Unit 2

equation for elasticity

% change in demand of good/ % change in price of good. % change= (original number- new number)/ original number

complements

2 goods that are bought and used together

fixed cost

a cost that does not change no matter how much of a good is produced.

subsidy

a gov payment that supports a business or market.

demand curve

a graphic representation of a demand schedule

diminishing marginal returns

a level of production in which the marginal product of labor decreases as number of workers increases. hiring too many workers

increasing marginal returns

a level of production in which the marginal product of labor increases as the number of workers increases. specialization increases output per worker so the second worker adds more to output than the first

elasticity of supply

a measure of the way quantity supplied reacts to a change in price. tells how firms will respond to change in price

rent control

a price ceiling placed on rent.

excise tax

a tax on production or sale of a good. can reduce supply of some goods. increases production costs adding extra cost to each unit

marginal revenue

additional income from selling one more unit of a good. when it is equal to marginal cost you are at the best level of output.

ceteris paribus

all other things held constant. assume nothing changes the demande curve is accurate

supply

amount of goods available

total revenue

amount of money the company receives by selling its goods. determined by price of goods and quantity sold.

substitution effect

consumer reacts to a rise in price of one good and by consuming less of that good and more of a substitute good

operating cost

cost of operating facility. includes variale costs.

variable costs

costs that rise or fall depending on the quantity produced. cost of raw materials and some labor

demand

desire to own something and the ability to pay for it

total cost

fixed cost and variable cost

normal goods

goods that consumers demand more of when income increases

substitutes

goods used in place of one another

price floor

gov can create a minimum price for a good or service

regulation

government intervention in a market that affects price quantity or quality of a good

elasticity

how flexible your decision to supply or demand relative to price effected by 1. availability 2. relative importance 3. necessities versus luxuries 4. change overtime

quantity supplied

how much of a good is offered for sale at a specific price

unitary elastic

if elasticity is exactly equal to one. demand equal price

price ceiling

maximum price that can be legally charged for a good. gov can impose it.

price floor

minimum price set by gov must be paid for good or service

inferior goods

other goods. as income increases demand falls for these goods.

minimum wage

price floor for wage

excess supply

price is too high. quantity supplied exceeds quantity demanded

excess demand

quantity demanded is more than quantity supplied. actual price lower than equilibrium price

surplus

quantity supplied exceeds quantity demanded at a given price

income effect

rising prices makes us feel poorer when prices increase, your budget wont buy as much as it used to, it feels as if you have less money.

market demand schedule

shows quantities demanded at each price by all consumers in the market

supply schedule

shows the relationship between price and quantity supplied for a specific goos. lists supply for a specific set of conditions

market supply schedule

shows the relationship between prices and total quantity supplied by all firms in a particular market.

shortage

situation in which quantity demanded is greater than quantity supplied. known as excess demand.

demand schedule

table that lists the quantity of a good that a person will purchase at each price in a market

marginal cost

the additional cost of producing one more unit.

marginal product of labor

the change in output from hiring one mor worker. measures change in output at the margin.

law of supply

the higher the price the larger the quantity produced ( new firms will have incentive to enter the market to earn profit)

disequilibrium

the market price of quantity supplied is anywhere but at equilibrium. quantity supply not equal to quantity demand

equilibrium

the point of balance between price and quantity. the market for a good is stable. the point at which quantity demanded and quantity supplied are equal where supply curves crosses demand curve

elasticity of demand

way consumers respond to price changes dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls

law of demand

when a goods price is lower consumers will buy more of it. when price is higher they buy less.

supply curve

when data points in the supply schedule are graphed.

elastic

you buy much less of a good after a small price increase. greater than 1

inelastic

your demand for a good that you will keep buying despite a price increase. less than 1.