Part 2 Flashcards
The price elasticity of demand for a good
a measure of the responsiveness of the quantity demanded of that good to changes in his price. Formally, the price elasticity of demand for a good is defined as the percentage change in the quantity demanded that results from a 1% change in its price.
The demand for a good is said to be elastic with respect to price if __. It’s inelastic if__. Demand is said to be unit elastic if__.
the absolute value of its price is greater than one.
the absolute value of its price is less than one.
the absolute value of this price elasticity is equal to 1.
Perfectly elastic demand, ppc is __
Prefectly inelastic demand, ppc is ___
Horisontal
Lodrätt
The dollar amount that consumers spend on a product (PxQ) is equal to dollar amount that sellers receive.
Total expenditures = total revenue
Income elasticity =
percentage change in quantity demanded/percentage change in income
Price elasticity of supply
the percentage change in quantity supplied that occurs in response to a 1% change in price
Reservation price
the highest price we’d be willing to pay to pursue it
The concept of utility
Measuring wants. Utility represents the satisfaction people derive from their consumption activities.
Marginal utility
the additional utility gain from consuming an additional unit of a good
Law of diminishing marginal utility
The tendency for the additional utility gain from consuming an additional unit of a good to diminish as consumption increases beyond some point.
Utility maximization model
The assumption is that people try to allocate their incomes so as to maximize their satisfactions a goal that is referred to as utility maximization. Finding the optimal combination of goods to yield the highest total utility.
the rational spending rule
spending should be allocated across goods so that the marginal utility per dollar is the same for each.
MUC / PC = MUV / PV
Real price
the dollar price of a good relative to the average dollar price of all other goods
Nominal price
the absolute price of a good in dollar terms
Marginal rate of substitution (MRS)
An important property of a consumer’s preference is the rate at which she is willing to change one good for another. This property is presented at any point on indifference curve by the MRS, which is defined as the absolute value of the slope of the indifference curve at that point.
Perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product
Price taker
a firm that has no influence over the price at which it sells its product
four conditions and characteristics of a perfectly competitive market
- all firms sell the same standardized product
- The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged.
- Productive resources are mobile.
- buyers and sellers are well informed.
Law of diminishing return
a property of the relationship between the amount of good of service produced and amount of variable factor required to produce it the law says that when some factors of production are fixed in increased production of the good eventually requires the ever larger increases in the variable factor.
Determinants of supply revisited
Technology, input prices, the number of suppliers, expectations and changes in prices of other products.
Accounting profit
= total revenue - explicit costs
Economic profit
= Total revenue – Explicit costs – Implicit costs
The market price’s two important functions
Rationing function of price - changes in prices distribute scarce goods to those consumers who value them most highly.
Allocative function of price - changes in price direct resources away from overcrowded markets and towards markets that are underserved. (In other words markets in which price cannot cover the cost of production and enters those who which price exceeds the cost of production.)
Barrier to enter
any force that prevents firm from entering a new market.
Economic rent
that part of the payment for a factor of production that exceeds the owner’s reservation price, the price below which the owner would not supply the factor.
= owners total revenue - reservation price (sum of explicit and implicit cost)
Efficient
a situation is efficient if no change is possible that will help some people without harming others.
