ECN 212 Exam #2 ASU Girante

price elasticity of demand

measures buyers' responsiveness to price changes

inelastic

- describes demand that is not very sensitive to price changes

- elasticity < 1

- complements

elastic

- describes demand that is very sensitive to a change in price

- elasticity > 1

- substitutes

less elastic

-fewer substitutes

-short run

-categories of products

-necessities

-steeper curve

-price change causes little change in demand

more elastic

-more substitutes

-long run (more time)

-specific brands

-luxuries

-flatter curve

-price change causes great change in demand

elasticity of demand

% change in quantity demanded / % change in price

price elasticity of supply

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

elasticity of supply

%change in quantity supplied / %change in price

income elasticity of demand

% change in quantity demanded / % change in income

cross-price elasticity of demand

% change in quantity demanded for good 1 / % change in price for good 2

price ceiling

maximum legal price that can be charged for a product

effects of price ceiling

- shortages

- reductions in product quality

- wasteful lines and other search costs

- a loss of gains from trade

- a misallocation of resources

price floor

a minimum price for a good or service

effects of price floor

- surplus

- gives producers more product to sell at higher price

- consumers substitute because of high price

subsidy

government payment given to individuals, organizations, or businesses designed to offset costs to advance a specific or public good

total tax revenue

vertical distance (tax) x quantity

total surplus

consumer surplus + producer surplus

earned income tax credit

a method of raising living standards of the working poor without creating unemployment

tax per unit

what buyers pay - what sellers receive

consumer surplus

- the difference between what consumers are willing to pay and what the do pay

- top area on graph

producer surplus

- the difference between the price and how much your seller is willing to sell that product for

- bottom area on graph

private cost

a cost paid by the consumer or the producer

external cost

a cost paid by bystanders, by people other than the consumer or the producer

social cost

the cost to everyone: the private cost + the external cost

externalities

external costs or external benefits that fall on bystanders

social surplus

consumer surplus + producer surplus + bystander's surplus

deadweight loss

- social cost > private value

- don't want to produce

external benefit

- a benefit received by people other than the consumers or producers trading in the market, a benefit to bystanders

- social value > private value

negative externality

harmful side effect that affects an uninvolved third party

postive externality

impact on the bystander is beneficial

excludability

whether it's possible to exclude someone from consuming a good

rivalry

whether its possible for multiple people/groups to consume a good

private goods

goods that are both excludable and rival in consumption

example of private good

food, clothing, cars

public goods

all goods that are excludable and non-rivals in consumptions

example of public good

national defense, clean air, emergency services

common resources

goods that are rival in consumption but not excludable

example of common resources

fish in the ocean, forestry

club goods

goods that are excludable but not rival in consumption

example of club goods

gym membership, cable tv, wifi

explicit costs

out-of-pocket costs for a firm

example of explicit cost

payments for wages and salaries, rent, or materials

implicit costs

the cost of resources already owned by the firm that could have been put to some other use

example of implicit cost

the opportunity cost of the owner's time

what is an economists goal of a firm?

to maximize profit

economic profit

total revenue - (explicit costs + implicit costs)

accountant profit

total revenue - explicit cost

fixed costs

- costs that do not vary with the quantity of output

- basic operating expenses that cannot be avoided

example of fixed cost

rent, insurance

variable costs

costs that vary with the quantity of output produced

example of variable cost

raw materials and labor

total costs

fixed costs + variable costs

marginal revenue

the additional income from selling one more unit of a good

marginal cost

the cost of producing one more unit of a good

normal profit

the minimum level of profit needed for a company to remain in business

average costs

total costs / number of output

sunk cost

a cost that has already been paid and cannot be recovered

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

diseconmies of scale

factors that cause a producer's average cost per unit to rise as output rises

long run

all costs are variable

short run

both fixed and variable costs

average variable cost (AVC)

variable cost / quantity of output

average total cost (ATC)

total cost / quantity of output

average fixed cost (AFC)

fixed cost / quantity of output

total revenue

price x quantity

all the money taken in

profit

total revenue - total cost

production function

the relationship between the quantity of inputs used to make the good and the quantity of outputs of the good

calculate marginal cost

change in total cost / change in quantity