micro #2 test

Q: Inelastic demand: < 1

1. The percent change in quantity is less than the percent change in price. (Quantity changes less than price.) 2. Steeper (more vertical) demand curve 3. If the elasticity is less than 1, businesses can increase revenue by increasing price. 4. Governments tend to tax non-elastic products because the additional cost added by the tax will not greatly reduce sales.

question

Price elasticity of demand

answer

How sensitive changes in quantity demanded are to changes in price

question

Calculating elasticity

answer

At the most basic, it's percent change in quantity over percent change in price
Midpoints formula
(examples on notes)

question

Classifications of elasticity

answer

...

question

Inelastic demand: < 1

answer

1. The percent change in quantity is less than the percent change in price. (Quantity changes less than price.)
2. Steeper (more vertical) demand curve
3. If the elasticity is less than 1, businesses can increase revenue by increasing price.
4. Governments tend to tax non-elastic products because the additional cost added by the tax will not greatly reduce sales.

question

Elastic demand: > 1

answer

1. Quantity changes more than price.
2. Flatter (more horizontal) demand curve
3. If prices raised, quantity falls by a greater percentage and total revenue declines.

question

Unitary elastic: = 1

answer

1. Equal percentage changes in price and quantity
2. Revenue remains constant as move along the demand curve
3. This requires a non-linear demand curve

question

Perfectly elastic: = infinity

answer

Quantity demanded falls to zero with even the slightest change in price. Demand curve is horizontal.

question

Perfectly inelastic: = 0

answer

Quantity demanded does not respond at all to price changes. Demand curve is vertical.
The degree of elasticity changes as you move along a demand curve, even though the slope is constant.

question

Determinants of elasticity

answer

...

question

Availability of substitutes

answer

Can depend on how specifically you define a market

question

Necessity versus luxury

answer

Necessity less elastic: Think groceries versus restaurants

question

Fraction of buyer's budget

answer

10% increase in a cup of coffee not the same as 10% increase in college tuition

question

Short-term vs. long-term

answer

Can adjust how much driving you do more in the long-term than in the short-term if gas prices rice

question

Production costs

answer

...

question

Basic assumption of economics:

answer

The motivation for business decisions is profit maximization.

question

Profit maximization best explains why firms do what they do

answer

Particularly, why they choose a particular price and output.
In simple terms, why they choose to make certain things and how much to make.

question

Explicit versus implicit costs

answer

...

question

Explicit costs:

answer

Payments to non-owners of a firm for their resources

question

Implicit costs:

answer

The opportunity costs of using resources owned by the firm

question

Economic and accounting profit

answer

...

question

Accounting profit:

answer

Total revenue minus total explicit cost

question

Economic profit:

answer

Total revenue minus explicit and implicit costs

question

Normal profit:

answer

Minimum profit needed to keep a firm in operation
- Equals zero economic profit

question

Short run versus long run

answer

...

question

Distinction depends on the ability to vary the quantity of inputs or resources used in production

answer

1. So in the short-run, for example, your factory machinery (capital) would be fixed; you could hire more workers, but they would only have the same amount of equipment to use.
2. In the long-run, you could build new factories and buy more equipment.

question

Fixed input

answer

Quantity cannot change during the short run

question

Variable input

answer

Quantity can change during the short run
i. Could vary workers hired during a year, or change the amount of raw materials used in production

question

Long run:

answer

Period of time when there is at least one fixed input
i. New factory built or new company enter the industry

question

Production function:

answer

The relationship between the maximum amounts of output a firm can produce and various quantities of inputs

question

Marginal product

answer

Change in total output produced by adding one unit of input, ceteris paribus
i. So how much does production increase when you add one more worker?
ii. Initially the marginal product is increasing but then falls because of diminishing marginal returns

question

Law of diminishing marginal returns:

answer

Marginal product decreases as additional units of a variable factor are added to a fixed factor

question

Total cost curves

answer

...

question

Total fixed cost:

answer

Cost that do not change as output changes
i. Must be paid even if output is zero

question

Total variable cost:

answer

Cost that are zero when output is zero and increase as output changes
Example: Hourly wages, electricity, fuel, raw materials

question

Total cost =

answer

Total fixed cost plus total variable cost

question

Average cost curves

answer

...

question

Average fixed cost:

answer

Total fixed cost divided by output
i. TFC/Q
ii. Fixed numerator divided by an ever-increasing denominator, so it's constantly falling as production increases

question

Average variable cost:

answer

Total variable cost divided by output
i. TVC/Q
ii. U-shaped: falls at first, then rises

question

Average total cost:

answer

Total cost divided by output
i. TC/Q
ii. Or AFC + AVC

question

Marginal cost curve

answer

a. Change in total cost when one additional unit of output is produced Or Change in TC/ Change in Q
b. The marginal cost curve intersects both the AVC and ATC curves at their minimums.

question

Long-run average costs

answer

...

question

Least cost rule

answer

To produce any given level of output, a firm will choose the input mix with the lowest cost.

question

Not pick the least possible cost:

answer

That's always to not produce anything and go out of business!
Rather any given level of output should be produced at the lowest cost you can do it

question

In the long run, companies consider the mix of capital and labor that allows them to produce what they want at the lowest possible price:

answer

i. The relative price of capital and labor is the deciding factor on which to use.
ii. As labor costs increase, capital like robotics are more attractive to a business.

question

Economies of scale: LRAC declines as the firm increases output

answer

So cost per unit is going down as produce more units

question

Better division of labor and specialization

answer

i. As a firm expands, having more workers allows managers to break a job into small tasks
ii. Each worker, including managers, can specialize by mastering narrowly defined tasks

question

Flat portion of LRAC
i. Constant returns to scale

answer

i. Believed to be shape of many real-world industries
ii. Same average cost per unit as you produce more

question

Upward-sloping portion of LRAC

answer

Diseconomies of scale
viii.Costs more per unit as make more units
As the firm grows, the chain of command lengthens, communication becomes more complex, too bureaucratic and operations bog down

question

Three characteristics of perfect competition

answer

Large number of small firms
Homogenous product
Easy entry and exist
Although few markets have exactly these characteristics, many markets generally have these attributes to some degree.

question

Short-run profit maximization for a perfectly competitive firm

answer

...

question

Because the firm is a price taker, the firm only has control over how much to produce.

answer

Specifically, what output maximizes profit at the going price?

question

Total revenue minus total cost is maximized

answer

Profits are maximized when the gap between total revenues and total costs is largest

question

Marginal revenue equals marginal cost

answer

Profits are also maximized when the cost of producing one more unit is equal to what money you'll get for selling one more unit
Marginal revenue is a horizontal line at the market price for a perfectly competitive firm

question

Short-run supply curves

answer

i. Perfectly competitive firm's short-run supply curve: A firm's marginal cost curve above the minimum point on its average variable cost curve
ii. Firm can earn an economic profit in the short run at equilibrium

question

Long-run supply curves

answer

...

question

In the long run, firms can change any input like plant size, can leave an industry if there are losses, or enter an industry if there are profits

answer

Entry and exit of firms is the key to long-run equilibrium

question

New firms shifts the short-run supply curve to the right

answer

This causes the price to fall
Economic profits equal zero in the long run

question

If firms exit because of losses, this shifts the short-run supply curve to the left

answer

This causes prices to rise
The economic loss turns into zero economic profit

question

In summary, in the long-run equilibrium is P = MR = SRMC = SRATC = LRAC

answer

Neither positive economic profits to attract new entrants nor negative economic profits (losses) to cause firms to shut down
Maximum efficiency is achieved
Lowest price is available to consumers

question

Market structure: Classification structure for key traits of a market

answer

Characteristics of perfect competition
Large number of firms
Homogenous product
Ease of entry and exit

question

Explain short-run profit maximization

answer

Goal: Maximize profits: TR-TC
Price taker: Must take market price because homogenous product
Production decision: So deciding how much to produce is the key
Marginal choice: If can make more profit from producing one more unit, will do so
MR = MC If will make less if produce one more unit, won't do so

question

Explain long-run competitive equilibrium

answer

No barriers: If profits being made, there's nothing stopping new companies from coming in and getting a slice.
Supply jumps: This increases the supply, causing the price to fall.
Equilibrium at zero economic profits.
Opposite if losing money: Firms close, supply falls, prices increase, erasing losses, and finally stop at zero economic profits.

question

Why do competitive firms stay in business if they make zero profit?

answer

Profit = TR - TC
Total cost includes all opportunity costs
Zero-profit equilibrium is where there is zero economic profit but positive accounting profit
i. Make just enough money where it's not worth it for you to quit and get into another line of work

question

Perfect competition from society's perspective:

answer

...

question

pros

answer

1. Firms produce in long-run at zero economic profits, where price equals average total cost. That is, prices are at the lowest possible level for consumers.
2. P = MC implies an efficient allocation of resources: You wouldn't be better off using your resources in any other way; you're getting the most out of them that you can.
i. Output produced at the lowest possible cost to society.
ii. This is efficiency.

question

Con

answer

Competitive markets rarely promote technological process because there are no barriers from competitors using what you do, giving little profit incentive to innovate.

question

Four-step procedure for analyzing each of the four market types. First, perfect competition:

answer

1. What does demand look like from a business's perspective?
i. Horizontal line: Price taker.
2. What is profit-maximizing quantity of output?
ii. MR=MC at lowest possible point of average total cost
3. Given profits (or losses) in the short-term, what is the long-run equilibrium?
iii. Firms enter (or exit), leading to zero economic profit.
4. Pros and cons from society's perspective?
iiii. Low cost and efficient but not innovative.

1 of 67

question

Price elasticity of demand

answer

How sensitive changes in quantity demanded are to changes in price

question

Calculating elasticity

answer

At the most basic, it's percent change in quantity over percent change in price
Midpoints formula
(examples on notes)

question

Classifications of elasticity

answer

...

question

Inelastic demand: < 1

answer

question

Elastic demand: > 1

answer

1. Quantity changes more than price.
2. Flatter (more horizontal) demand curve
3. If prices raised, quantity falls by a greater percentage and total revenue declines.

question

Unitary elastic: = 1

answer

1. Equal percentage changes in price and quantity
2. Revenue remains constant as move along the demand curve
3. This requires a non-linear demand curve

question

Perfectly elastic: = infinity

answer

Quantity demanded falls to zero with even the slightest change in price. Demand curve is horizontal.

question

Perfectly inelastic: = 0

answer

Quantity demanded does not respond at all to price changes. Demand curve is vertical.
The degree of elasticity changes as you move along a demand curve, even though the slope is constant.

question

Determinants of elasticity

answer

...

question

Availability of substitutes

answer

Can depend on how specifically you define a market

question

Necessity versus luxury

answer

Necessity less elastic: Think groceries versus restaurants

question

Fraction of buyer's budget

answer

10% increase in a cup of coffee not the same as 10% increase in college tuition

question

Short-term vs. long-term

answer

Can adjust how much driving you do more in the long-term than in the short-term if gas prices rice

question

Production costs

answer

...

question

Basic assumption of economics:

answer

The motivation for business decisions is profit maximization.

question

Profit maximization best explains why firms do what they do

answer

Particularly, why they choose a particular price and output.
In simple terms, why they choose to make certain things and how much to make.

question

Explicit versus implicit costs

answer

...

question

Explicit costs:

answer

Payments to non-owners of a firm for their resources

question

Implicit costs:

answer

The opportunity costs of using resources owned by the firm

question

Economic and accounting profit

answer

...

question

Accounting profit:

answer

Total revenue minus total explicit cost

question

Economic profit:

answer

Total revenue minus explicit and implicit costs

question

Normal profit:

answer

Minimum profit needed to keep a firm in operation
- Equals zero economic profit

question

Short run versus long run

answer

...

question

Distinction depends on the ability to vary the quantity of inputs or resources used in production

answer

question

Fixed input

answer

Quantity cannot change during the short run

question

Variable input

answer

Quantity can change during the short run
i. Could vary workers hired during a year, or change the amount of raw materials used in production

question

Long run:

answer

Period of time when there is at least one fixed input
i. New factory built or new company enter the industry

question

Production function:

answer

The relationship between the maximum amounts of output a firm can produce and various quantities of inputs

question

Marginal product

answer

question

Law of diminishing marginal returns:

answer

Marginal product decreases as additional units of a variable factor are added to a fixed factor

question

Total cost curves

answer

...

question

Total fixed cost:

answer

Cost that do not change as output changes
i. Must be paid even if output is zero

question

Total variable cost:

answer

Cost that are zero when output is zero and increase as output changes
Example: Hourly wages, electricity, fuel, raw materials

question

Total cost =

answer

Total fixed cost plus total variable cost

question

Average cost curves

answer

...

question

Average fixed cost:

answer

Total fixed cost divided by output
i. TFC/Q
ii. Fixed numerator divided by an ever-increasing denominator, so it's constantly falling as production increases

question

Average variable cost:

answer

Total variable cost divided by output
i. TVC/Q
ii. U-shaped: falls at first, then rises

question

Average total cost:

answer

Total cost divided by output
i. TC/Q
ii. Or AFC + AVC

question

Marginal cost curve

answer

a. Change in total cost when one additional unit of output is produced Or Change in TC/ Change in Q
b. The marginal cost curve intersects both the AVC and ATC curves at their minimums.

question

Long-run average costs

answer

...

question

Least cost rule

answer

To produce any given level of output, a firm will choose the input mix with the lowest cost.

question

Not pick the least possible cost:

answer

That's always to not produce anything and go out of business!
Rather any given level of output should be produced at the lowest cost you can do it

question

In the long run, companies consider the mix of capital and labor that allows them to produce what they want at the lowest possible price:

answer

i. The relative price of capital and labor is the deciding factor on which to use.
ii. As labor costs increase, capital like robotics are more attractive to a business.

question

Economies of scale: LRAC declines as the firm increases output

answer

So cost per unit is going down as produce more units

question

Better division of labor and specialization

answer

i. As a firm expands, having more workers allows managers to break a job into small tasks
ii. Each worker, including managers, can specialize by mastering narrowly defined tasks

question

Flat portion of LRAC
i. Constant returns to scale

answer

i. Believed to be shape of many real-world industries
ii. Same average cost per unit as you produce more

question

Upward-sloping portion of LRAC

answer

Diseconomies of scale
viii.Costs more per unit as make more units
As the firm grows, the chain of command lengthens, communication becomes more complex, too bureaucratic and operations bog down

question

Three characteristics of perfect competition

answer

Large number of small firms
Homogenous product
Easy entry and exist
Although few markets have exactly these characteristics, many markets generally have these attributes to some degree.

question

Short-run profit maximization for a perfectly competitive firm

answer

...

question

Because the firm is a price taker, the firm only has control over how much to produce.

answer

Specifically, what output maximizes profit at the going price?

question

Total revenue minus total cost is maximized

answer

Profits are maximized when the gap between total revenues and total costs is largest

question

Marginal revenue equals marginal cost

answer

question

Short-run supply curves

answer

question

Long-run supply curves

answer

...

question

In the long run, firms can change any input like plant size, can leave an industry if there are losses, or enter an industry if there are profits

answer

Entry and exit of firms is the key to long-run equilibrium

question

New firms shifts the short-run supply curve to the right

answer

This causes the price to fall
Economic profits equal zero in the long run

question

If firms exit because of losses, this shifts the short-run supply curve to the left

answer

This causes prices to rise
The economic loss turns into zero economic profit

question

In summary, in the long-run equilibrium is P = MR = SRMC = SRATC = LRAC

answer

Neither positive economic profits to attract new entrants nor negative economic profits (losses) to cause firms to shut down
Maximum efficiency is achieved
Lowest price is available to consumers

question

Market structure: Classification structure for key traits of a market

answer

Characteristics of perfect competition
Large number of firms
Homogenous product
Ease of entry and exit

question

Explain short-run profit maximization

answer

question

Explain long-run competitive equilibrium

answer

question

Why do competitive firms stay in business if they make zero profit?

answer

question

Perfect competition from society's perspective:

answer

...

question

pros

answer

question

Con

answer

Competitive markets rarely promote technological process because there are no barriers from competitors using what you do, giving little profit incentive to innovate.

question

Four-step procedure for analyzing each of the four market types. First, perfect competition:

answer

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micro #2 test

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