Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
EXAM 2 Micro Econ
| Term | Definition |
|---|---|
| Elasticity | measure of responsiveness of quantity demanded or quantity supplied to one of its determinants |
| Price Elasticity of Demand | measures how much the quantity demanded responds to a change in price |
| Elastic | Ed > 1, consumers are responsive to price change |
| Inelastic | 0<Ed<1, consumers are not responsive to change in price |
| Unitary elastic | Ed =1 |
| Formula of Ed | % change in qd / % change in price |
| Formula of % change in in qd/price | change in qd or price /average price or qd |
| Interpret this Ed, 2.87% | As the price changes by 1% consumers demand will change by 2.87% |
| Determinants of Price Elasticity | Availability of close substitutes, time, importance of budget, and necessities versus luxuries |
| Examples of availability of close substitutes | Insulin, if price changes people still need it. Demand won't change. Cereal has lots of substitutes so if price changes demand will too |
| Example of time | If gas prices increase demand will not change immediately, takes time to get a hybrid or electric car |
| Longer time period of price change | demand will be more elastic |
| Shorter time period of price change | demand will be less elastic |
| Example of importance of budget | if a car price changes by 10% people may be more reluctant. However a pen price changes by 10% people will be more likely to not change too much of someone's budget |
| A luxury item will have | more elastic demand |
| A necessity will have | less elastic demand |
| price elasticity of demand decreases as we move | down the demand curve |
| on the upper end of the demand curve the price | is elastic |
| on the lower end of the demand curve the price | is inelastic |
| in the middle of the demand curve the price | is unitary elastic |
| the flatter the demand curve the | more price elastic, price sensitive |
| the steeper the demand curve the | less price elastic |
| perfectly inelastic demand | Ed = 0, demand curve is vertical |
| perfectly elastic | Ed = infinity, demand curve is horizontal |
| If a firm increases price of their products will total sales revenue increase or decrease? | We don't know. We'd need to know Ed |
| Ed | price elasticity of demand |
| income elasticity of demand | measures how quantity demanded changes as consumer income changes |
| Ei | income elasticity of demand |
| Equation for income elasticity of demand | % change in qd / % change in income |
| Inferior good has an Ei of | less than 0, because of an inverse relationship |
| Normal good has an Ei of | greater than 0, because they change together in the same direction |
| Income inelastic | greater than 0 but less than 1 |
| Income elastic | greater than 1 |
| Cross Elasticity of Demand | measures how quantity demanded of one good changes as price of another changes |
| Exy | cross elasticity of demand |
| Equation for Cross Elasticity of demand | % change in good X/% change in good Y |
| Subsitutes in the context of Exy | Exy will be greater than 0 |
| Complements in the context of Exy | Exy will be less than 0 |
| Unrelated goods in the context of Exy | Exy will be equal to 0 |
| Price Elasticity of Supply | measure of how much quantity supplied responds to change in price of that good |
| Es | price elasticity of supply |
| Equation for Price Elasticity of Supply | % in quantity supplied / % change in price |
| % in quantity supplied / % change in price | [(change in qs)/(avg qs)]/[(change in price)/(avg price)] |
| How do we measure market efficency? | to compute the total benefit consumers and producers derive from trading |
| Consumer Benefit from trading | Difference in maximum price customer is willing to pay and how much they actually pay |
| If I am willing to pay $30 for a ticket to a game but I actually pay $20, I have a | $10 benefit is consumer surplus |
| Consumer Surplus | the benefit derived from trading |
| Producer benefit from trading | measured by the difference between the price the producer receives for the product and the minimum amount he is willing to accept for the product |
| Maximum Price Policy/ Price Ceiling | the government implements a law that keeps people from selling a good for higher than a specific price |
| Minimum Price Policy/Price Floor | a government policy that keeps sellers from selling above a specific price |
| demand curve tells us | what the maximum price a consumer is willing to pay for one product |
| supply curve tells us | what the minimum price a producer is willing to sell one product for |
| total producer surplus | aggregate producer surplus |
| consumer surplus = | maximum amount willing to pay - actual price |
| producer surplus = | actual price - minimum price willing to sell the good |
| Nonbinding price policy | is maximum price policy is above equilibrium or minimum price policy is below equilibrium, nothing will change |
| For government policy to be effective the maximum price policy must be | below equilibrium |
| For government policy to be effective the minimum price policy must be | above equilibrium |
| consumer surplus on the supply and demand diagram is | in the upper part of the left triangle |
| producer surplus on the supply and demand curve is | in the lower part of the left triangle |
| a market where an additional transaction benefits buyers, sellers, and 3rd parties is a | inefficient market |
| %change in price = | % change in supply/ (Ed+Es) |
| increasing taxes | decreases supply which results in a higher equilibrium price and lower equilibrium quantity |
| Who really pays taxes? | Consumers don't pay the full extent of the tax. Price increases, but not to the same amount that the tax increases |
| Only a portion of taxes is | transferred to consumers |
| The people running the business bear | the rest of the tax burden |
| The amount of the tax shifted on to consumers depends on | the price elasticity of demand for the product |
| more elastic demand means less of a tax burden | for the consumers |
| Spillover costs (negative externalities) | costs that affect 3rd parties, an example is pollution |
| if this product had a perfect inelastic demand then all of the tax would fall on to | the consumer |
| 3rd parties | someone who is not the producer or consumer |
| For products that are associated with spillover costs the | free market equilibrium is inefficient |
| Supply curve 2, is social costs which equals | private costs + spillover costs |
| Socials costs has more cost associated with it which is why | the supply curve is shifted to the left. |
| the intersection of social costs supply curve and demand is | the social optimal equilibrium |
| left to the free market, the level of output is | larger than when taking into account spillover costs |
| optimal thing to do with spillover costs is | for the government to impose taxes |
| government can force the market to the socially optimal level output by imposing | a pollution tax |
| spillover benefits, positive externalities | benefits of consumption or production may not be confined to the individuals who decide how much of the product to consume/produce |
| example of spillover benefit | education, because higher productivity of people spillovers to others in society |
| considering spillover benefits | the original demand curve represents the price value to consumers and the rightward demand curve represents the social value |
| spillover benefits = | private value + social benefits |
| to use the second demand curve with spillover benefits | the government can implement subsidies |
| the free market leads to too much production of a good that has | spillover costs |
| the free market leads to too little production of a good that has | spillover benefits |
| short run | firms can change some inputs of production but not all |
| long run | firms can change all inputs of production, including the size of the facilities |
| marginal product of labor (MP) | change in output with each worker |
| average product of labor (AP) = | total output / total labor |
| whenever MP is higher than AP it pulls the AP | up and vice versa |
| short run total costs = | variable costs + fixed costs |
| when the firm is not producing any product the total costs will equal | their fixed costs |
| short run marginal cost formula 1 | change in total variable cost/ change in quantity |
| short run marginal cost formula 2 | change in short term total costs/ change in quantity |
| short run average fixed costs = | fixed costs/output |
| short run average variable costs = | total variable costs/output |
| short run average total costs formula 1 | average short run variable costs + short run average fixed costs |
| short run average total costs formula 2 | short run total costs/output |
| the SMC, short run marginal costs curve | falls then rises |
| the AFC, short run average fixed costs curve | is always falling |
| the SAVC, short run average variable costs curve | falls then rises |
| the SATC, short term average total costs curve | falls then rise and is at the top of the graph |
| diminishing return starts to set in where the | short run marginal costs (SMC) curve goes up |
| SAVC and SATC intersect at | the minimum |
| short run average costs are shaped like a U because | it first falls due to increase in productivity and will eventually have diminishing returns set in |
| the marginal costs curve intersects the average total costs curve | at the minimized value of average total costs |
| cost in the long run | a firm can choose the size of production facility, there is no diminishing return because all inputs can be changed |
| Long run average costs | total costs/ output level |
| Economies of scale | LAC decreases as output increase |
| Causes of economies of scale | firm uses indivisible outputs and labor specialization |
| firm using indivisible outputs | input that cannot be scaled down to produce smaller quanitites of outputs (running cable despite filling all tneants |
| labor specialization | LAC is higher in smaller facilities because labor is less specialized |
| minimum efficient scale | the output number where LAC becomes horizontal |
| diseconomies of scale | if LAC increases as output increases, backwards L |
| the minimum efficient scale point is | smallest output level that minimizes LAC |
| Diseconomies of scale occurs due to | coordination problems within management |
Created by:
user-2020714