Economics 1010

Midterm #2 Ch 5-7, 13

Elasticity

a measure of how much buyers and sellers respond to changes in market conditions

Price Elasticity of Demand

a measure of how much the quantity demanded of a good respond to a change in the price of that good.

Demand is Elastic

the elasticity is greater than 1, so that the quantity moves proportionately more than the price

Demand is Inelastic

the elasticity is less than 1, so that the quantity moves proportionately less than the price

Unit Elasticity

Elasticity is equal to 1

Total Revenue

The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold ( P x Q )

Income Elasticity of Demand

measures how the quantity demanded changes as consumer income changes

Normal Goods

higher income raises quantity demanded. The Income Elasticity of Demand is positive

Inferior Goods

higher income lowers the quantity demanded. The Income Elasticity of Demand is positive

Cross-price Elasticity of Demand

measures how the quantity demanded of one good responds to a change in the price of another good

Substitute

goods used in place of one another

an increase in the price of one good leads to an increase in the quantity demanded of the other

Complement

goods that are used together

an increase in the price of one good leads to a decrease in the quantity demanded of the other

Price Elasticity of Supply

a measure of how much the quantity supplied of a good respond to a change in the price of that good

Price Ceiling

a legal maximum on the price at which a good can be sold

Price Floor

a legal minimum on the price at which a good can be sold

Welfare Economies

the study of how the allocation of resources affects economic well-being

Willingness to Pay

 the maximum amount that a buyer will pay for a good

Consumer Surplus

a buyer’s willingness to pay minus the amount the buyer pays

Marginal Buyer

the buyer who would leave the market first if the price was any higher

Cost

the value of everything a seller must give up producing a good (producers opportunity cost)

Producer Surplus

the amount a seller is paid for a good minus the seller’s cost

Efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

Industrial Organization

the study of how firms’ decisions regarding prices and quantities depend on the market conditions they face

Total Cost

the market value of the inputs a firm uses in production

Profit

total revenue minus total costs

Explicit Costs

the input costs that require an outlay of money by the firm

Implicit Costs

the input costs that do not require an outlay of money by the firm

Economic Profit

total revenue minus total cost, including both explicit and implicit costs

Accountant Profit

total revenue minus explicit costs

Production Function

the relationship between quantity of inputs (i.e. workers) used to make a good and the quantity of output (i.e. cookies) of that good

Marginal Product

the increase in output that arises from an addition unit of input (i.e. labor)

Diminishing Marginal Products

the property whereby the marginal product of an input declines as the quantity of the input increases

Fixed Costs

costs that do not vary with the quantity of output produced (the rent of the factory)

Variable Costs

costs that do vary with the quantity of output produced

Total Costs

the sum of fixed and variable costs

Efficient Scale

the quantity of output that minimizes average total cost

Economics of Scale

the property whereby long-run average total cost falls as the quantity of output increases

Diseconomies of Scale

the property whereby long-run average cost rises as the quantity of output increases

Constant Returns to Scale

the property whereby long-run average total cost stays the same as the quantity of output changes