Midterm 2 Flashcards
Price Elasticity of Demand
Measures the responsiveness of Quantity Demanded to a Change in Price
Income Elasticity of Demand
Measure the responsiveness of Quantity Demanded to a change in Income
Elasticity of Supply
Measures the responsiveness of Quantity Supplied to a change in Price
Cross Price Elasticity
Measures the responsiveness of Quantity Demanded of one good to the change in Price for another good
Sin Tax
Governement taxing certain goods (cigarettes & alcohol) to indirectly generate revenue to cover the Consumers’ Tax Burden
3 Assumptions of Preferences
- Completeness
- Transitivity
- Nonsatiation
Completeness
Consumer has choice between 2 goods, so they rank them so that ONLY 1 of these is true:
i) Consumer prefers 1 over 2
ii) Consumer prefers 2 over 1
iii) Consumer is indifferent
Tansitivity
Consumer prefers good X over good Y, then they must prefer good W over good Z
- Prefer pink to yellow, & prefer yellow to orange therefore you prefer pink to orange (Because pink is above yellow, which is above orange)
Nonsatiation
More of a commodity is preferred to less
- Ceteris paribus
Utility
Satisfaction, happiness, need for fulfillment consumers recieve from good/ service
Marginal Utility
Change in Utility results from incremental change in consumption of good/ service
Law of Diminishing Marginal Utility
More of a good/ service is consumed, the Smaller the Increase in Utility
- 3rd adds less than the 2nd, 4th adds less than the 3rd
- does NOT apply to $
Consumers’ Objective
To Maximize their Utility subject to their income
Consumer Equilibrium
Must satisfy BOTH conditions:
1) Consumer must spend ALL of their income
2) Gossen’s 2nd Law (Equimarginal in Consumption)
Discrete VS Continous
Discrete: CANNOT be broken into pieces
- Can’t sell 1/4 of a car
Continous: CAN be continually divided
- Sell orange juice in 1L, 250ml, etc.
Voluntary Programs
Responsibilty is on the individual
- There is NO incentive
Impure PRIVATE Good
Club good
Impure PUBLIC Good
Open access resources
Consumer Surplus
Difference between what the consumer is willing to pay & what they have to offer
Marginal Value
Value to society
- Necessary vs Luxury
Sunk Cost Fallacy
Allowing past cost decision to influence current behavior
OverConfidence
People assume they know more than they do
- Leads to bad decisions/ mistakes
OverEmphasizing the Present
People put too much emphasis upon current consumption
Framing Bias
Consumers may react to a small difference in price
Warm Globe Bias
People make choices because they are trying to influence people’s perception of themselves
Sole Propietorship
Business is owned by a single person
PROS:
- easy to form & dissolve
- decision making power resides with sole owner
- only taxed once
CONS:
- Unlimited Liability for debts of the firm
Unlimited Liability
Owner’s personal assets can be seized by the firm’s creditors
Partnership
Business is owned by 2+ people
PROS:
- easy to form & dissolve
- permits specialization
- spreads risk
CONS:
- Joint Unlimited Liability
- decision making is more complex
Joint Unlimited Liability
Each partner is equally liable for debt acquired by business
Corporation
Legal entity that may conduct business in its own name just as an individual does
- owners = shareholders
PROS:
- can raise large sums of money
- Limited Liabilty
CONS:
- subject to Double Taxation
- subject to Principal Agent Problem
Limited Liability
Personal assets CANNOT be seized
Double Taxation
Profits of corporation are subject to
1) Corporate Taxation
2) Income Tax
Principal Agent Problem
Managers not doing what was promised to the Shareholders
- Shareholers want to MAX firm profits
- Managers want to MAX personal salary
Primary Market for Stocks
Corporation issues a new stock
- where the 1st transaction occurs
Secondary Market for Stocks
Existing stock are bought & sold
Variable Inputs
Quantity of the input CAN be charged within the time period
Fixed Inputs
Quantity of the input CANNOT be changed within the time period
Short-Run
At least 1 input is Fixed
Long-Run
ALL inputs are Variable
Total Product
Total amount of labour reduced during some time period
Law of Diminishing Marginal Returns
As more of an input as added to production process, eventually the increase in output will diminish
- All other inputs constant
Accounting Costs
Actual expenditures & expenses for capital equipment
- ONLY includes Explicit Costs
Economic Costs
Accounting Cost + Opportunity Costs
Fixed Costs in Short-Run
Costs that DO NOT change as output changes
- ex: Price of car, Registration fees
Variable Costs in Short-Run
Costs that DO change as output changes
- ex: Gas, Maintenance
Perfect Competition structure
Lots of little firms, homogeneous products, MANY buyers & sellers, FREEDOM of entry & exit, NO influence on market
Monopoly structure
Only 1 firm
Monopolistic Competition structure
Hybrid of Monopoly & Perfect Competition
Oligopoly structure
Few LARGE firms, homogeneous products, power over price, HIGH entry barriers
Marginal Revenue
Change in Total Revenue resulting from an incremental change in output
Marginal Costs
Change in Total Cost resulting from an incremental change in output
- Measures how much cost changes as we produce 1 more of some product
Producers’ Surplus
Amount producers are paid - what they are willing to accept
- CANNOT be negative
Change in Quantity Demanded
Caused by change in product’s Price
- Movement ALONG Demand Curve
Change in Quantity Supplied
Caused by change in Price
- Movement ALONG Supply Curve
