Econ Test 2
Does the calculation of price elasticity depend on the units of measurement of the good?
Elasticities do not depend on the types of measures used and are most useful when you want to compare responsiveness of demand in different markets.
Technical (operational) efficiency
A point at which a producer cannot produce more output without using more of at least one input.
What factors affect the price elasticity of demand for a good?
Available substitutes, percentage of income, time period, necessity, who pays, brand loyalty
Why might a concave PPF be more appropriate for demonstrating cost than a straight line PPF? Are all inputs of production equally productive in producing both types of output?
Because in a concave the resources are not equally productive in all activities. As we gradually increase a particular output level, with each additional increment we have to use resources that are less and less suitable (less productive).
If the absolute value of price elasticity of demand is greater than 1, is demand elastic or inelastic?
Elastic
Why is the short-run average cost curve U-shaped? NOTE: there are two components to the shape, the initial decrease average cost then the increasing average cost. What causes each?
It falls at first, then gradually levels out before beginning to rise.
What does a production function demonstrate?
It is a graph plotting inputs against outputs.
A point outside (to the right of) the production possibilities curve of a nation:
Is not attainable for this nation.
When the price of a product is increased 10%, the quantity demanded decreases 15%. The price-elasticity of demand coefficient for this product is:
1.5
Outcome
A change in health status as a result of the system processes (in the health services context, the change in health status as a result of care).
Long run
A decision-making time frame over which quantities of all inputs to production can be varied.
Short run
A decision-making time frame within which at least one input (the fixed input) cannot be varied.
If demand is price elastic, when price increases does total revenue increase or decrease?
Decrease
Total revenue falls as the price of a good is raised, if the demand for the good is:
Elastic
If the percentage change in quantity is greater than the percentage change in price, is demand elastic or inelastic?
Elastic because price elasticity of demand is greater than 1
Summarize the relationship between price elasticity of demand, the direction of a price change, and the direction of the change in revenue.
Elastic demand- 1% price rise decreases the quantity sold by more than 1% and total revenue decreases Unit elastic demand - 1% price rise decreases the quantity sold by 1% total revenue does not change Inelastic demand-1% price rise decreases quantity sold by less than 1% and total revenue increases
Over the long run, does demand tend to be more elastic or inelastic compared to the short-run?
Elasticity tends to be greater over the long run as consumers have more time to adjust their behavior and search for substitutes.
What does constant returns to scale refer to?
Example: All resources used in the production of a product are increased by 20 percent and output increases by 20 percent.
Is price elasticity of demand for necessary goods more elastic or inelastic?
Inelastic. The more necessary a good, the lower the elasticity, as people will attempt to buy it no matter the price i.e. insulin
Variable costs are:
Costs that
If demand is price inelastic, when price increases does total revenue increase or decrease?
Increase
If the absolute value of price elasticity of demand is less than 1, is demand elastic or inelastic?
Inelastic
What are examples of variable inputs in production?
X-ray film, syringes, needles, personnel time
Other things equal, and given that the elasticity of demand for health care is 0.2, a 10% increase in the price of health care in the US will reduce the quantity of health care demanded by about:
x/10 = .2 so 10 x .2 = 2%
Fixed costs of production in the short run:
Cannot be reduced by
If labor is the only variable input, then marginal product of labor refers to the:
Increase in output resulting from employing one more unit of labor.
Fixed costs are those costs which are:
Independent of the rate of output
What are examples of goods that typically have inelastic demand?
insulin, petrol, tobacco
Suppose you are given the following data on demand for a product. The price elasticity of demand when price decreases from $9 to $7 is: Price Quantity demanded $10 30 9 40 8 50 7 60 6 70
20/50 = .4 -2/8 = -.25 .4/.25 = 1.6
If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be:
200+600/4 = 200
How is the percentage change in price calculated using the average price?
= Change in price / Average Price
How is the percentage change in quantity demanded calculated using the average quantity demanded?
= Change in quantity / Average Quantity
Diminishing returns to scale
A situation when a proportionate increase in all inputs yields a less than proportionate increase in output.
In interpreting the Ed value as either elastic or inelastic, we look at the:
Absolute value of the Ed coefficient
Fixed input
An input to production that does not vary in the short run. The time for which at least one input cannot be changed actually defines the short run.
Variable input
An input to production that varies directly with the level of output.
A point or combination that is on the production possibilities curve is:
Attainable and technically efficient
A point inside the production possibilities curve is __________ while a point outside the curve is ______________.
Attainable; unattainable
How does brand loyalty affect price elasticity of demand?
Brand attachment can make consumers insensitive to price changes resulting in more inelastic demand.
What does increasing returns to scale refer to?
By improved division of labor and increased specialization.
What are examples of goods that typically have elastic demand?
Cereal and shampoo
Price elastic
Change in price produces a more than proportionate change in quantity demanded.
Price inelastic
Change in price produces less than proportionate change in quantity demanded.
When the consumer does directly pay for the good is demand more elastic or inelastic than if a third-party pays for the good?
Consumer pays = Elastic. Third party pays = Inelastic. When the purchaser does not directly pay for the good they consume, such as in employer-sponsored health insurance, demand is likely to be more inelastic.
How is total cost calculated? NOTE: in the short run total cost is always the sum of the total variable cost and total fixed cost.
Fixed cost + Variable cost
If the portion of income spent on the good is relatively large, is demand more elastic or inelastic?
Goods that take a large portion of a consumer's income tend to have greater elasticity.
How do the long run and short run differ in terms of the whether inputs can be varied?
Long run=all inputs to production can be varied. Short run there are limits to this as some inputs are fixed so only variable inputs can be altered.
If a good is an inferior good is income elasticity of demand positive or negative?
Negative
When goods are complements, is price elasticity of demand positive or negative?
Negative (less than zero) because a positive change in price brings about a negative change in quantity demanded.
Is price elasticity of demand positive or negative? Why?
Negative because it indicates that as the price of a good increases, all other factors held constant, consumers will demand less of that good. The law of demand.
Does the total fixed cost increase as the total output increases?
No.
What is the formula for calculating total revenue (TR)?
Number of units of goods sold X price per unit
What is the formula for calculating price elasticity of demand?
PED = Percentage change in quantity demanded / Percentage change in price
What does cross-price elasticity of demand measure?
Percentage change in quantity demanded of the good divided by percentage change in price of another related good. If the related good is a complement then the cross-elasticity of demand is less than zero because a positive change in price brings about a negative change in quantity demanded. If related good is a substitute then the cross-elasticity of demand is more than zero because a positive change in price brings about a positive change in quantity demanded. Closer the substitute the higher the cross-price elasticity of demand.
If an economy is producing in a technically efficient way, what must happen before the economy will be able to increase output (expand the PPF)?
Point lies within PPF. There is excess capacity. If output was increased, there does not need to be a reduction in the output of other goods and services. No input can be decreased without also decreasing output.
Which points represent technical efficiency? (This term was introduced in Chapter 1 and the concept is discussed in the paragraph before the figure in the text.)
Points that lie exactly on the PPF so that you cannot increase one output without reducing other outputs.
If a good is a normal good is income elasticity of demand positive or negative?
Positive
When goods are substitutes, is price elasticity of demand positive or negative?
Positive (greater than zero) because a positive change in price brings about a positive change in quantity demanded.
We would expect the cross elasticity of demand between pepsi and coke to be:
Positive, indicating substitute goods.
How do "returns to a factor" and "returns to scale" refer to different concepts? Which is a short run concept and which is a long run concept?
Return to factor (Short term) indicates the addition to output b y increasing only one factor. Returns to scale (long-run phenomenon) indicate the addition to output attained by increasing all factors by the same proportion.
What does diminishing returns refer to? Review the Feedback for question 1 of Activity 5.2.
That in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs.
The long run is a period of time, or a time-frame, in which:
The amount of all resources can be varied.
Production possibilities frontier
The boundary between the combinations of goods that can be produced and those that cannot with the resources available. NOTE: the PPF is often referred to as the production possibilities curve (PPC), they can be used interchangeably. The PPF is the graphical representation of the production possibilities that were presented in tabular form in Chapter 1.
What does marginal product (MP) measure? How is it calculated?
The extra output achieved for each additional input. Total product associated with x number of nurses minus the total product with one less nurse.
Production function
The functional relationship that indicates how inputs are transformed into outputs in the most efficient way.
Output
The good or service that is the result of the production process (in the case of health services, the service that is delivered).
The production possibilities curve is a graph of:
The maximum combinations of products that can be produced
Does the availability of more substitutes result in relatively more elastic demand or inelastic demand compared to when fewer substitutes are available?
The more and closer the substitutes available, the higher elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made.
Price elasticity of demand
The percentage change in quantity demanded divided by the associated percentage change in price. Responsiveness of buyers of a good to changes in it's price.
Income elasticity of demand
The percentage change in quantity demanded of a good divided by the percentage change in population income.
Cross price-elasticity of demand
The percentage change in quantity demanded of a good divided by the percentage change in the price of another related good.
Price elasticity of supply
The percentage change in quantity supplied of a good divided by the percentage change in the good's own price.
Which is not characteristic of a product with relatively inelastic demand?
There are a large number of good substitutes for the good.
Returns to a factor
This measures the addition to output as one factor to production is increased.
Returns to scale
This measures the addition to output as the scale of operations increases in the long run so that all inputs can be varied.
How is average total cost calculated?
Total cost divided by total product.
Other things equal, if the prices of a firm's variable inputs were to increase:
Total variable cost and total cost would increase, but total fixed cost would be unchanged.
What does decreasing returns to scale refer to?
Usually explained by the difficulties involved with managing and coordinating all the decisions that need to be made to run a large organization.
What does perfectly elastic demand refer to?
When the quantity demanded is infinitely responsive to a price change, then price elasticity of demand is infinity and demand is perfectly elastic.
What does perfectly inelastic demand refer to?
When the quantity demanded remains constant when the price changes, then the elasticity of demand is 0 and demand is perfectly inelastic.
Does the total variable cost increase as total output increases?
Yes.
If the demand for a product is elastic, then:
a higher tax on the product will generate less tax revenue.
If the percentage change in quantity is less than the percentage change in price, is demand elastic or inelastic?
inelastic because price elasticity of demand is less than 1
What are examples of fixed inputs in production?
investments such as hospital buildings or x-ray machines
