Exam 3 - Microeconomics

income elasticity of demand

% change in quantity demanded / % change in income Positive for normal goods negative for inferior goods High elasticity for luxury goods Low elasticity for neccesities

cross-price elasticity of demand

% change in quantity of A demanded / % change in price of B Positive if products are substitutes Negative if products are complements

Price Elasticity of SUPPLY

% change in quantity supplied / % change in price

Consequences of Binding price floor

Surplus

Relationship between price and total revenue with respect to Elasticity

TR = PRICE x QUANTITY for a price increase... if demand is INELASTIC, TR increases. if demand is ELASTIC, TR decreases.

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

Relationship between Elasticity and the slope of the demand curve

The flatter the curve, the bigger the elasticity.

perfectly inelastic demand

percentage change in Q / percentage change in P = 0

Inelastic demand

percentage change in q / percentage change in p < 1

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays Closely related to the demand curve

tax incidence

the manner in which the burden of a tax between buyers and sellers in a market Falls on the side of the market that is the least elastic

welfare economics

the study of how the allocation of resources affects economic well-being

Factors that determine price elasticity of demand

1. Whether close substitutes are available 2. Whether the good is a necessity or a luxury 3. Narrowly or Broadly defined good 2. Time (Short run or long run)

Marginal cost

= Change in TC/Change in Output = Slope of TC curve

total surplus

=consumer surplus + producer surplus Value to buyers minus Costs to Sellers Market is efficient when Total Surplus is maximized

economies of scale

ATC decreases as Output increases. - left side of graph

constant returns to scale

ATC does not change as Output increases

diseconomies of scale

ATC increases as Output increases - right side of graph

Factors determining the elasticity of supply

Capacity to increase production Short run vs long run - more elastic in long run

Marginal Product

Change in TP / Change in labor Slope of the TP function

Why does a lower price increase Consumer Surplus?

Higher consumer surplus for existing customers, New buyers enter market

implicit costs

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur Not Included in Accounting , therefore Accounting Profit > Economic profit usually.

linear demand curve and elasticity

Inelastic demand.... has points with low P and High Q Elastic demand... has points with high P and Low Q

Law of Diminishing Output

Marginal product of labor decreases as we add more labor. Gets flatter with more labor (Law of diminishing Marginal Product)

social welfare

Maximize economic well-being of everyone of the society measured by total surplus.

Production Function

Plots total production against labor Starts at the Origin Gets FLATTER as production RISES

producer surplus

Price received - Willingness to sell Closely related to the supply curve

Total Cost Function

Relationship between quantity produced and total costs Gets STEEPER as the amount produced RISES (law of diminishing Marginal product)

Consequences on Binding price ceiling

Shortages, rationing mechanisms

Relationship between elasticity and slope of the SUPPLY curve

The more inelastic, the steeper the SUPPLY curve

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Relationship between Price and total revenue with respect to Elasticity pt. 2

When demand is inelastic... P and TR move in SAME direction When demand is elastic... P and TR move in OPPOSITE direction If demand is unit elastic... TR remains constant when P changes.

unit elastic demand

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value

elastic demand

greater than 1