
What are the two ways to identify
a perfect competition firm’s profit maximizing output
- use total revenue and total cost
- use marginal revenue and marginal cost
For Method 1 for output >TP1
TC __ TR
π __ 0
Economic Loss or Normal Profit or Economic Profit
> ,<, Economic Loss
For Method 1 Between 0-TP0
TC __ TR
π __ 0
Economic Loss or Normal Profit or Economic Profit
> ,<, Economic Loss
For Method 1 At TP0 or at TP1
TC __ TR
π __ 0
Economic Loss or Normal Profit or Economic Profit
=,=, Normal Profit
For Method 1 Between TP0-TP1
TC __ TR
π __ 0
Economic Loss or Normal Profit or Economic Profit
<,>, Economic Profit
For Method 1 at TP☆
TR __ TC by the _____ amount
Profit is _____
> , greatest, maximized
