Microecon 1.01 - 1.07 Flashcards
Price Elasticity of Demand (ED) formula
% change in Quantity Demanded/% change in price
Demand curve slopes down
When is demand elastic?
If elasticity of demand (ED) is greater than 1, total revenue will decline if the price is increased
Ex. Automobile
When is demand inelastic?
If elasticity of demand (ED) is less than 1, total revenue will increase if the price is increased
Ex. table salt
When is demand unit elastic (unitary)?
If elasticity of demand (ED) is equal to 1, total revenue is not sensitive to price changes
Income elasticity of demand formula
% change in quantity demanded/% change in income
positive income elasticity example good?
It is a normal good. New cars. As income increases quantity demanded for new cars increases
Negative income elasticity example?
It is inferior good. Used cars. income increases quantity demanded for used cars decreases
Arc method Elasticity of demand
change in quantity demanded/average quantity demanded
________________________________
Change in price/average price
Cross-elasticity of demand formula
% change in the quantity of demanded for product X
__________________________________________
% change in the price of product Y
Cross elasticity substitutes?
cross elasticity is a positive number. Price of butter increases, quantity demanded for margarine increases
Cross elasticity complements?
negative number. Price of chips increases quantity demanded for salsa decreases
(Supply Curve)Economists would say that when higher prices……..is higher
Quantity supplied
Changes in supply curve where quantity supplied becomes larger for each and every price
the supply curve shifts outward or to the right
Changes in the supply curve where quantity supplied becomes smaller for each and everyprice
the supply curve shifts inward, to left
Direct relationship supply curve factors
Increases in these factors cause outward (supply increase) number of producers Government subsidies Price expectation reductions in costs of production
Inverse relationship supply curve factors
Cause inward shift.
increases in production costs
Prices of other products
Price elasticity of supply (ES) formula
% change in price
Market Equilibrium
point at which demand and supply curve cross.
quantity demanded = quantity supplied
equilibrium price
Price ceiling on equilibrium
quantity demanded will exceed quantity supplied. Shortage of goods results
Price floor on equalibrium
quantity supplied will exceed quantity demanded resulting in surplus of goods. floor line is always above price ceiling line
increasing returns of scale
Output increases by a greater proportion > 1.0
Constant Returns to scale
Output increases in same proportion = 1
Decreasing returns to scale
Output increases by a smaller proportion < 1
returns to scale formula
% increase in output
_______________
% increase in input
Marginal Cost
The increase in cost that results from producing one extra unit.
Marginal Revenue
the change in total revenue associated with the sale of one more unit of output
Marginal Revenue product
the increase in total revenue received by the addition of one additional unit of an input or resource
Marginal propensity to consume MPC
the % of the next dollar of income that the consumer would be expected to spend
Change in consumption/change in income
Marginal propensity to save MPS
the % of the next dollar that the consumer would be expected to save
change in savings/change in income
Perfect Competition conditions
Large number of sellers
All firms sell identical product (wheat, corn)
There is no non-price competition (no advertising)
Firms may enter or exit market easily
Each firm has perfectly elastic (horizontal)
Pure monopoly
one producer
no substitutes
Demand curve is vertical
Monopoly laws
Sherman act 1890
Clayton act 1914
The robison patman act 1936
the cellar Kefauver act 1950
Monopolistic competition
a lot of sellers
firms sell similar products
demand curve is slightly downward
Oligopoly
Small number of large sellers barriers to enter non-price competition the firms demand curve in kinked oil industry
