ECON1001 USYD

explicit opportunity costs

costs that involve direct payment (eg. the cost of going to university)

implicit opportunity costs

opportunities that that do not have an explicit cost (eg. the loss of possible income by coming to university instead)

marginal benefit (MB)

the benefit of an extra unit consumed, fo the consumer. Consumers will stop buying a good when MB = P

marginal cost (MC)

the additional cost of buying an extra unit

ceteris paribus

all other things held constant, to examine only one factor at a time

causation

when a change in one variable causes a change in another variable

correlation

when two or more factors are observed to be moving in the opposite direction together

production possibility frontier

illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other

absolute advantage

the ability of a party to produce a good or service more efficiently than its competitors

comparative advantage

the ability of a party to produce a good or service at a lower opportunity cost than its trading partners

specialisation

where a party focuses on the production of a limited scope of goods to gain a greater degree of efficiency

factors influencing the level of demand

income, taxes, expectations, price of substitutes

short run

the period of time during which at least one of a firm's inputs is fixed

long run

the time period in which all inputs can be varied

production functions (cobb-douglas function)

shows the relationship between a variety of inputs used and the maximum quantity of outputs produced

marginal product (MP)

the change in output when one or more extra inputs is used. It is generally diminishing

fixed costs (FC)

costs that do not vary with output. When output is zero, all costs are fixed costs

variable costs (VC)

costs that vary with output

total costs (TC)

the sum of fixed costs and variable costs

VC formula

TC-FC

FV formula

TC-VC

TC formula

FC+VC

average fixed costs (AFC)

the fixed cost per unit of output

average variable costs (AVC)

the variable cost per unit of output

average total costs (ATC) or (AC)

the total cost per unit of output

AFC formula

FC/q (where, q=quantity and FC=fixed costs)

AVC formula

VC/q (where, q=quantity and VC=variable costs)

ATC formula

TC/q (where, q=quantity, and TC=total costs)

the relationship between ATC, AVC and MC

MC passes through the minimum of ATC and AVC

long-run marginal costs (LRMC)

the marginal cost of increasing output by one unit taking into account that all input can be varied to achieve this

firm supply

the quantity of output a firm is willing and able to supply at a certain price, a firm should sell until P=MC

profit formula

π=TR - TC(q) (where, π=profit, TR=total revenue, TC=total costs and q=quanity)

first order condition

determines at what point a function gives a maximum or minimum output. A mathematical condition for optimisation stating that the first derivative is zero. (dπ/dq=0)

second order condition

determines whether a function gives a minimum or maximum output. (d^2π/dq^2)

producer surplus (PS)

the total amount that a producer benefits from producing and selling a quantity of a good at market price

consumer surplus (CS)

the difference between the price that consumers pay and the price that they are willing to pay for a good at a certain price

market equilibrium

a situation in which quantity demanded equals quantity supplied. The price at which this occurs is called the market-clearing price or equilibrium price

excess supply (ES)

if the market price is above the equilibrium price, the quantity supplied exceeds the quantity demanded, this difference is called excess supply

pareto efficiency

An allocation is Pareto efficient if it is not possible to re-allocate resources in a manner that makes at least one individual better off while making no individual worse off

elasticity (ε)

a measure of how responsive one variable (y) is to changes in another variable (x). That is when we increase x by a certain amount, does y change?

elasticity formula

ε=%Δy/%Δx (where, Δ=change in, y=y variable, x=x variable)

point method

a method of calculating the elasticity of a particular outcome. For example, what is the elasticity on a demand curve around the point (Q,P)? In these cases we use the point method

point method formula

ε=(Δy/y)/(Δx/x) = (Δy/Δx) (x/y) = (dy/dx) (x/y)

midpoint (arc) method

a method of calculating the elasticity when moving from one point to another. For example, the price of a good changes from P1 to P2, which causes the quantity demanded to change from Q1 to Q2. In this case, it is unclear whether we measure the change in price as a percentage of P1 or P2. To resolve this, sometimes we adopt the midpoint method

midpoint (arc) method formula

ε=(Δy/y^m)/(Δx/x^m) = (Δy/Δx)*(x^m/y^m) (where, y^m = (y1+y2/2) and x^m = (x1+x2/2)

price elasticity of demand

measures how sensitive the quantity demanded for a good (Qd) is to change in price (P)

perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero. The demand curve is vertical

perfectly elastic demand

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity. The demand curve is horiztonal

total revenue (TR) formula

TR(P) = P x q (where, P=price, q=quantity)

marginal cost (MC) formula

MC= ΔTC / ΔQ (where, Δ=change in, TC=total cost and q=quantity)

Things to add for week 3 Content

Example of fc, vc

short run and long run def

MP and AP relationship (not cause and effect but occurring at the same time)

The graph for avc, atc and fc mc

LRAC

economies of scale