Economics 300 Exam 2

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Perfect elastic demand curve is
is horizontal
price elasticity changes along a
along a staright-line demand curve
what is the formula for the price elasticity of demand?
Q2-Q1/Q2+Q1/
P2-P1/P2+P1
If elasticity demand is >1, you have a what?
elastic demand
if elasticity demand is <1, what?
inelastic demand
if elasticity demand =1, what?
unitary elastic demand
if elasticity demand=inf, what?
perfectly elastic
if elasticity demand=0, what?
perfectly inelastic
if the percentage change in quantity demanded of a good increases by less than the percentage change in the change in the price of the good,
then the demand for the good is inelastic
when demand for good is inelastic, a price increase of a good will result in
an increase in total revenue
when demand is elastic, a decrease in price causes an increase in
total revenue
Along the elastic range of a demand curve, price changes cause
total revenue to change in the opposite direction.
A vertical demand curve is
perfectly inelastic
Economists focus on
the absolute value of the elasticity of demand
elasticity refers to
responsiveness
Governments examine elasticity of demand to estimate
how changes in excise tax rates affect their tax revenues.
Elasticity of demand becomes _____ over time
greater over time
The fewer the number of substitutes for a good
the lower is its elasticity of demand.
payments to non owners of a firm for their resources
explicit costs
the opportunity costs of using resources owned by a firm
implicit costs
formula for economic profit
total revenue -(explicit and implicit costs)
A normal profit refers to
a zero economic profit.
any resource for which the quantity cannot change during the period of time under consideration. ex: size of plant
fixed input
anyresource for which the quantity can change during the period of time under consideration. ex: workers hired
variable input
In the long run, all costs are
variable.
change in output produced by adding 1 unit of variable input
marginal product
formula for marginal product
change in output/
change in input
Marginal product rises when
marginal cost falls
costs that do not vary as output varies and that must be paid even if output is zero ex: rent
Total Fixed costs(TFC)
costs that are zero when output is zero and vary as output varies. ex: raw materials
total variable costs(TVC)
formula for average fixed cost(AFC)
TFC/Q
formula for average variable cost(AVC)
TVC/Q
formula for Average total cost?
TC/Q or AFC+AVC
change in total cost when one additional unit of output is produced
marginal cost
formula for marginal costs
change in TC/ change in Q
A firm's average fixed cost curve is never
U-shaped
One measures an implicit cost through the
application of the opportunity cost principle
The law of diminishing returns implies that the marginal product of the variable input
will eventually fall in the short run
from top to bottom on graph, where if MC, ATC, AVC, and AFC located
MC is a u, then ATC, AVC, and AFC
The point of inflection on the TVC curve corresponds to
the minimum point on the MC curve.
There are no fixed costs in
the long run
Economies of scale are present over the range of output where
the LRAC curve is falling
Dis-economies of scale are mainly caused by
the difficulties in managing a large eneterprise
A Competetive firm will sell nothing at prices
above the market price.
A firm can increase its profits by
increasing its output beyond one at which MR>MC.
A competitive firm's short run supply curve is
its marginal cost curve above its AVC curve
A perfectly Competitive firm may have any one of three
possible long run supply curves
Perfect competition is characterized by
many small sellers, a homogeneous or identical product and freedom of entry of entry or exit.
In Competition ,P=
MR for each firm.
To maximize profit, a competitive firm must sell where
P(MR)=MC
Profit(NR)=TR-TC
(remember STC=TFC+TVC)
In long-run equilibrium, the competitive firm has no incentive to change
output, plant size, or enter or leave the industry.
formula for a firm maximizing profits
MR=MC
formula for when a firm will shut down int he short run
P=AVC
Formula where a firm will break even
P=ATC
In long-run equilibrium, a competitive firm produces
where short-run and long-run AC are minimized.
A permanent increase in the demand for the product of a competitive firm will lead to
new entry and temporarily higher profits.
In long-run equilibrium for a competitive industry, firms make
normal profits (zero economic profits).
economic profit
is equal to Total Revenue minus both Explicit and Implicit cost.
normal profit
the minimum profit necessary to keep a firm in operation
short run (SR)
a period of time so short that there is at least one fixed input
long run (LR)
A period of time so long that all inputs are variable
Production Function
the relationship b/w the maximum amounts of output that a firm can produce and various quantities of inputs.
Law of diminishing returns
the principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor .
Total Cost (TC)
the sum of total fixed cost and total variable cost at each level of output.
TC = TFC + TVC
Long Run Average Cost Curve (LRAC)
The curve that traces the lower cost per unit at which a firm can produce any level of output when the firm can build any desired plant size. (firm's planning curve)
Constant Returns to scale
A situation in which the long run average cost curve does not change as the firm increase output.
Dis-economies of scale
situation in which the long run average cost curve rises as the firm increases output.
Market Structure
Consist of 3 market characteristics: (1) the number of sellers, (2) the nature of the product, and (3) the ease of entry into or exit from the market.
Perfect Competition
is a market structure in which an individual firm cannot affect the price of the product it produces .
Barrier to entry
Any obstacle that makes it difficult for a new firm to enter a market.
Price taker
A seller that has no control over the price of the product it sells
Marginal Revenue (MR)
The change in total revenue from the sale of one additional unit of output.
MR = change in total revenue / change in output
Perfectly Competitive firm's SR supply curve
the firm's marginal cost curve above the minimum point on its average variable cost curve