Macroeconomics

What is a direct relationship

a positive relationship where both variables move in the same direction

How is a direct relationship shown on a graph?

Upward sloping line or curve

What is an inverse relationship?

a negative relationship where variables move in oppositve directions

How is an inverse relationship shown on a graph?

Downward sloping line or curve

What is slope?

the ratio of the change in the vertical variable to the change in the horizontal variable

Formula for slope?

Change in Y / change in X (rise/run)

What is an independent relationship?

one variable changes while the other stays constant

How is an independent relationship shown on a graph

a horizontal line

What is a three variable relationship in a graph?

a curve that shifts when a third variable (not on either axis) changes

What causes movement along a curve

a change in a variable on oen of the axes

What causes a shift of a curve

a change in a variable not on either axis

What causes a shift of a curve

a change in a variable not on either axis

Helpful rule for graphs?

Direct = upward slope; inverse = downward slope

What is price elasticity of demand?

The ratio of the percentage change in quantity demanded to the percentage change in price

Formula for price elasticity of demand?

Ed = 5change Q/ % change P

Why do we use the midpoint formula?

It avoids different elasticity values depending on direction of movement along the curve

When is demand elastic?

Ed > 1

Effect on total revenue when demand is elastic and price falls

Total revenue increases

When is demand inelastic?

Ed < 1

Effect on total revenue when demand is inelastic and price falls?

Total revenue decreases

When is demand unitary elastic

Ed = 1

Effect on total revenue when demand is unitary elastic?

Total revenue stays the same

What is perfectly elastic demand?

A tiny price changes causes an infinite change in quantity demanded

What is perfectly inelastic demand?

quantity demanded does not change when price changes

Determinants of elasticity

availability of substitutes

share of budget

time to adjust

How do substitutes affect elasticity?

More substitutes → more elastic demand

How does budget share affect elasticity?

Larger share of budget → more elastic demand

How does time affect elasticity?

More time → more elastic demand

Does elasticity vary along a linear demand curve?

Yes - elastic at high prices, inelastic at low prices

What is income elasticity of demand?

% change of Q/ % change income

What does a positive income elasticity indicate?

Normal good

What does a negative income elasticity indicate?

Inferior good

What is cross elasticity of demand

% change Q of one good / % change P of another good

Positive cross elasticity means?

Goods are substitutes

Negative cross elasticity means?

Goods are complements

What is price elasticity of supply?

% change Qs / % change P

When is supply elastic

ES > 1

When is supply inelastic?

Es < 1

What determines elasticity of supply?

How easily producers can change output

What is a demand curve?

A curve showing quantities consumers are willing to buy at various prices, ceteris paribus

What is the law of demand?

Price increase → Quantity demanded down (inverse relationship)

Why does the demand curve slope downward?

Because lower prices increase purchasing ability and willingness to buy

What is market demand?

The horizontal sum of all individual demand curves

What causes a change in quantity demanded?

A change in price → movement along the demand curve

What is a change in demand?

A shift of the entire demand curve due to non price determinants

Non - Price determinants of demand?

Numver of buyers, tastes/ preferences, income, expectations, prices of related goods

What is a normal good?

A good for which demand increases when income increases

What is an inferior good

A good for which demand decreases when income increases

What is a substitute good?

A good that competes with another; price up of one → demand up for the other

What is a complementary good?

A good consumed with another; price up of one → demand down for the other

What is a supply curve?

A curve showing quantities sellers are willing to produce at various prices

What is the law of supply?

Price up → quantity supplied up (direct relationship)

Why does the supply curve slope upward?

Higher prices give producers incentive to supply more

What is market supply?

The horizontal sum of all individual supply curves

What causes a change in quantity supplied?

A change in price → movement along the supply curve

What is a change in supply?

A shift of the entire supply curve due to non - price determinants

Non - price determinants of supply?

Number of sellers

Technology

Resource prices

Expectations

Prices of other goods

What is a market?

Any arrangement where buyers and sellers interact

What is a surplus

Quantity supplied > quantity demanded at a given price

What happens to price during a surplus

Downward pressure on price

What is a shortage?

Quantity demanded> quantity supplied at a given price

What happens t oprice during a shortage?

Upward pressure on price

What is equilibrium

The price and quantity where Qd = Qs

What happens when demand increases (supply constant)?

Price increase, Quantity increase

What happens when demand decreases (supply constant)

Price decrease, quantity decrease

What happens when supplly increases (demand constant)?

Price decrease, quantity increase

What happens when supply decrease (demand constant)?

Price increases, quantity decrease

What happens when both demand and supply shift?

Price effect depends on relative shift sizese

Quantity effect depends on relative shift sizes

What happesn when both demand and supply shift?

Price effect depends on relative shift sizes

Quantity effect depends on relative shift sizes

What is the key rule ofr analyzing shifts?

Demand shift → price and quantity move in same direction

Supply shift → price and quantity move in opposite directions

What is consumer surplus

The difference between what consumers are willing to pay and what they actually pay

Where is consumer surplus on a graph

The area under the demand curve and above the equilibrium price

What is producer surplus

The difference between the price producers receive and the minimum price they are willing to accept

Where is producer surplus on a graph ?

The area above the supply curve and below the equlibrium price

Where are competitive markets efficient?

They maximize the sum of consumer and producer surplus

What is deadweight loss?

The loss of total surplus from underproduction or overproduction

What causes deadweight loss?

Producing too little or too much relative to the efficient equilibrium quantity

What does deadweight loss represent?

The dollar value of potential benefits that society misses out on due to inefficiency

What happens to total surplus at equilibrium

It is maximized - no deadweight loss

What happens when output is below equilibrium

Underproduction → deadweight loss on the left of equilibrium

What happens when output is above equilibrium?

Overproduction → deadweight loss on the right of equilibrium

What are the explicit costs?

Payments to non - owners for resources (wages, rent, materials)

What are implicit costs?

Oppurtunity costs of using resources the firm already owns

Formula for accounting profit?

Total revenue - explicit costs

Formula for economic profit?

Total revenue - (explicit + implicit costs)

Why is economic profit more useful for decisions?

It includes oppurunity costs, giving a full picture of trade - offs

What is normal profit?

Zero economic profit; revenue covers all oppuruntiy costs

What is fixed input?

An input cannot change in the short run

What is a variable input?

An input that can change in the short run

What is the short run?

A period where at least one input is fixed

What is the long run?

A period where all inputs are variable

What is the production function?

The relationshp between inputs and maximum output

What is marginal product?

Change in output from adding one more unit of input

Wha tis the law of diminshing returns?

MP eventually decreases as more variable input is added to a fixed input

What is total fixed cost (TFC)?

Costs that do not change with output

What is the total variable cost (TVC)?

Costs that change with output

Formula for total cost (TC)?

TC = TFC + TVC

What is average fixed cost (AFC)?

TFC / Q

What is the average variable cost (AVC)?

TVC / Q

What is the average total cost (ATC)?

ATC = Tc / Q = AFC + AVC