Random Flashcards
What is the formula for Price Elasticity of Demand?
Price Elasticity of Demand = Change in Quantity Demanded / Change in Price
This measures how much the quantity demanded of a good responds to a change in price.
What does an elasticity value of 0 indicate?
Perfectly Inelastic
This means that quantity demanded does not change regardless of price changes.
What does an elasticity value of 1 indicate?
Unit Elastic
This means that the percentage change in quantity demanded is equal to the percentage change in price.
What is the relationship between price and total revenue when demand is relatively elastic?
Inversely related
If demand is elastic, an increase in price will lead to a decrease in total revenue.
What are the three questions to determine Demand Elasticity?
- Are there substitutes available?
- Can the purchase be delayed?
- Does the price require a large percentage of income?
These questions help assess how sensitive demand is to price changes.
What does Cross-Price Elasticity of Demand (CPED) measure?
Whether products are substitutes or complements
It assesses how the quantity demanded of one product changes in response to a change in the price of another product.
What does a positive CPED value indicate?
Substitutes
This means that an increase in the price of one product leads to an increase in the quantity demanded of another.
What does Income Elasticity of Demand measure?
How consumers are constrained by budget or income
It indicates how quantity demanded changes in response to changes in consumer income.
What is the formula for Price Elasticity of Supply?
Price Elasticity of Supply = % Change in Quantity Supplied / % Change in Price
This measures how responsive the quantity supplied of a good is to a change in price.
Define Consumer Surplus.
The difference between the highest price a consumer would pay and the actual price paid
It represents the benefit to consumers from participating in the market.
Define Producer Surplus.
The difference between the lowest price a producer would accept and the actual price received
It indicates the benefit to producers from selling in the market.
What is a Price Ceiling?
Maximum legal price that can be charged for a product or service
It is intended to protect consumers from high prices.
What is a Price Floor?
Minimum legal price that can be charged for a product or service
It is intended to protect producers by ensuring prices do not fall too low.
What does the Law of Demand state?
There is a negative relationship between price and quantity demanded
As price increases, quantity demanded decreases, and vice versa.
What does the Law of Supply state?
There is a positive relationship between price and quantity supplied
As price increases, quantity supplied increases, and vice versa.
What does the acronym SPICE stand for in Demand Shifters?
- Substitute Goods
- Preference / Population
- Income
- Complementary Goods
- Expectations
These factors can shift the demand curve.
What does the acronym ROTTEN stand for in Supply Shifters?
- Resource Cost
- Other Goods’ prices
- Technology
- Taxes and subsidies
- Expectations
- Number of Sellers
These factors can shift the supply curve.
Define Marginal Utility.
The extra amount of satisfaction or utility from consuming one more unit of a good or service
It helps determine how much of a good a consumer is willing to purchase.
When is Total Utility at its highest point?
When Marginal Utility is 0
This indicates that consuming more of the good does not provide additional satisfaction.
What is the Utility Maximization rule?
A consumer maximizes utility when the marginal utility per dollar spent for all items is equal
This helps consumers allocate their budget effectively.
What are the two types of inputs in production?
- Variable Inputs
- Fixed Inputs
Variable inputs can be changed in the short run, while fixed inputs cannot.
Define Total Product (TP).
The total quantity of output produced by a certain amount of inputs
It reflects the overall production efficiency.
What is Marginal Product (MP)?
The additional output produced by one more unit of a variable input
Often refers to labor, calculated as MP = TPL.
What is Average Product (AP)?
The average quantity of output produced by one unit of a variable input
Calculated as APL = TPL.
What are the types of production costs in the short run?
- Fixed Cost (FC)
- Variable Cost (VC)
- Total Cost (TC)
Each type of cost plays a role in determining a firm’s overall expenses.
What is Marginal Cost (MC)?
The additional cost of producing one more unit of output
It is calculated as MC = TC / Q.
What happens to Marginal Cost (MC) as Marginal Product (MP) increases?
MC decreases initially due to specialization and eventually rises due to diminishing returns
This reflects the relationship between production efficiency and cost.
Define Average Fixed Cost (AFC).
Average Fixed Cost is calculated as Total Fixed Costs divided by the quantity produced
It decreases as output increases.
What is the formula for price elasticity of demand?
% change in quantity demanded / % change in price
What does it mean if PED = 0?
Perfectly inelastic demand — vertical demand curve
When is demand considered elastic?
When PED > 1
What happens to total revenue when demand is elastic and price increases?
Total revenue decreases
What does a negative cross-price elasticity of demand (CPED) imply?
The goods are complements
What does a positive income elasticity imply?
The good is a normal good
List the 5 demand shifters (SPICE).
Substitutes, Preferences/Population, Income, Complements, Expectations
What is the total revenue (TR) formula?
TR = Price × Quantity
What does a price floor cause if set above equilibrium?
A surplus
What is consumer surplus?
The difference between what a consumer is willing to pay and what they actually pay
What is the utility maximization rule formula?
MUx/Px = MUy/Py
If MUx/Px > MUy/Py, what should the consumer do?
Buy more of good X and less of good Y
What are variable inputs?
Inputs that can be changed in the short run
What is the marginal product (MP) formula?
MP = Change in total product / Change in labor
What does it mean when MP = 0?
Total product is at its maximum
What is marginal cost (MC)?
The cost of producing one more unit of output
What is the MC formula?
MC = Change in total cost / Change in quantity
What does diminishing returns mean?
As more of a variable input is added, MP eventually decreases
What are fixed costs?
Costs that stay the same regardless of output level
What are the two types of inputs in production?
Fixed inputs and variable inputs
