Econ Final
Inverse relationship between price and quantity demanded because
1. Diminishing marginal utility 2. The income effect 3. The substitution effect
Assumptions
1. Rational behavior 2. Preferences 3. Budget Constraint 4. Prices
Absolute advantage
A country can produce more
Categories of profit
Accounting profit - TR minus explicit costs Normal Profit - only takes into account explicit Economic Profit - TR minus explicit and implicit costs
At equilibrium the following occurs
All buyers willing and able to pay will obtain
Ceteris paribus
All things equal
Average product
Also called labor productivity Output per unit of labor input
Comparative advantage
Can product it cheaper/less opportunity cost
Shifts of the cost curve occur for
Changes in either resource prices of tech Price of labor either increase or decrease Discovery of more efficient tech
Determinants of demand
Consumer expectations Income (Normal vs. inferior) Tastes Number of buyers Prices of Related goods
Fallacy of composition
True for parts is true for whole
Responsiveness of consumers to a price change is
Elasticity of demand % change in quantity demanded of product / % change in price of product OR Change in quantity demanded/ midpoint / change in price/ midpoint >1 elastic <1 inelastic = 1 unit elastic
How responsive producers are to price changes is
Elasticity of supply % change in quantity supplied of product / % change in price of product >1 elastic <1 inelastic = 1 unit elastic
Producer surplus
Difference between the actual price producers receive and the minimum acceptable price Benefits consumers
Consumer surplus
Difference between the maximum price a consumer is willing to pay and the actual price Benefits consumer
From firms point of view, there are two types of costs
Explicit costs - monetary payment Implicit - opportunity costs
Marginal product
Extra output of product associated with adding a unit of a variable resource
Assumptions of PPC curve
Full employment Fixed resources Fixed technology
Law of Diminishing returns
Get less out of resources as you add more Assumes: 1. Tech is fixed 2. All units of labor are of equal quality
Economies of scale
Help explain downsloping part of LR-ATC curve 1. Labor specialization 2. Managerial specialization 3. Efficient capital 4. Average design and development costs decline with greater output
Three market periods
Immediate market period - time immediately after a change in market price but too short for producers to respond with change in quantity supplied Short run - too short to change plant capacity but can change other things Long run - can change everything
Diseconomies of scale
Issues with efficiently controlling and coordinating a firm's operations
Allocative efficiency occurs at quantity levels where
MB = MC Maximum willingness to pay = minimum acceptable price Combined surplus is at a maximum
Average product displays same tendencies as marginal product
MP > AP: AP goes up MP intersects AP where AP is at max
You keep making decisions until
MU of A/ = MU of B/ Price of A Price of B
Cross elasticity of demand
Measures how sensitive consumer purchases of X are to a change in the price of Y % change in quantity demanded of x / % change in price of y > 0 = substitute goods < 0 = complementary goods = 0 independent goods
Economizing Problem
Our economic wants exceed our economic means
Efficiency: combined consumer and producer surplus
Productive efficiency Allocative efficiency
Determinants of supply
Resource prices Technology Taxes and subsidies Prices of other goods Producer Expectations The number of sellers in the market
Shortage vs. scarcity
Shortage - finite in quantity and demand is greater Scarcity - something is finite in quantity Something has value due to scarcity Shortages exist because a third party entity wants to determine what the price should be
Determinants of price elasticity of demand
Substitutability Proportion of income Luxuries vs. necessities Time (More elastic with more time)
Total Revenue test
TR goes down, demand is inelastic TR goes up, demand is elastic I think this is when price decreases
A product has utility if it can satisfy a want
Utility and usefulness are not synonymous Utility is subjective Utility is difficult to quantify
Allocative effiency
every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing
Resource Market and Product Market Cycle
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Productive efficiency
the economy could not produce any more of one good without sacrificing production of another good