ABM 1041 Exam 2 Study Guide

Elasticisty

helps us understand how responsive quantity is to change in "prices"

elastic demand

measures how responsiveness of quantity demanded to changes in the price of the product

Price elastcity of demand

% change Q/ % change P

always negative number, why absolute value used

larger number (in absolute value) indicates greater elasticity

Inelastic

% change Q < % change P

elastic

% change Q >% change P

unitary elastic

% change Q=% change P

determinants of elasticity

demand for inelastic goods is less sensitive to price changes

elastic goods are sensitive to price changes

Factors that affect elasticity

number of substitutes available

whether a good is a luxury or necessity

cost as a proportion of one's budget

period to respond to changes in price

midpoint method

%change Q= [(Q1-Q2)/ [Q0+Q1)/2]

Elasticity's affect on revenues

Elastic: an increase in price causes a net decrease in revenue

Inelastic: an increase in price causes a net increase in revenue

utility

a hypothetical measure of the satisfaction one receives from consuming a good or service

Utility assumption

people want to maximize their utility or satisfaction

marginal utility

the additional satisfaction from consuming one more unit of a good or service

marginal utility analysis

studies consumer decision making in face of budget constraints

asserts rational consumers will allocate their incomes to maximize their own well-being

determines at which point on budget line one consumer to maximize utility

law of diminishing marginal utility

as one consumes more of a given product, the additional satisfaction from each additional unit falls

utility maximization

individuals maximize total satisfaction when consuming where the marginal utility per dollar is equal for all goods and services

all firms must determine

what a market wants

how to produce the good or service

different types of firms

sole proprietorships

partnerships

corporation

Sole Proprietorship

one owner, easy to start, limited access to financial capital, owners personal assets subject to unlimited liability

Partnership

more than one owner, can divide tasks among partners, personal assets of all owners subject to unlimited liability

corporation

owners called stockholders, have legal rights, can raise money by issuing stocks and bonds, owners protected by limited liability

production

is the process of turning inputs into outputs, the cost structure depends on the nature of the production process

short run production

at least one factor of production (such as plant size) is fixed

long run production

all factors are variable, firms enter response to profits and exit in response to losses

marginal product in short run production

is the change output resulting from a one-unit increases in labor (change Q/ change L)

rises as more workers are hired then falls as diminishing returns occurs

average product in short run production

is total output divided by the amount of labor input (Q/L)

explicit costs

expenses paid directly to some entity (wages, leases, raw materials, taxes)

implicit costs

opportunity costs of using resources (depreciation, forgone wages)

accounting profit

TR= explicits costs

economic profit

when profits are greater than zero after implicit costs are considered

TR- exp costs- imp costs

normal profit

equals an economic profit of zero TR- exp costs=imp costs

normal rate of return

is the return just sufficient to keep investors satisfied; it there for represents the opportunity costs of capital

fixed costs (overhead)

do not vary with the quantity produced

Variable costs

rises as the level of output increases

sunk costs

already incurred and cannot be recovered

total costs and calculation

are the sum of fixed and variable costs

TC= FC+VC

marginal costs and calculation

the change in total cost from the production of one more unit of output

MC= change in TC/ change Q

crossed the minimum points of ATC & AVC curves

average total cost and calculation

a measure of productivity (in terms of cost efficiency)

average variable costs calculations

VC/Q

average fixed costs calculations

the average fixed cost curve always decreases as production increases TC/Q

production costs in long run

all inputs can be adjusted, therefor no fixed costs in long run

shutdown rule

minimum point on AVC, losses exceed fixed costs

in long run business will only earn

normal profit

marginal product calculations

is the change in output resulting from a one-unit increase in labor (change Q/ change L)

law of diminishing marginal product

the reduction in the marginal product of labor as more workers are used, if too many workers are used, negative returns to labor can result

Perfect Competition Characteristics

many buyers and sellers, standardized products, no barriers to market entry or exit, no long-run profit, no control over price act as price takers

Monopolistic Competition characteristics

many buyers and sellers, differentiated products, little to no barriers to market entry or exit, no long-run economic profit, some control over price

oligopoly Characteristics

relatively few firms, interdependent decision making, substantial barriers to market entry, potential long-run economic profit, shared market power, considerable control over price

Monopoly Characteristics

one firm, no close substitutes for product, nearly insuperable barriers to entry, potential long-run economic profit, substantial market power and control over price

Marginal Revenue

the change in total revenue that results from sale of one additional unit of a product

change in TR/change in Q

maximize profit rule

a firm maximizes profit by producing at the point where MR equals MC

first focus on short-run profit maximization

5 steps to maximize profit

1) find MR=MC

2) find optimal Q

3) find optimal P

4) find ATC

5) find profit =(P-ATC)xQ

P=MC rule