exam 2 Econ 202 carlisle
determinants of elasticity of demand
-the number of available substitutes -how broadly or narrowly a product is defined -the size of an item's price relative to on's income -whether the product is a luxury or a necessity -the length of time it takes the market to adjust
the basic formula for the price elasticity of demand coefficient is what?
Ed = percentage change in Qd / percentage change in Price
unit elastic
Ed equals 1
elastic
Ed is greater than 1
inelastic
Ed is less than 1
coefficient of price elasticity of supply
Es= percentage change in quantity supplied of X / percentage change in price of X
if the price of a fixed factor of production increases by 50% what effect would this have on the marginal-cost schedule facing a firm?
None, because fixed costs do not affect marginal cost.
inelasticity
The inability to expand or contract rapidly. "[The] most serious shortcoming [of the country's financial structure] was the inelasticity of the currency."
if a rational consumer is in equilibrium identify which of the following conditions regarding marginal utility hold true.
The marginal utility of the last dollar spent on each good purchased will be the same.
what doe the income effect, substitution effect and diminishing marginal utility have in common
They all help explain the downsloping demand curve. A consumer's demand curve for a product is downsloping because: marginal utility diminishes as more of a product is consumed.
demand is unit elastic when
a change in price leaves total revenue unchanged
diminishing marginal returns
a level of production in which the marginal product of labor decreases as the number of workers increases
long run
a period of time sufficiently long for a firm to vary the amounts of all resources used, including plant size. all costs are variable
what is normal profit
a profit metric that takes into consideration both explicit and implicit costs
how would a perfectly inelastic demand schedule appear on a graph
a vertical line
what do wages paid to factory works, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
all are oppurtunity costs
the long run is a period of time in which what?
all factors of production and costs are variable
the law of supply suggests that the price-elasticity of supply is:
always less than 1
the main determinant of elasticity of supply is:
amount of time the producer has to adjust inputs in response to a price change
a budget line with a shift from AB to CD with products of M and N. what is the impact of this shift?
an increase in the price of M and a decrease in the price of N.
utility-maximization model
assumes that the typical consumer is rational and acts on the basis of well-defined preferences
law of diminishing marginal utility
beyond a certain quantity, additional units of a specific good will yield declining amounts of extra satisfaction
the price elasticity of demand coefficient measures what?
buyer repsonsiveness to price changes
average fixed cost
declines continuously as output increase because a fixed sum is being spread over a larger and larger number of units of production; graph is U-shaped
elasticity of supply
depends on the ease of shifting resources between alternative used, which varies directly with the time producers have to adjust to a price change
law of diminishing returns
describes what happens to output as a fixed plant is used more intensively
the utility of a good or service
determined by how much satisfaction a particular consumer obtains from it
perfectly elastic
horizontal line
cross elasticity of demand
how sensitive the purchase of one product is to changes in the price of another product
negative cross elasticity
identifies complementary goods
positive cross elasticity
identifies substitute goods
income effect
implies that a decline in the price of a product increase the consumer's real income and enables the consumer to buy more of that product with a fixed income
substitution effect
implies that a lower price makes a product relatively more attractive and therefore increases the consumer's willingness to substitute it for other products
fixed costs
independent of the level of output
income elasticity demand
indicates the responsiveness of consumer purchases to a change in income
what does any combination of goods lying outside of the budget line indicate?
is unattainable given the consumers income
concepts of economies of scale
labor specialization, managerial specialization, efficient capital
what direction does the budget line shift when money income stays the same, but there is a reduction in price of two, both products are on the x and y axis
left
minimum efficient scale
lowest level of output at which it can minimize its long-run average cost
the firm's short-run marginal-cost curve is increasing when....
marginal product is decreasing
if the demand for what is highly price inelastic, what effect would an extraordinary large crop have
may reduce farm income
indifference curve analysis presumes what?
presumes only that the consumer can say one combination of two goods yields more or less utility than some other combination.
demand is inelastic when
price and total revenue change in the same direction
the demand for cocaine among addict is relatively elastic or inelastic
relatively inelastic
the demand for a luxury good who purchase price would exhaust a big portion of ones income would be what: elastic or inelastic; perfectly or relatively so
relatively price elastic
the demand for a necessity whose cost is a small portion of one's total income is: elastic or inelastic, perfectly or relatively so
relatively price inelastic
total cost of any output =
sum of fixed and variable costs at the output
how does elasticity relate to a shift in demand for a product?
the change in quantity demanded due to a change in price is large.
how does inelasticity relate to a shift in demand for a product
the change in quantity demanded due to a change in price is small
marginal cost
the extra, or additional, cost of producing one more unit of output; graphically the MC curve intersects the ATC and AVC curves at their minimum points
sunk cost fallacy
the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial
a change in the slope of the budget line is solely the result in change, of what?
the price in one good relative to another
the law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
the price elasticity of supply measures how:
the responsiveness of quantity supplied to changes in price.
economies of scale
the situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant
average total cost
the sum of average fixed and average variable costs; graph is U-shaped
the demand for cheerios cereal is more price elastic than the demand for cereals as w whole. Pick the best explanation why
there are more substitutes for Cheerios than for cereals as a whole.
demand is elastic when
total revenue changes in the opposite direction from prices
marginal product is highest where marginal cost is lowest
true
marginal utility can be positive, negative or zero
true
explain how to derive a demand curve by observing the outcomes of price changes
utility-maximizing rule and the demand curve are logically consistent. Because marginal utility declines, a lower price is needed to induce the consumer to buy more of a particular product
variable costs
vary with output
perfectly inelastic demand
vertical line
implicit costs
which are the opportunity costs of using resources that are already owned
explicit costs
which flow to resources owned and supplied by others
if there are 10 plants producing the total domestic consumption of a product and each plant is operating at minimum efficient scale, then each plant accounts for what percentage of domestic consumption?
10 percent
elasticity
A measure of how much one economic variable responds to changes in another economic variable.
if a variable resource increased for the typical firm, which curve would be affected: AFC, AVC, or MC: would it be a downward or upward shift?
AVC; upward