Week 4: costs of production Flashcards
Income elasticity (Ei)
the responsiveness of a product’s quantity demanded to changes in consumer income
Positive Income Elasticity
= normal good
ex. expensive cars
Negative Income Elasticity
= inferior good
ex. turnips
Cross-price elasticity (Exy)
the responsiveness of the quantity demanded of one product (x) to a change in price of another (y)
Positive Cross-Price Elasticity
= substitutable
ex. apples and oranges
Negative Cross-Price Elasticity
= complementary
ex. milk and cereal
Price Elasticity of Supply
measures the responsiveness of quantity supplied to changes in price
Elastic supply
quantity supplied greater than price
Inelastic supply
quantity supplied less than price
Perfectly elastic supply
• supply for which a product’s price remains constant regardless of quantity supplied
• a constant price and a horizontal supply curve
Perfectly inelastic supply
• supply for which a product’s quantity supplied remains constant regardless of price
• a constant quantity supplied and a vertical supply curve
Immediate run
• not enough time to react
• perfectly inelastic
ex. getting more resources (more supplies and new employees) will be difficult
Short run
• some time to react and get more resources
• either elastic or inelastic
Long run
more time to react and get more resources
Constant-cost industry
• increase in price increases production but not resource prices
• as new businesses enter the industry in the long run due to the higher price, this price is gradually pushed back down to its original level
• the long-run supply curve is perfectly elastic
Increasing-cost industry
• increase in price increases production and resource prices
• as new businesses enter the industry in the long run due to the higher price, this price is gradually pushed back down to its lowest possible level, but this level is higher than it was originally
• the long-run supply curve is very elastic
Formulas
• Income elasticity
• Cross-price elasticity
• Elasticity of supply
Excise taxes
• a tax on a particular product expressed as a dollar amount per unit of quantity
• such a tax creates a new supply curve (S1) seen by consumers
• it is vertically above the initial supply curve (S0) seen by producers
• the price seen by consumers is now higher than that seen by producers
ex. alcohol, cigarettes
Who pays Excise taxes?
• consumers and producers
• goes to gov not producers
• if producers don’t respond to tax they could lose revenue especially if their product is elastic
ex. $1 tax each pay $0.50
The Effect of Elasticity Supply Curve
the more elastic the demand curve the greater the proportion of an excise tax paid by producers
The Effect of Elasticity Demand Curve
the more elastic the supply curve the greater the proportion of an excise tax paid by consumers
Price Controls
• price floor
• price ceiling
Price floor
• min price set above the equilibrium price
• creates surplus
• at top of graph
ex. min wages, agricultural goods
Agricultural Price Supports
• they help overcome unstable agricultural prices
• economists assert that farmers win from these supports
• but consumers and taxpayers lose from these supports
Price ceiling
• max price set below the equilibrium price
• creates shortage
• at bottom of graph
ex. rent
Rent Controls
• they keep down prices of controlled rental accommodation
• economists assert that some (especially middle-class) tenants win from these controls
• but other (especially poorer) tenants lose from these controls
3 Types of Production
• Primary sector
• Secondary sector
• Service sector (third)
Primary sector
industries that extract or cultivate natural resources
ex. coal, oil
Secondary sector
industries that make or process goods
ex. cars, phones, cookies
Service sector (third)
• trade and information industries
• labour intensive
• involves people
ex. clay pottery
Productive Efficiency
• making a given quantity of output with the least costly combination of inputs
• labour-intensive
• capital-intensive
Labour-intensive
employs more labour and less capital
Capital-intensive
employs more capital and less labour
Economic costs
= explicit costs + implicit costs
Explicit/accounting costs
• payments to resource supplies outside a business
• will always be greater than economic profit
Implicit/opportunity costs
what owners give up by being involved in a business
Economic profit
• = TR (P x Q) – economic costs
• if positive then there is reason for a firm to continue its operations
Production in the Short Run
• some inputs (such as capital) are fixed
• other inputs (such as labour) are variable
Fixed
things you can’t change
ex. amount of ovens, size of bakery
Variable
things you can change
ex. hiring more people, buying more resources
Total Product (q)
the total quantity of output derived from a given workforce (L)
Product measures
• Average product
• Marginal product
Average product
= q / L
(total product divided by the number of workers)
Marginal product
= Δq / ΔL
(the change in total product (Δq) divided by the change in the number of workers (ΔL))
Law of diminishing marginal returns
• the addition of more variable input causes marginal product to fall after some point
• average product also falls after some point
Average value is rising
= marginal value is above
Average value is falling
= marginal value is bellow
Average value stays constant
= marginal value is equal
