Lecture on Elasticity and Production Costs

Flashcards covering concepts of elasticity in demand and supply, including types of goods and economic vs. accounting costs, based on the provided lecture notes.

Positive Statement

A statement that predicts an outcome or describes facts, without involving a value judgment.

Normative Statement

A statement that involves a value judgment or an opinion about what 'should' be, often based on what is considered 'good'.

Drug Bust (Economic Impact)

A law enforcement operation that reduces the supply of drugs in the market, leading to higher prices and, for an inelastic demand, increased total revenue for sellers not caught.

Elasticity of Supply

A measure comparing the percentage change in the quantity supplied of a product to the percentage change in its price.

Elastic Supply

Occurs when suppliers are price-sensitive; a small change in price leads to a proportionally larger change in quantity supplied.

Inelastic Supply

Occurs when suppliers are price-insensitive; a change in price leads to a proportionally smaller change in quantity supplied.

Time (Determinant of Supply Elasticity)

The primary determinant of the elasticity of supply; supply becomes more elastic over longer periods as businesses have more time to adjust production.

Immediate Market Period (Supply Elasticity)

A period so short that the supply of a product is fixed and cannot be changed, making supply perfectly inelastic.

Original Art (Supply Elasticity)

Typically has an inelastic supply due to its fixed and unique quantity (e.g., one Mona Lisa).

Cross Elasticity of Demand

Compares the percentage change in demand for one product (X) to the percentage change in the price of another product (Y) to determine if they are substitutes, complements, or independent.

Substitute Goods (Cross Elasticity)

Products with a positive cross elasticity of demand, meaning an increase in the price of one leads to an increase in demand for the other.

Complementary Goods (Cross Elasticity)

Products with a negative cross elasticity of demand, meaning an increase in the price of one leads to a decrease in demand for the other.

Independent Goods (Cross Elasticity)

Products with a zero or near-zero cross elasticity of demand, meaning a change in the price of one has no significant effect on the demand for the other.

Income Elasticity of Demand

Compares the percentage change in quantity demanded for a product to the percentage change in income, used to classify goods as normal/superior or inferior.

Normal/Superior Goods (Income Elasticity)

Products with a positive income elasticity of demand; demand increases as income increases.

Inferior Goods (Income Elasticity)

Products with a negative income elasticity of demand; demand decreases as income increases.

Production Costs

The expenses incurred by businesses in creating goods or services, which influence the supply offered in the market.

Explicit Cost

Direct, out-of-pocket monetary payments made by a business to outsiders for resources (e.g., wages, rent, materials, utilities, taxes).

Implicit Cost

The opportunity costs of using resources owned by the firm, representing the income sacrificed by not using the resources in their best alternative use (e.g., foregone rent, interest, wages, and normal profit).

Normal Profit

The minimum profit an entrepreneur must receive to justify remaining in business, considered an implicit cost by economists.

Accounting Profit

Calculated as total revenue minus explicit costs.

Economic Profit

Calculated as total revenue minus both explicit and implicit costs (including normal profit).