Exam 3 - Microeconomics
income elasticity of demand
% change in quantity demanded / % change in income Positive for normal goods negative for inferior goods High elasticity for luxury goods Low elasticity for neccesities
cross-price elasticity of demand
% change in quantity of A demanded / % change in price of B Positive if products are substitutes Negative if products are complements
Price Elasticity of SUPPLY
% change in quantity supplied / % change in price
Consequences of Binding price floor
Surplus
Relationship between price and total revenue with respect to Elasticity
TR = PRICE x QUANTITY for a price increase... if demand is INELASTIC, TR increases. if demand is ELASTIC, TR decreases.
explicit costs
The actual payments a firm makes to its factors of production and other suppliers.
Relationship between Elasticity and the slope of the demand curve
The flatter the curve, the bigger the elasticity.
perfectly inelastic demand
percentage change in Q / percentage change in P = 0
Inelastic demand
percentage change in q / percentage change in p < 1
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays Closely related to the demand curve
tax incidence
the manner in which the burden of a tax between buyers and sellers in a market Falls on the side of the market that is the least elastic
welfare economics
the study of how the allocation of resources affects economic well-being
Factors that determine price elasticity of demand
1. Whether close substitutes are available 2. Whether the good is a necessity or a luxury 3. Narrowly or Broadly defined good 2. Time (Short run or long run)
Marginal cost
= Change in TC/Change in Output = Slope of TC curve
total surplus
=consumer surplus + producer surplus Value to buyers minus Costs to Sellers Market is efficient when Total Surplus is maximized
economies of scale
ATC decreases as Output increases. - left side of graph
constant returns to scale
ATC does not change as Output increases
diseconomies of scale
ATC increases as Output increases - right side of graph
Factors determining the elasticity of supply
Capacity to increase production Short run vs long run - more elastic in long run
Marginal Product
Change in TP / Change in labor Slope of the TP function
Why does a lower price increase Consumer Surplus?
Higher consumer surplus for existing customers, New buyers enter market
implicit costs
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur Not Included in Accounting , therefore Accounting Profit > Economic profit usually.
linear demand curve and elasticity
Inelastic demand.... has points with low P and High Q Elastic demand... has points with high P and Low Q
Law of Diminishing Output
Marginal product of labor decreases as we add more labor. Gets flatter with more labor (Law of diminishing Marginal Product)
social welfare
Maximize economic well-being of everyone of the society measured by total surplus.
Production Function
Plots total production against labor Starts at the Origin Gets FLATTER as production RISES
producer surplus
Price received - Willingness to sell Closely related to the supply curve
Total Cost Function
Relationship between quantity produced and total costs Gets STEEPER as the amount produced RISES (law of diminishing Marginal product)
Consequences on Binding price ceiling
Shortages, rationing mechanisms
Relationship between elasticity and slope of the SUPPLY curve
The more inelastic, the steeper the SUPPLY curve
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Relationship between Price and total revenue with respect to Elasticity pt. 2
When demand is inelastic... P and TR move in SAME direction When demand is elastic... P and TR move in OPPOSITE direction If demand is unit elastic... TR remains constant when P changes.
unit elastic demand
demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value
elastic demand
greater than 1
