Supply, Demand, Profit, Cost Curves Flashcards
Competitive Market
Market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold
Supply and Demand Model
Model of how a competitive market works
Demand Schedule
Shows how much of a good or service consumers will be willing and able to buy at different prices
Quantity Demanded
Actual amount of a good or service consumers are willing/and able to buy at some specific price
Demand Curve
Graphical representation of the demand schedule (relationship between quantity demanded and price)
Law of Demand
Higher price of a good or service, all other things equal, leads people to demand a smaller quantity of that good or service
Change in Demand
Shift of the demand curve, which changes quantity at any given price
Movement along demand curve
Change in quantity demanded of a good that is the result of a change in the good’s price
Substitutes
If a rise in the price of a good leads to a demand in the other, they are substitutes
Complements
A rise in the price of a good leads to a decrease in demand for other goods, they are complements
Normal Good
increased income increases demand for a good (Buying steak, taking cabs)
Inferior Good
Increased income leads to decreased demand for a good (taking the bus)
Individual Demand Curve
Shows relationship between quantity demanded and price for 1 consumer
Quantity Supplied
Actual amount of a good and service producers are willing to sell at some specific price
Supply Schedule
Shows how much of a good/service producers will supply at some given price
Supply Curve
Shows the relationship between quantity supplied and price
Law of Supply
Other things being equal, price and quantity supplied of a good are positively related
Change in supply
Shift of supply curve, changes quantity at any given price
Movement Along Supply Curve
Change in the quantity supplied of a good that is the result of a change in that good’s price
Input
Anything that is used to produce a good or service
Individual Supply Curve
Illustrates the relationship between quantity supplied and price for 1 producer
Equilibrium
No individual can be better off without making someone worse; Where supply=demand
Equilibrium Price/ Market-Clearing Price
The price at which quantity demanded=quantity supplied
Equilibrium Quantity
Quantity of the good bought and sold at equilibrium price
Surplus
Quantity supplied exceeds the quantity demanded. Occurs when price is above its equilibrium level
Shortage
When quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level
Price Controls
Legal restrictions on how high or low a market price may go
Price Ceiling
Maximum price sellers are allowed to charge for a good
Price Floor
Minimum price buyers are required to pay for a good
Inefficient Allocation to Consumers
When people who want the good badly and are willing to pay a high price don’t get it, but those who care little and pay low but get the good
Wasted Resources
People expend money, effort, and time to cope with shortages caused by the price ceiling
Inefficiently Low Quality
Sellers offer low quality goods at a low price even though buyers would prefer higher quality at a higher price
Black Market
Market in which goods/services are bought and sold illegally- because it is illegal to sell them at all or because prices charged are legally prohibited by price ceiling
Minimum Wage
Legal floor on wage rate; which is the market price of labor
Inefficient Allocation of Sales Among Sellers
Would sell good at lowest price are not always those who are willing to sell it
Inefficiently High Quality
Sellers offer high quality goods at a high price, even though buyers would prefer a low quality at a lower price
Quantity Control/Quota
Upper limit on the quality of some good that can be bought or sold
License
Gives its owner the right to supply a good or service
Demand Price
The price at which consumers will demand a certain quantity
Supply Price
Price at which producers will supply a certain quantity
Wedge
When Price paid by buyers end up being higher than that received by sellers, it creates a wedge
Quota Rent
Difference between demand and supply
Price at the Quota
Earnings that accure to the license-holder from ownership of the right to sell the good. Equal to the market price of the license when licenses are traded
Deadweight Loss
Lost gains associated with transactions that do not occur due to market intervention
Utility
Measure of preferences over some set of goods and services
Law of Diminishing Marginal Utility
As a person increases consumption of a product while keeping consumption of other products constant, there is a decline in marginal utility that person derives from consuming each additional unit of product
Producer Surplus
Prod: measure between amount producer receives and minimum amount producer is willing to accept. Different (surplus amount) is the benefit producer receives for selling
Consumer Choice/Optimal Purchase Rule
Consumer should spend budget so that marginal utility spent on all products are equal
Allocative Efficiency
State of economy in which production represents consumer preferences- marginal benefit=marginal utility
Elasticity
A variable or good’s sensitivity to change of another variable. Change of demand/supply in response to price/income change
Total Revenue
Total receipts from sales of a given quantity of goods/services (Total income)
Price Discrimination
Microeconomic pricing strategy where identical or largely similar goods are transacted at different prices by same provider in different markets
Consumer Surplus
Difference between total amount that consumers are willing/able to pay for a good and total amount that they actually do pay
Substitution Effect
The change in the quantity of that of a good is the change in the quantity of that good demanded as consumer substitutes the good has become relatively cheaper for the good that has become relatively more expensive
Income Effect
Change in the quantity of that good is the change in the quantity of that good demanded that results from a change in the purchasing power when the price of the good changes
Price Elasticity of Demand
Ratio of percent change in the quantity demanded to the percent change in the price as we move along the demand curve (drop the minus sign)
Midpoint Method
Technique for calculating the percent change. In this approach, we calculate changes in variable compared with the average changes in variable compared with the average or midpoint, of the initial and final values
Perfectly Inelastic
Quantity demanded does not respond at all to changes in price (vertical line)
Perfectly Elastic
Any price increase will cause the quantity demanded to drop to zero (horizontal line)
Elastic
Price elasticity of demand is greater than 1
Inelastic
Price elasticity of demand is less than 1
Unit Elastic
Price elasticity of demand is exactly 1
Total Revenue
Total value of sales of a good or service / (price x quantity supplied)
Cross-Price Elasticity
Measure of the effect of the change in one good’s price on the quantity demanded of the other good
Income Elasticity of Demand
Percent change in other good’s price
Income elastic
Income elasticity of demand for that good is greater than 1
Income inelastic
Income elasticity of demand for that good is positive but less than 1
Price Elasticity of Supply
Measure of responsiveness of quantity supplied to the price of that good. It is ratio of percent change in quantity supplied to the percent change in the price as we move along the supply curve
Perfectly inelastic supply
Price elasticity of supply is zero, changes in price of good have no effect on quantity supplied (vertical line)
Perfectly Elastic supply
Quantity supplied is zero below some price and infinite above that price (horizontal line)
Willingness to pay
Maximum price at which a consumer would buy a good
Individual Consumer Surplus
Net gain to an individual buyer from the purchase of a good. Equal to the difference between a buyer’s willingness to pay and the price paid
Total Consumer Surplus
Sum of individual consumer surpluses of all the buyers of a good in a market
Consumer Surplus
Both individual and total consumer surplus
Cost
Lowest price at which he or she is willing to sell a good
Individual Producer Surplus
Net gain to an individual seller from selling a good. Equal to the difference between the price received and the seller’s cost
Total Producer Surplus
Sum of individual producer surpluses of all the sellers of a good in a market
Producer Surplus
Individual and total producer surplus
Total Surplus
Total net gain to consumers and producers from trading in a market. It is the sum of producer/consumer surplus
Progressive Tax
Tax that rises in proportion to income
Regressive Tax
Tax that rises less than in proportion to income
Proportional Tax
Tax that rises in proportion to income
Excise Tax
Tax on sales of a good/service
Tax incidence
Distribution of the tax burden
Deadweight loss on a Tax
Decrease in total surplus resulting from the tax, minus the tax revenues generated
Administrative Costs
Resources used by government o collect the tax, and by tax payers to pay/evade it, over amount collected
Lump-Sum Tax
Tax of fitted amount paid by all taxpayers
Util
Unit of utility (happiness)
Marginal Utility
Change in total utility generated by consuming an additional unit of a good
Marginal utility curve
Shows how marginal utility depends on quantity of good consumed
Principle of Diminishing Marginal Utility
Each successive unit of a good consumed adds less to utility than previous units
Budget Constraint
Limits cost of a consumer’s consumption bundle to no more than income
Consumption Possibilities
Set of all consumption bundles that are affordable, given income and prevailing prices
Budget line
Consumption bundles available to a consumer who spends all of income
Optional Consumption Bundle
Consumption bundle that maximizes total utility given budget constraint
Marginal Utility per Dollar
Additional utility from spending one more dollar on that good
Optimal Consumption Rule
In order to maximize utility, a consumer must equate marginal utility per dollar spent on each good in the consumption bundle
Explicit Cost
Cost that actually involves laying out money
Implicit Cost
Measured by the value, in dollar terms, of benefits that are forgone (doesn’t require money)
Accounting
Total revenue of a business minus its explicit cost and depreciation
Economic Profit
Business’ total revenue minus the opportunity cost of its resources. Usually less than the accounting profit
Implicit Cost
Opportunity cost of the capital used by a business- income the owner could have realized from that capital if it could have been used in its next best alternative way
Normal Profit
When economic profit is equal to zero, and is just high enough to keep a firm engaged in current activities
Principle of Marginal Analysis
Every activity should continue until marginal benefit equals marginal cost
Marginal Revenue
Change in total revenue generated by an additional unit of output
Optimal Output Rule
Profit is maximized by producing a specific quantity of output
Marginal Cost Curve
shows how the cost of producing one more unit depends on the quantity that has already been produced
Marginal Revenue Curve
Shows how marginal revenue varies as output varies
Production Function
Relationship between the quantity of inputs a firm uses and the quality of outputs it produces
Fixed Inputs
An input whose quantity is fixed for a period of time and cannot be varied
Variable Input
Input whose quantity the firm can vary at anytime
Long Run
Time period for which all inputs can be varie
Short Run
Time period in which at least one input is fixed
Total Product Curve
Shows how the quantity of output depends on the quantity of the variable of input, for a given quantity of fixed input
Marginal Product
Additional quantity of output produced by using one more unit of an input
Diminishing Returns to an Input
Increase in quantity, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
Fixed Cost
Cost that does not depend on the quantity of output produced (cost of fixed input)
Variable Cost
Cost that depends on the quantity of output produced (cost of the variable input)
Total Cost
Sum of fixed cost and variable cost (of producing a certain quantity of output)
Total Cost Curve
Shows how total cost depends on a quantity of output
Average (Total) Cost
Total Cost divided by quantity of output produced
U-Shaped Average Total Cost Curve
Curve that falls at low levels of output and then rises at higher levels
Average fixed cost
Fixed Cost per unit of output
Average Variable Cost
Variable cost per unit of output
Spreading Effect
Larger output, greater quantity output over fixed cost spread (leads to lower average fixed cost)
Diminishing Returns Effect
The larger the output, the greater the amount of variable input required, increasing average variable cost
Minimum Cost Output
Quantity at which average total cost is lowest (bottom of U-shaped curve)
Long Run Average Total Cost Curve
Shows relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
Economies of Scale
Long run average total cost declines as output increases
Increasing returns to scale
When output increases MORE than in proportion to an increase in all inputs (double all inputs=output more than doubles)
Diseconomies of Scale
When long run average total cost increases as output increases
Decreasing Returns to Scale
When output increases less than in proportion to an increase in all inputs
Constant Returns to scale
When output increases directly in proportion to an increase in all inputs
Sunk Cost
Cost that has been incurred and is nonrecoverable
