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A A E Chaps 6-9
A A E Exam 2
| Term | Definition |
|---|---|
| Price Elasticity of Demand | % change in consumption in response to % change in prices |
| Elastic Demand | Product or resource whose PED is greater than 1, so that any given percentage change in price leads to LARGER percentage change in Qd |
| Inelastic Demand | Product or resource for which PED is less than 1, so that any given percentage change in price leads to a SMALL percentage change in Qd |
| Unit Elasticity | Demand or supply for which the elasticity coefficient is equal to 1 Percentage change in Qd or Qs is equal to the percentage change in price |
| Perfectly Inelastic Demand | Qd DOESN'T RESPOND to a change in price Product or resource demand in which price can be of any amount at a particular quantity of the product or resource that is demanded |
| Perfectly Elastic Demand | Price reduction causes consumers to increase their purchases from zero to all they can obtain |
| Cross Price Elasticity | % change in consumption in response to % change in the other product prices |
| Substitute Goods | Cross Elasticity greater than 0 |
| Complement Goods | Cross Elasticity less than 0 |
| Independent/Unrelated Goods | Cross Elasticity equal to 0 |
| Income Elasticity | % change in consumption in response to 1% change in income |
| Necessities | Income Elasticity of Demand between 0 and 1 Normal Goods |
| Luxury Goods | Income Elasticity of Demand greater than 1 Normal Goods |
| Inferior Goods | Income Elasticity of Demand less than 0 |
| Law of Diminishing Marginal Utility | As consumer consumes more and more units of a particular good/service, the additional satisfaction (utility) that they get from each additional unit will eventually decrease |
| Budget Constraint | Limit on the amount of goods and services a consumer can afford to buy, given their income and the prices of goods and services |
| Total Revenue (TR) | Total amount of dollars received by a firm/firms from the sale of a product |
| TR Formula | TR = P x Q |
| Price Elasticity of Supply (PES) | Ratio of percentage change in Qs of a product/resource to the % change in its price Measure of responsiveness of producers to a change in the P of a product or resource |
| Immediate Market Period | Length of time during which the producers of a product are unable to change the Qs in response to change in price Perfectly inelastic supply |
| Indifference Curve | Graphical representation of a set of consumption bundles that give the same level of satisfaction to a consumer |
| Consumer Equilibrium | Point at which a consumer's budget is spent in a way that maximizes their total utility |
| indifference Map | Collection of indifference curves that shows a consumer's preferences for different combinations of two goods |
| Marginal Rate of Substitution | Slope of an indifference curve Rate at which a consumer is willing to trade one good for another while remaining indifferent |
| Consumer's Optimal Consumption Bundle | Point where highest indifference curve is tangent to budget line Where marginal rate of substitution (MRS) = price ratio of two goods |
| Substitution Effect | Shows change in consumer's consumption of one good when the price of that good changes, while holding consumer's utility level constant |
| Income Effect | Change in consumer's consumption of one good when their income changes, while holding prices of two goods constant |
| Rational Behavior | Human behavior based on comparison of MC and MB Behavior to maximize total utility |
| Utility-Maximizing Rule | To obtain greatest TU, consumer should allocate money income so that the last dollar spent on each good/service yields the same MU |
| Explicit Costs Examples | Rent, salaries for employees, any contractual cost obligations |
| Implicit Costs Examples | Entrepreneurial talents, value of other offers/uses of machinery and resources |
| Accounting Profit | Total revenue of a firm minus explicit costs |
| Economic Profit | Total revenue of a firm minus explicit and implicit costs |
| Total Cost | Sum of all costs incurred by a firm, including explicit and implicit |
| Normal Profit | Level of accounting profit at which a firm generates an economic profit of 0 after paying for entrepreneurial ability Min level of profit needed for company to remain competitive |
| Variable Cost Examples | Delivery costs, transportation cost, per unit costs |
| Diminishing Marginal Returns | As more and more of a variable input is added to a fixed input, the additional output produced by each additional unit of the variable input will eventually decrease |
| Long Run ATC Curve | Shows lowest ATC at which a firm can produce any level of output in the long run Curve is U shaped, but flatter than short run ATC Curve since all inputs are variable |
| Minimum Efficient Scale | Level of output at which a firm can produce its goods or services at its lowest LR ATC possible Point at which LR ATC curve reaches minimum |
| Economies of Scale | When a firm experiences a decrease in LR ATC as it increases its output |
| Economies of Scale Cause | Often due to specialization of labor, ability to take advantage of bulk discounts, and other efficiency increasing factors |
| Diseconomies of Scale | When a firm becomes too large and experiences an increase in LR ATC |
| Diseconomies of Scale Cause | Can be due to communication difficulties, increased bureaucracy, or other factors hindering efficiency |
| Constant Returns to Scale | When a firm's ATC of producing a product remains unchanged in the LR as firm varies size of its plant and output |
Created by:
Eliana.s
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