Microeconomics 5-8

What is the formula for elasticity?

% change in quantity demanded / % change in price

what type of elasticity is ED = 1?

unitary elastic

what type of elasticity is ED > 1?

elastic

what type of elasticity is ED < 1?

inelastic

What is the formula for total revenue?

Price x Quantity

Formula for income elasticity of demand

% change in quantity demanded / % change in income

What is the formula for cross elasticity of demand?

% change in quantity demanded of product X / % change in price of product Y

What does cross elasticity of demand measure?

The responsiveness of the quantity demanded of one good to a change in the price of another good.

formula for price elasticity of supply

% change in quantity supplied / % change in price

Formula for consumer equilibrium

MUx/Px=MUy/Py

What is utility?

the want-satisfying power of a good or service

What is marginal utility?

the benefit gained from consuming one additional unit of a good or service.

What is the law of diminishing marginal utility?

Additional units provide less and less additional utility over a short time period.

What is income effect?

a change in quantity demanded caused by a change in consumer income

what is the substitution effect?

the change in quantity demanded because of the change in the price of the product relative to substitutes.

What does LRAC stand for?

long run average cost curve

Inputs are also known as

factors of production

What is normal profit?

total revenue = total opportunity cost

What are economies of scale?

A situation in which the long-run average cost curve declines as the firm increases output.

What are constant returns to scale?

A situation in which the long-run average cost curve does not change as the firm increases output.

What are diseconomies of scale?

A situation in which the long-run average cost curve rises as the firm increases output.

Formula for economic profit

total revenue - explicit costs - implicit costs

Formula for total cost

fixed cost + variable cost

Formula for average cost

total cost/output

What are explicit costs?

Explicit costs are also called out-of-pocket costs. Explicit costs involve payment of cash and include wages and salaries, office supplies, interest paid on loans, payments to vendors for raw materials, and so forth.

What are implicit costs?

opportunity costs

What is perfect competition?

many competitors; identical product

Formula for profit maximization

MR = MC

What is a price taker?

a buyer or seller who cannot affect the market price

When is it time to shut down?

it is when the price is below minimum average variable cost(AVC)

What are examples of fixed costs?

- rent

- interest on loans

- property insurance premiums

- local and state property taxes

- salaries

- routine wear and tear on machines and other capital goods

what are examples of variable costs?

raw materials and wages

What are the three average cost curves?

1. Average fixed cost

2. Average variable cost

3. Average total cost

what is average fixed cost?

total fixed cost/quantity

what is AVC

average variable cost; TVC/Q

what is average total cost?

total cost/quantity

what is marginal cost?

change in total cost / change in quantity

what is a fixed input?

an input whose quantity is fixed for a period and cannot be varied

what is variable input?

an input whose quantity the firm can vary at any time