Exam 2 MICROECON

Elastic

Consumers are RESPONSIVE to price changes. Represented as a HORIZONTAL line on graph.

Inelastic

Consumers are UNRESPONSIVE to price changes. Represented as a VERTICAL line on graph.

(ELASTIC) If there is an increase in price, how is quantity demanded affected?

Small increase in price, there will be a large reduction in quantity demanded that's perfectly ELASTIC.

(INELASTIC) If there is an increase in price, how is quantity demanded affected?

Consumers WILL buy even if the price goes up. Ex: medicine, people will buy no matter the price increases. This is INELASTIC demand.

Finding the percentage change formula.

The percentage change formula calculates the change in a value relative to its original value, expressed as a percentage. It is commonly used in economics to determine changes in price, quantity, or other variables.

A number greater than 1 is _____?

A) Elastic

B) Unit Elastic

C) Inelastic

Elastic

A number equal to 1 is _____?

A) Elastic

B) Unit Elastic

C) Inelastic

Unit Elastic

A number between 0 and 1 is _____?

A) Elastic

B) Unit Elastic

C) Inelastic

Inelastic

How would you solve this to find out if it's elastic or inelastic?

If you're in the inelastic range, an increase in price leads to an increase or decrease in TR (total revenue)?

increase in total revenue

If you're in the inelastic range, a decrease in price leads to an increase or decrease in TR (total revenue)?

decrease in total revenue

If you're in the elastic range, an increase in price leads to an increase or decrease in TR (total revenue)?

Decrease in total revenue

If you're in the elastic range, a decrease in price leads to an increase or decrease in TR (total revenue)?

Increase in total revenue

When unit elastic, TR is at it's what?

Unit Elastic = TR max

Income elasticity formula

% change in quantity demanded / % change in income

Use the income elasticity formula to know if it's a normal or an inferior good

Positive is ____?

A) Normal good

B) Inferior good

Normal good

Negative is _____?

A) Normal good

B) inferior good

Inferior good

Cross price elasticity formula

Measures the responsiveness of demand for one good to the price change of another good.

Use the cross price elasticity formula to know if it's a substitute or a complement

How to get MC (Marginal Cost)?

The change of TC (Total Cost) or the change of VC (Variable Cost)

How to get the AVC?

VC/Q (variable cost divided by quantity)

How to get TC (total cost)?

FC+VC (Fixed Cost + Variable Cost)

How to get the AFC (Average Fixed Cost)?

FC/Q (Fixed Cost divided by quantity)

How to get the ATC (Average Total Cost)?

AFC+AVC (Average Fixed Cost + Average Variable Cost) or TC/Q (Total Cost divided by Quantity)

Two types of profit

Accounting Profit & Economic Profit

What is the difference between AP (accounting profit) and EP (economic profit)?

AP is the total revenue minus explicit costs, while EP accounts for both explicit and implicit costs, reflecting opportunity costs.

When asking a business owner how much they make, will they tell you their economic profit or their accounting profit?

Accounting Profit

Economic profit is a…

Signal to enter or exit, to see what they should do what their business.

Positive economic profit means to…

Enter

Negative economic profit means to…

Exit (this means you're not covering your opportunity cost, you can make more money doing something else)

Formula to find profit

Profit = TR - TC

Formula to get TR

TR = P × Q

How to get accounting profit?

TR (Total Revenue) - EC (Explicit Cost) = Accounting Profit

Scale deals with…

The size of the business

Economics of Scale

As you increase the size of your business, your cost per unit goes down

Constant returns to scale

As businesses get larger, it starts to level-off

Diseconomies of scale

When get too large, the cost of unit goes up. What causes this? As get larger there's distribution costs, redundant layers of middle management, diffculg to keep employee morality. When in this range, they want to cut thr size of the business to get into the more competitive range.