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Economics Test 2
Terms in this set (32)
The sensitivity of one variable to changes in another
Ex: If the price of gasoline rises by ten cents a gallon, how would that affect your gasoline consumption?
Price Elasticity of Demand - ALWAYS NEGATIVE
(If prices changes - what do buyers do?)
εd = (%ΔQd) / (% ΔP)
%ΔQd = ΔQd/Average Qd
%ΔPx = ΔP/Average P
εd = %ΔQ / %ΔP = (ΔQd/AverageQd) / (ΔP/Average P)
Price Elasticity of Supply - ALWAYS POSITIVE
(If price change - what do sellers do?)
εs = (%ΔQs) / (%ΔP)
%ΔQs = ΔQs/Average Qs
%ΔP = ΔP/Average P
εs = %ΔQ / %ΔP = (ΔQs/AverageQs) / (ΔP/Average P)
Buyers are sensitive to a change in price. A slight increase will affect the buyer's consumption of the good significantly.
εd > 1.0
(εd is greater than one)
When the demand is elastic, any change in price has the opposite effect on total revenue (TR is price x quantity sold). Thus, if price is raised, total revenue will fall. If the price is lowered, total revenue increases.
Buyer's are more lenient with changes in price because they really need or want it. A slight or decrease or increase in price will not affect the buyer's consumption of the good.
εd < 1.0
(εd is less than one)
When the demand is inelastic, any change in price has the same effect on total revenue. Thus, a price reduction reduces total revenue, and a price increase will increase total revenue.
Unitary elasticity of Demand
Two points equal distance from the midpoint
εd = 1.0
When the demand is unitary elastic, any change in price had no effect on the total revenue; TR stays constant
Factors that cause the demand for a product to become more INELASTIC:
INELASTIC (curve is almost vertical):
- Few Substitutes
- Little or no time to shop around and compare prices
- Small percent of the budget
(If incomes change - what do buyers do?)
η = %ΔQ / %ΔY
η= (ΔQ/AverageQ) / (ΔY/Average Y)
(where Y = income)
+ = normal good
- = inferior good
Cross Price Elasticity
(If the price of a related good changes - what do buyers do?)
σy,x = %ΔQdy / % ΔPx
* A change in the price of good x affects the purchases (quantity demanded) of good y.
- = complement
+ = substitute
Price Elasticity of Demand on a Straight-Line Demand Curve
Upper half of the demand curve - Demand is Elastic
Εd > 1.0 If P↓ TR↑ If P↑ TR↓
Mid-point of the demand curve - Demand is Unitary elastic
Εd = 1.0 If P↑ or ↓ TR Δ
Lower half of the demand curve - Demand is Inelastic
Εd < 1.0 If P↑ TR↑ If P↓ TR↓
Price Elasticity of Supply
*Typically greater (more elastic) over longer time periods, and can be very inelastic in the short run.
εS < 1.0 "inelastic"
εS > 1.0 "elastic"
εS = 1.0 "unitary elastic"
If the supply curve intersects the price axis it's elastic
If the supply curve intersects the quantity axis its inelastic
If the supply curve intersects in between the price and quantity axis it is unitary elastic
When a company's revenue equals it's costs.
The company is covering all of its explicit costs(out of pocket costs) and still earning a normal return on its investment (normal profit)
A cost that does not change with an increase or decrease in the amount of goods or services produced.
Costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases.
Total Cost of a good or service
The sum of the fixed and variable costs
Economies of scale
Range I on the ATC Curve
-The ATC curve slopes downward
-"Decrease in cost"
-The more you produce the cheaper it is per-unit
*The more you produce the faster and more efficient your production gets
*Distributing fixed costs over a much wider range of output
*Purchase increased quantities of raw materials and obtain volume or quantity discounts, reducing the cost per unit;
*Specialize its labor, giving each worker a narrow range of tasks to perform and allowing them to become proficient in those activities.
Range II on the ATC Curve
-The ATC curve is flat.
-Minimum or lowest range on the curve
-Costs the same amount of money for each additional unit
Diseconomies of scale
Range III on the ATC Curve
-The ATC curve slopes upward
-"Increase in cost"
- As you produce more units the cost per-unit is increasing
Operating at a very high volume you have:
*More equipment breakdowns
*Employee's get stressed out from heavy work load and may create problems by sabotaging the work effort or doing shoddy work
*Long jams in the flow of physical goods
*Too much material coming in; product get jumbled up
The cost of producing one additional unit
The money being made for the business
The pleasure or satisfaction that people enjoy as a result of consuming a product or partaking in an event
The additional or added benefit or enjoyment
Ex:The additional enjoyment we receive for each additional slice of pizza we eat. Thus the marginal utility (MU) of slice #1 is greater than that of slice #2, which is greater than that of slice #3 etc.
When the marginal utility begins to decrease or decline
Ex: Each additional slice of pizza we eat is slightly less enjoyable than the slice before it.
Law of Diminishing Utility
The more you consume of something the less you enjoy each additional unit.
1) Money is subject to the law of DU at some point
2) Relationships are subject to the law of DU
Equation regarding Utility
MUa/Pa = MUb/Pb
Given: Total Fixed Cost and Total Variable Cost
Total Variable Costs
Total Costs (TFC+TVC)
-As the output increases, our ATC decreases
-In the early levels of output, we have a declining range of ATC
-As the total cost declines it reaches a minimum called the productive efficiency point (producing the lowest cost per unit)
-If we expand production beyond the minimum point then our cost per unit begins to increase
-As the curve increases over more output, it gets closer and closer to the ATC Curve
-AVC follows the same pattern as the ATC curve
Average Fixed Cost
The distance between the ATC and AVC Curve for a certain unit of output
-Total fixed cost per unit
-The distance between the two curves gets closer and smaller to represent the fact that the AFC is continually declining
-Hook shaped curve
-Works with a positive slope
-Intersects the lowest point on both the AVC and ATC Curve, and then it continues to climb
Factors that cause the demand for a product to become more ELASTIC:
ELASTIC (demand curve is almost flat):
- Many Substitutes
- A lot of time to shop around and compare prices
- Large percent of the Budget
FACTS ABOUT THE COST CURVE:
-Not all three shapes (economies of scale, constant cost, diseconomies of cost) take place at the same time
1) When ATC is falling, MC is below/less than ATC.
2) When ATC is rising, MC is above/more than ATC.
3) When ATC is at a minimum, ATC = MC.
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