Midterm 2 Flashcards
What is Price elasticity of Demand?
Elasticity of Total Revenue
Total Revenue = ?
Price x Quantity
%^Q = ?
Q1 - Q0 / Q0
%^P = ?
P1 - P0 / P0
When demand for a product is elastic and price goes down what happens to TR?
TR goes UP
When demand for a product is elastic and price goes up what happens to TR?
TR goes DOWN
When demand is inelastic and price goes up what happens to TR?
TR goes UP
When demand is inelastic and price goes down what happens to TR?
TR goes DOWN
What are Determinants of elasticity of Demand
-Existence of close substitutes
-% Income spent on a product
-Luxuries and Necessities
-Time
What happens to elasticity if there are more substitutes?
It will be more elastic due to the higher demand for the product
Necessities make demand more elastic or inelastic?
Inelastic
Luxuries make demand more elastic or inelastic?
Elastic
What can time do to a products elasticity?
Over time a inelastic product can become elastic
If Exy > 0 what is it caused by
Substitutes
If Exy < 0 what is it caused by
Complements
If Exy = 0 what is it caused by
It not related
Exy stands for?
% ^ Qd for X divided by % ^ Price of Y
The Demand curve if demand is elastic is more what?
Relatively Horizontal
The Demand curve if demand is inelastic is more what?
Relatively Vertical
The Demand curve id demand is unitary elastic is what?
Not to vertical but not too horizontal
If Demand is perfectly inelastic then the demand curve is what?
Perfectly Vertical
If Demand is perfectly elastic then the demand curve is what?
Perfectly Horizontal
What is Income elasticity of Demand?
The responsiveness of Qd will change in income
How do you determine Income elasticity?
Ei = % ^ in Qd divided by % ^ in income
If Ei > 0 what kind of goods is the product?
Normal Goods
If Ei < 0 what kind of goods is the product?
Inferior Goods
What is Price Elasticity of Supply?
Responsiveness of Qs to a change in price of the same product.
If % ^ of Qs > % ^ of P then?
Supply is elastic and Es > 1
If % ^ of Qs < % ^ of P then?
Supply is inelastic and Es < 1
If % ^ of Qs = % ^ of P then?
Supply is Unitary elastic and Es = 1
What is the main Determinant of Supply?
Time (The more time the more elastic)
Look at Elasticity of Tax Incidence
Look at Elasticity of Tax Incidence
What is Marginal Utility?
The additional satisfaction of consuming 1 more unit of a product?
The more tacos you eat what happens to Marginal Utility?
Marginal Utility will gradually go up until it hits a point where its no longer satisfying to eat more tacos and it will begin to go back down?
Why should consumers allocate their income?
So that the last dollar spent can yield the same level utility.
LOOK AT TABLE ON PAGE 177
LOOK AT TABLE ON PAGE 177
What causes a negative slope of the individual demand curve?
-Substitution effect
-Income
-Law of diminishing MU
If Price goes down what happens to purchasing power of Income?
Purchasing power of income goes UP
What is a firm?
A institution that hires factors of production to produce various goods and services?
What is a plant?
A physical facility such as a factory that is used to produce and distribute goods.
What is a industry?
A group of firms that produce similar products.
What is economic cost?
The value of input to produce output
What determines the amount of goods and services that producers are willing to produce?
It depends on the price of product and the cost of production
What are the two different types of costs when it comes to Economic cost?
Explicit cost
Implicit cost
What is explicit cost?
The payments by the firm to outsiders such as raw materials and wages
What is implicit cost?
The opportunity cost of a firm using resources in producing output
Accounting profit = ?
Total Revenue - Explicit Cost
Economic Profit = ?
Total Revenue - (Explicit = Implicit cost including a normal profit)
What does Short Run mean?
Short run is a time frame where there are some fixed features of production and a time that not long enough for a firm to change the planned capacity.
What does Long Run mean?
Long run is a time frame where all factors of production are a variable
What is the variable factor?
Labour
What is Total Product (TP)
All output that could be produced but all units of input during given time
What is Average product (AP)
How much output on average is being produced per unit of input
How do you calculate AP
TP / Labour
What is Marginal Product (MP)
The additional units of output that are produced by one more unit of input
How do you calculate MP
Change in TP / Change in labour
What happens to AP when MP is higher than it?
MP pulls AP up
What happens to AP when MP is lower than it?
MP pulls AP down
What is the Law of Diminishing Marginal Product?
As more units of a variable factor are added to fix factors of production (land and capital) after a certain point Marginal product of the variable factor diminishes because each additional edition of the variable factor will have smaller and smaller units of the fixed factor.
What are the two types of Total cost?
Total fixed cost
Total variable cost
What is total fixed cost?
The cost that fixed regardless of the level of output
What is total variable cost?
The cost that increases as production increases
LOOK AT GRAPHS ABOUT TC, TVC and TFC
LOOK AT GRAPHS ABOUT TC, TVC and TFC
What is Marginal Cost?
Additional cost of producing one more unit of output
Marginal Cost cuts both ATC and AVC where?
At their minimum point
MP and MC do what in their graph forms?
Mirror each other (Refer to Notes)
What happens to firm in Long Run?
Firms will adjust factors of output to maximize production
The long run cost curve is a envelope of what?
Short Run average total cost curves
What happens the minimum point of ATC in Long run
A new firm is added
What happens in the Economies of scale state in the long run AC curve?
% ^ in output > % ^ in input
What happens in the Diseconomies of scale state in the long run AC curve?
% ^ in output < % ^ in input
Economies of scale happens when?
When the AC is decreasing as output is increasing
What are some factors that explain economies of scale?
Division of Labor
Specialization
Managerial specialization
Use of efficient capital
Research, development and advertising
What is constant return to scale?
% ^ in output = % ^ in input
