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