ECON Midterm II - Custom Scholars
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# ECON Midterm II

question
Elasticity
A measure of how much one economic variable responds to changes in another variable
question
Price Elasticity of Demand
The responsiveness of quantity demanded to a change in price
question
Elastic demand
Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price (E>1)
question
Inelastic demand
Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price (E<1)
question
Unit elastic demand
Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price (E=1)
question
Perfectly elastic demand
The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand=infinity
question
Perfectly inelastic demand
The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand=0
question
Cross price elasticity
The percentage change in quantity demanded of one good divided by the percentage change in the price of another good
- substitutes (E>0)
- complements (E<0)
- unrelated (E=0)
question
Income elasticity of demand
A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income
- normal (E>0)
- necessity (0<E<1)
- luxury (E>1)
- inferior (E<0)
question
When demand curves intersect.....
the flatter curve is more elastic
question
The determinants of price elasticity of demand
- Availability of close substitutes
- Passage of time
- Luxuries vs necessities
- Definition of the market
- Share of the good in consumer's budget
question
When demand is inelastic....
a cut in price will decrease total revenue
question
Elasticity is not....
constant along a linear demand curve
question
Utility
the satisfaction people receive from consuming goods and services
question
Indifference curve
a curve that shows the combination of consumption bundles that give the consumer the same utility
question
Marginal Utility
The change in total utility a person receives from consuming one additional unit of a good or service
question
Law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time (i.e.: the satisfaction from the 1st ice cream vs. the 11th ice cream)
question
Budget constraint
P1Q1+P2Q2=M
The limited amount of income available to consumers to spend on goods and services
question
Utility maximization
MU1/P1 = MU2/P2
Marginal Utility per dollar of each good are equal to each other AND add up to budget
question
A consumption diagram has to have...
both the budget constraint and the indifference curve
question
If the price of a good changes....
put on horizontal axis + the slope of the budget constraint changes
question
Rules for indifference curves
- farther is better
- indefinite number of curves
- indifference curves cannot cross
- indifference curves always slope down
question
Technological change
a change in the ability of a firm to produce a given level of output with a given quantity of inputs
question
short run
the period of time during which at least one of a firm's inputs is fixed (Fixed capital (K) labor is variable)
question
long run
the period in which a firm can vary all its inputs, adopt new technology and increase or decrease the size of its physical plant
question
Total cost
the cost of all inputs a firm used in production (VC+FC)
question
Variable Cost
costs that change as output increases PQ
question
Fixed Cost
costs that remain constant as output changes
question
TC=FC+VC
divide everything by Q to get averages (ATC=AFC+AVC)
question
Production function
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
question
Marginal product of labor
Additional output a firm produces as a result of hiring one more worker
question
Law of diminishing returns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
question
average product of labor
the total output produced by a firm divided by the quantity of workers
question
Marginal cost
the change in a firm's total cost from producing one more unit of a goo or service.
question
Average fixed cost
fixed cost divided by the quantity of output produced
question
average variable cost
variable cost divided by the quantity of output produced
question
constant returns to scale
the situation in which a firm's long-run average costs remain unchanged as it increases output
question
diseconomies of scale
the situation in which a firm's long run average costs rise as the firm increases output
question
economies of scale
a situation in which the average cost of production falls as the firm gets larger and invests more money
question
minimum efficient scale
the level of output at which all economies of scale are exhausted
question
marginal cost has to...
intersect with average total cost at its minimum
1 of 41
question
Elasticity
A measure of how much one economic variable responds to changes in another variable
question
Price Elasticity of Demand
The responsiveness of quantity demanded to a change in price
question
Elastic demand
Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price (E>1)
question
Inelastic demand
Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price (E<1)
question
Unit elastic demand
Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price (E=1)
question
Perfectly elastic demand
The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand=infinity
question
Perfectly inelastic demand
The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand=0
question
Cross price elasticity
The percentage change in quantity demanded of one good divided by the percentage change in the price of another good
- substitutes (E>0)
- complements (E<0)
- unrelated (E=0)
question
Income elasticity of demand
A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income
- normal (E>0)
- necessity (0<E<1)
- luxury (E>1)
- inferior (E<0)
question
When demand curves intersect.....
the flatter curve is more elastic
question
The determinants of price elasticity of demand
- Availability of close substitutes
- Passage of time
- Luxuries vs necessities
- Definition of the market
- Share of the good in consumer's budget
question
When demand is inelastic....
a cut in price will decrease total revenue
question
Elasticity is not....
constant along a linear demand curve
question
Utility
the satisfaction people receive from consuming goods and services
question
Indifference curve
a curve that shows the combination of consumption bundles that give the consumer the same utility
question
Marginal Utility
The change in total utility a person receives from consuming one additional unit of a good or service
question
Law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time (i.e.: the satisfaction from the 1st ice cream vs. the 11th ice cream)
question
Budget constraint
P1Q1+P2Q2=M
The limited amount of income available to consumers to spend on goods and services
question
Utility maximization
MU1/P1 = MU2/P2
Marginal Utility per dollar of each good are equal to each other AND add up to budget
question
A consumption diagram has to have...
both the budget constraint and the indifference curve
question
If the price of a good changes....
put on horizontal axis + the slope of the budget constraint changes
question
Rules for indifference curves
- farther is better
- indefinite number of curves
- indifference curves cannot cross
- indifference curves always slope down
question
Technological change
a change in the ability of a firm to produce a given level of output with a given quantity of inputs
question
short run
the period of time during which at least one of a firm's inputs is fixed (Fixed capital (K) labor is variable)
question
long run
the period in which a firm can vary all its inputs, adopt new technology and increase or decrease the size of its physical plant
question
Total cost
the cost of all inputs a firm used in production (VC+FC)
question
Variable Cost
costs that change as output increases PQ
question
Fixed Cost
costs that remain constant as output changes
question
TC=FC+VC
divide everything by Q to get averages (ATC=AFC+AVC)
question
Production function
the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
question
Marginal product of labor
Additional output a firm produces as a result of hiring one more worker
question
Law of diminishing returns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
question
average product of labor
the total output produced by a firm divided by the quantity of workers
question
Marginal cost
the change in a firm's total cost from producing one more unit of a goo or service.
question
Average fixed cost
fixed cost divided by the quantity of output produced
question
average variable cost
variable cost divided by the quantity of output produced
question
constant returns to scale
the situation in which a firm's long-run average costs remain unchanged as it increases output
question
diseconomies of scale
the situation in which a firm's long run average costs rise as the firm increases output
question
economies of scale
a situation in which the average cost of production falls as the firm gets larger and invests more money
question
minimum efficient scale
the level of output at which all economies of scale are exhausted
question
marginal cost has to...
intersect with average total cost at its minimum

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