Midterm 1 Flashcards
Normative Analysis
Analysis concerned with what ought to be
Postitive Analysis
Analysis concerned with what is
Unit-eslastic demand
Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value
substitution effect
Good becomes cheaper relative to the other, MU/P for pizza increases. Lowers opportunity cost, as you need to give up less of the other good, increase quantity (substitution effect)
Income effect
You can afford more (increase in purchasing power) – like having higher income (income effect). Normal or inferior good?
minimum efficient scale
the level of output at which all economies of scale are exhausted
Isocost line
All the combinations of two inputs, such as capital and labor that have the same total cost
Isoquant
A curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
Marginal Utility
The change in total utility a person receives from consuming one more additional unit of a good or service
MRT - Marginal Rate of Technical Substitution
The rate at which a firm is able to substitute one input for another while keeping the level of output constant
MRS - Marginal rate of substitution
The rate at which a consumer would be willing to trade off one good for another
What is the equation for elasticity
Elasticity = %Q / %P
%Q = ∆ Q/ Q
%P = ∆P / P
externality
a benefit/cost affecting someone who is not directly involved in the consumption/production of a good or service
Social cost of production
= private cost + any external cost
Social benefit of consumption
= private benefit + any external benefit
With no externalities
private (cost/benefit) = social (cost/benefit)
When do you need to think about deadweight loss
When considering externalities
What happens when demand is inelastic
An increase in price raises total revenue
A decrease in price reduces total revenue
What happens when demand is elastic
An increase in price reduces total revenue
A decrease in price raises total revenue
