Econ Unit 2

Factors affecting elasticity

1) Availability of Substitutes 2) Relative Importance 3) Necessities Versus Luxeries 4) Change over Time

Related Goods

1) Complements 2) Substitutes

Production Costs

1) fixed costs a. does not change regardless of production (rent) 2) Variable Costs a. costs that rise or fall depending on the quantity produced (raq materials and some labor) 3) Total Cost (fixed + variable costs)

subsidies

government payment that supports a business market (pay a producer a set subsidy for each unit of a good produced)

regulation

raise production cost (ex remove lead from gasoline to prevent health hazards but this is more expensive)

governments influence on supply

raising/lowering cost of producing goods a gov can encourage or discourage an entrepreneur or an industry

example of price ceiling and price floor

rent control

Two behavior patterns that affect the law of demand

substitution and income effect

supply shock

sudden shortage of good

excise taz

tax on the production or sale of a good thus increasing production costs

marginal costs

the additional cost of producing one more unit

Marginal product of Labor

the change in output at the margin from hiring one more worker. How much output a new worker will increase

marginal cost includes

the cost of the inputs that go into production (labor or raw materials)

Factors of elasticity of supply

TIME - short term: a firm cannot easily change its output level, so supply is inelastic (agriculture / haircuts). long term: firms are more flexible so supply is more elastic.

increase in cost of input

decrease in supply at all price levels because more expensive to produce (higher marginal cost)

what do you do with excess demand

raise prices

Diminishing marginal returns

After the firm hires its first three workers, one for each task, the benefits of specialization end. Adding more workers increase total output but at a decreasing rate. A firm with diminishing marginal returns of labor will produce less and less output from eacha dditional unit of labor added to the mix. 3 stations but 5 workers

What can cause shifts in demand curve?

Ceteris Paribus is not true 1) Income a. normal goods b. inferior goods 2) Consumer Expectations a. suspected future circumstances that affect demand 3) Population 4) Consumer Tastes and Advertising

if no control over price only option is to

change production and raise/lower marginal cost until it equals out with constant price

law of supply

Goal: profit. As the price of a good rises, existing firms will produce more in order to earn additional revenue; new firms will enter the market to earn a profit for themselves. If prices of a good falls, some firms will produce less, and others might drop out of the market.

example of LOS

If a firm is already earning a profit by selling a good, then an increase in price -cteris paribus- will increase the firms profit. They want to produce and sell more to take advantage of the higher prices.

The factory is producing at a level of output at which marginal revenue is equal to marginal cost, but the market price is so low that the factory's total revenue is still less than its total cost, and the firm is losing money. Should they close the factory down?

The firm should keep the factory open if the total revenue from the goods and services of the factory produces is greater than the cost of keeping it open.

(% change in quantity of demand) / (% change in price) = 1

Unitary elastic

Increasing marginal returns (and example)

a level of production which the marginal product of labor increases as the # of workers increases Ex: marginal returns increase when additional workers leads to specialization of tasks like a production line. If each worker focuses on only one part oof the process, she will waste less time switching between tasks and will become more skillful at her assigned tasks.

in an uncontrolled market, the price of a good and quantity sold will settle at

a point where the quantity supplied equals the quantity demanded

search costs

a result of excess demand. Searching from store to store looking for a product. It is fthe financial and opportunity cost consumers pay in searching for a good or service

capital

any human-made resource that is used to produce other goods

government regulation on max and min price can lead to imbalance

between supply and demand

all other things held constant

ceteris paribus

Elasticity of Supply

how firms will respond to changes in the price of a good

influence on supply

i. future expectations of prices ii. number of suppliers the larger producers of a good the more supply and the supply curve will shift right

market entry

if pizza selling is doing well, more people are likely to join into that business market

technology causes

input costs to lessen

Most profitable level of output

look for the biggest gap between total revenue and total cost or when marginal income meets marginal cost

low price is a sign of

overproduction

Profit

total revenue - total production cost

Prices communicate to both buyers and sellers

whether goods are in short supply or readily available

negative marginal returns

workers decrease output by getting in each others way and disrupting production process