Week 1 Flashcards
Shut-down price
intersect Marginal Cost and Average Variable Cost
Break even price
intersect Marginal Cost and Average Total Cost
Marginal cost: change in TC/ change in quantity
Maximum profit price
Marginal revenue should be equal to marginal cost
Best affordable consumption point
intersect of the indifference curve and indifference curve
Budget line
Y=p1q1+p2q2
Seven factors thee quantity demanded is depending on + which ones will shift the demand curve
- price of a product
- prices of related products
- income
- preferences
- population (number of consumers)
- expected future prices
- expected future income
change in factors 2 to 7 will make the demand curve shift as a whole
Normal goods and price decrease
both income effect and substitution effect result in rising purchases
Inferior goods and decrease in price
income effect will be negative but the substitution effect will still be positive
Substitution effect
people buy more of a product because the price has fallen compared to the prices of other products
-> shift along the existing indifference curve, slope budget line has changed
income effect
people buy more of a product because of the increase in real income as a result of the average fall in prices
-> moving to a higher indifference curve
The reason for downward sloping demand curve
Principle of decreasing Marginal Benefit or Law of
decreasing Marginal Utility. The more you consume the
lower is the Marginal Benefit, and the less people want
to pay for the last unit:
Price elasticity of demand
Measures the effect of price changes on the quantity demanded
Ep= (change in q/ q average)/ (change in p/ p average)
Price elasticities of demand
perfectly elastic demand: Ep infinite
Elastic demand: Ep> 1
Unit-elastic demand: Ep=1
Inelastic demand: 0
Income elasticity of demand
Eincome = (change in q/q) / (change in y/y)
Income elasticities of demand
Luxuries: Eincome is larger than 1
Necessities: Eincome is positive but near 0
Inferior products: Eincome is less than 0
Total Revenue formula
addendum: in perfect competition
TR= p*q
In case of perfect competition
Average revenue AR=Price
Marginal revenue MR=Price
Marginal return of labour formula
change in q/ change in labour
Factors that cause demand curve shift (demand shocks)
- change in price related products (complementary or substituting products)
- change in expected future price
- change in expected future income
- preference
- income
- population (number of consumers)
Factors influencing the elasticity of demand
- closeness of substitutes: the closer the substitutes for a good, the more elastic the demand for it, as consumers find it easier to switch
- proportion of income spent on good: the greater the proportion of income spent on a good, the more inelastic the demand for it
- necessity vs luxury: the more necessary a good, the lower the elasticity of demand
Supply curve shows the relationship of
quantity supplied of a good and its price
Demand curve shows the relationship of
the quantity demanded and its price
Factors that shift the supply curve (supply shocks)
- price of fops
- price of related products
- supply of related goods
- expected future prices
- number of suppliers
- technology
Marginal cost formula and explanation
change in TC/ change in quantity
the change in tc resulting from a one-unit increase in output, the cost of producing one more unit of a good
Profit maximization rule
MR = MC
MP= MR-MC -> MP= 0
As long as MR> MC, revenues per additional unit of output are higher than the costs so TP increases
