Intro to Econ Module 2

Inelastic demand

the quantity demanded is not as sensitive to changes in prices. The percentage change in quantity demanded divided by the percentage change in price is < 1

Necessity

A good or service that is viewed as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities

> An extreme example of a case where there are very few to no substitutes

decrease

With elastic demand, when prices INCREASE OR DECREASE, costs and revenues both BLANK

rise, fall, falls

With inelastic demand, when prices INCREASE, revenues BLANK and costs BLANK as quantity produced BLANK

fall, increase, increases

With inelastic demand, when prices DECREASE, revenues BLANK and costs BLANK as quantity produced BLANK

perfectly inelastic

Unusual circumstance - price changes do not affect the quantity demanded at all. Vertical line

perfectly elastic

Unusual circumstance - price change affects the quantity demanded by as much as possible. Horizontal line

price elasticity of supply

the percentage change in quantity supplied divided by the percentage change in the price of the good or service

percentage change in quantity supplied / percentage change in price

Equation for elasticity of supply

percentage change in quantity demanded / percentage change in income

Equation for income elasticity

luxuries

special case of normal goods and have an income elasticity that is positive and also greater than one - exotic vacations, sports cars, second homes, crystal and china, and restaurant meals

inferor good

demand decreases as a result of rising income. Ex. used cars and clothing, inexpensive small apartments, and foods like rice and potatoes

price floor

minimum price set by law or regulation

> Prices are higher than they otherwise would be. It must be above the equilibrium price

below

An effective price ceiling is _ the equilibrium price

above

An effective price floor is _ the equilibrium price

greater

A change in supply will have a _ effect on the price of a relatively more inelastic demand curve than a relatively elastic one

physical capital, human capital, and labor

3 near universal inputs to production

productivity

all about how much output you can get with your inputs

Total Factor Productivity

In the equation Y = A f (K, H, L), A represents:

National Output

In the equation Y = A f (K, H, L), Y represents:

function of

In the equation Y = A f (K, H, L), F () represents:

physical capital

In the equation Y = A f (K, H, L), K represents:

human capital

In the equation Y = A f (K, H, L), H represents:

labor

In the equation Y = A f (K, H, L), L represents:

ATC = TC / Q

equation for average total cost

AFC = FC / Q

equation for average fixed cost

AVC = VC / Q

equation for average variable cost

MC = (tri)TC / (tri)Q

equation for marginal cost (where “tri” = Δ)

falling

When MC < ATC, ATC is _

rising

When MC > ATC, ATC is _

factors of production

The resources used to produce goods and services often divided into three categories: labor (all physical and mental inputs of people), capital (the machines, tools, buildings, and inventories), and land (the actual land used, including raw materials from the land)

production function

A function showing the maximum output for each specific combination of inputs given current levels of technology

>> Relationship between quantities of inputs and the total quantity of output produced in a given time period

short run

A period in which at least one input or factor of production is fixed

total product

the total amount of output that can be produced in a given time period with specific amounts of inputs

long run

A time period long enough that all inputs can be changed

marginal product

the change in output or product that results from increasing a variable input by one unit while all other variables are held constant. It can be calculated by dividing the change in output by the change in labor used (ΔTP/ΔL)

technological change

a shift in production function, usually in the direction of a greater quantity of output at each level of input. May be the result of the creation of new products, the redesign of old products, or the creation of new methods of manufacturing

Law of Diminishing Marginal Returns

the marginal product of an input will eventually decrease as more of that input is used. Assumes that all other inputs remain constant

slope

change in total product divided by the change in the amount of labor = same as definition of marginal product (graph)

average product

the total product divided by the number of units of a particular input used

rises toward marginal product

when marginal product > average product, average product _

turns and starts declining

when marginal product drops below average product, average product _

is at its maximum point

when marginal product = average product, average product _

the rental rate of capital

another phrase for the cost of capital

total fixed cost

the costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when the total product is zero. Costs that do not vary as output changes

total variable cost

for a given level of output, the costs (prices multiplied by the amounts of inputs) of the inputs that can be changed. There are the costs that vary as output changes

total cost

the sum of total fixed cost and total variable cost

marginal cost

the change in total cost resulting from an increase in production of one unit of output. Can be calculated by dividing the change in total cost by the change in total product

inverse

The relationship between marginal product and marginal cost is _

wage rate

In formula, W is

the change in total product / change in number of workers

MP formula

explicit costs

the cost that a business pays by writing a check or paying cash

accounting profits

total revenue minus explicit costs. When this can be earned elsewhere, it’s not counted as a cost

implicit cost

the cost that a business bears by being in its business and not in another business. The profit that can be earned elsewhere - the opportunity cost

economic profit

total revenues minus all costs, including explicit and implicit costs. Equals accounting profit minus normal profit (accounting profit foregone)

normal rate of return

the return that the owner would earn in the next best alternative

competitive firm

in an industry with many other firms producing identical goods. Has no control over its price. An extreme and rather unusual

monopoly

only one firm. Has a lot of influence over its price but not total. Extreme

differentiated

Goods may be identical or ___

entry barriers

any impediment that makes it difficult or impossible for a new firm to enter and compete in a market

Ex. extremely high setup costs, legal barriers

free entry

no serious impediment for a newcomer to start a business and compete. Does not mean costless

perfectly competitive market

a market with many buyers and sellers all producing the same product. Consumers and producers are aware of quality and prices. Firms can easily enter and exit the industry

maximization of profits

ostensibly firms’ primary goal. Suggests firms will act as though it is their only goal

price takers

a firm “takes” the price that is given by the market supply and demand conditions. The firm cannot change the price

market supply

the sum of all the individual firms’ quantities supplied at each price

total revenue

the number of goods sold multiplied by the price at which they are sold

marginal revenue

the change in total revenue resulting from the sale of one more unit

average revenue

total revenue divided by the quantity sold

TR = P x q

equation for total revenue

MR = (tri)TR / (tri)q

equation for marginal revenue (where tri = delta / change in)

TR / q

equation for average revenue

zero, positive, continue

If P = MC, the firm is breaking even and earning BLANK economic profits (but BLANK accounting profits). The firm should BLANK producing

is making a profit, produce

If P > ATC, the firm __ and should…

is experiencing losses, shut down

If P < ATC, the firm __ and should…

price = marginal revenue

In a perfectly competitive market, this is true

firm supply

a firm’s quantity supplied at each price level

allocatively efficient

allocating available resources to produce the kinds of goods and services that consumers want the most. The levels of production of goods and services are such that a change in those levels will make consumers worse off, not better off

marginal utility

the change in satisfaction of one unit of good or service