Microeconomics Midterm 2

Q: Cross price elasticity of substitute, compliment, and unrelated goods

- substitute: as price of coffee increases, demand for tea increases (cross-price elasticity > 0) - compliment: as price of gas increases, demand for cars decrease (cross-price elasticity < 0) - unrelated goods: cross price elasticity = 0

question

inelastic demand

answer

when demand or quantity supplied isn't sensitive to a change in price good

question

elastic demand

answer

when the demand or quantity supplied changes significantly due to a change in the price of good

question

what does a perfectly elastic supply curve look like?

answer

straight, horizontal line

question

What does a perfectly inelastic supply curve look like?

answer

straight, vertical line

question

What is the formula for calculating Price elasticity of supply? (responsiveness of quantity supplied to a price change) aka fancy E

answer

percent change in quantity supplied / percent change in price
(Q2-Q1 (P2-P1
Q1+Q2 /2) P1+P2 /2) then divide these percent changes

question

Which is inelastic, unitelastic, or elastic?
- Price Elasticity < 1
- Price Elasticity = 1
- Price Elasticity > 1

answer

- Inelastic
- Unitelastic
- Elastic

question

income elasticity of demand & formula

answer

a measure of how much the quantity demanded of a good respond to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

% change in D / % change in income

question

What is the trend of demand when income increases/ decreases for a normal and inferior good?

answer

Normal good:
- as income increases, demand increases
- as income decreases, demand decreases
{income elasticity > 0}

Inferior good:
- as income increases, demand decreases
- as income decreases, demand increases
{income elasticity < 0}

question

Cross price Elasticity of Demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good,

formula: % change in demand / % change in price

question

Cross price elasticity of substitute, compliment, and unrelated goods

answer

- substitute: as price of coffee increases, demand for tea increases (cross-price elasticity > 0)

- compliment: as price of gas increases, demand for cars decrease (cross-price elasticity < 0)

- unrelated goods: cross price elasticity = 0

question

Definition of marginal utility

answer

Measure of additional satisfaction you get from consuming an additional good

question

Law of diminishing marginal utility

answer

rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

question

Definition of total utility

answer

total satisfaction an individual gets after each good is purchased (keep in mind that while total utility is increasing, marginal will be decreasing yet may still be positive until TU decreases)

ex. after purchasing the third scoop of ice cream, an individual's total utility may have shifted from 8 to 10, causing marginal utility to change from 4 to 2, for instance

question

consumer equilibrium

answer

point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.

also known as utility maximization

question

location of consumer & producer surplus @ market equilibrium

answer

consumer surplus - lefthand upper triangle from equilibrium point (difference between what consumers are willing to pay for a good and what they actually pay when buying it)

producer surplus - lefthand bottom triangle from equilibrium point (area above supply curve & sum of the difference between the market price of the good and marginal cost of the good for all suppliers)

question

implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

ex. time it takes to train an employee, opting for starting one's own business (implicit cost is salary of previous job)

question

explicit costs

answer

Cost involving monetary payment a firm makes to its factors of production and other suppliers.

ex. employee wages, equipment

question

sunk cost (and sunk cost fallacy)

answer

costs that have already happened and cannot be recovered. Sunk costs are excluded from future decisions because the cost will be the same regardless of the outcome

SCF: when a firm takes into account sunk costs when making a decision

question

accounting profit and how to calculate it

answer

the revenue a firm makes, taking into account the monetary resources (explicit costs) it has spent.

formula: Total Revenue - explicit costs

Accounting profit will always be greater than Economic profit

question

economic profit and how to calculate it

answer

the revenue a firm makes taking into account BOTH explicit costs and implicit costs

formula: TR - explicit costs - implicit costs OR
Accounting profit - implicit costs

Economic profit will always be less than Accounting profit

question

fixed cost

answer

a cost that does not change as output is increased or decreased /

ex. mortgage

question

variable cost

answer

production cost that varies as output changes; labor, energy, raw materials

question

Law of Diminishing Marginal Returns

answer

When the more units of capital you add brings a firm less additional return

ex. A pizza shop purchasing an additional pizza oven where each continuous oven bought leads to a decrease in marginal return

question

marginal product of labor

answer

Change in production output/change in input labor This can help a company determine if a new employee has a positive effect on production or if a new piece of equipment increases production output

question

how to calculate fixed cost and variable cost

answer

fixed:

variable:

question

Average Variable Cost equation

answer

total variable cost per unit produced by a company

AVC = VC/Q

question

Average Total Cost

answer

ATC = TC/Q or VC+FC or AVC+AFC
--------
Q

question

Short Run Costs

answer

Usually smaller and less easy to change due to fixed inputs. Example: small shipments of materials.

It is the period in which some factors are held constant and some are variable. Since the short-run costs are closely related to short-run productivity, for each measure of short-run productivity, there is a counterpart. Just as there are variable and fixed inputs, there are also fixed and variable costs. In short, Cost is the reciprocal of productivity.

question

Long Run Costs

answer

all costs are variable, no fixed costs

question

economies of scale

answer

forces that reduce a firm's average cost as the scale of operation increases in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

perfectly competitive market

answer

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

question

Shape of the demand curve in perfect competition

answer

horizontal line because it is equal to the equilibrium price of the entire market, perfectly elastic

question

how to calculate marginal revenue

answer

change in total revenue / change in quantity

question

how to calculate average revenue

answer

total revenue/quantity

question

Monopoly

answer

Only one seller and many buyers, barriers to entry are low

question

long run/short run in perfect competition

answer

long run: firms enter/exit the market, adjust scale of operations until economic profit is 0, all resources are variable

short run: attracts new firms to enter the market

1 of 37

question

inelastic demand

answer

when demand or quantity supplied isn't sensitive to a change in price good

question

elastic demand

answer

when the demand or quantity supplied changes significantly due to a change in the price of good

question

what does a perfectly elastic supply curve look like?

answer

straight, horizontal line

question

What does a perfectly inelastic supply curve look like?

answer

straight, vertical line

question

What is the formula for calculating Price elasticity of supply? (responsiveness of quantity supplied to a price change) aka fancy E

answer

percent change in quantity supplied / percent change in price
(Q2-Q1 (P2-P1
Q1+Q2 /2) P1+P2 /2) then divide these percent changes

question

Which is inelastic, unitelastic, or elastic?
- Price Elasticity < 1
- Price Elasticity = 1
- Price Elasticity > 1

answer

- Inelastic
- Unitelastic
- Elastic

question

income elasticity of demand & formula

answer

question

What is the trend of demand when income increases/ decreases for a normal and inferior good?

answer

question

Cross price Elasticity of Demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good,

formula: % change in demand / % change in price

question

Cross price elasticity of substitute, compliment, and unrelated goods

answer

question

Definition of marginal utility

answer

Measure of additional satisfaction you get from consuming an additional good

question

Law of diminishing marginal utility

answer

rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

question

Definition of total utility

answer

question

consumer equilibrium

answer

question

location of consumer & producer surplus @ market equilibrium

answer

question

implicit costs

answer

question

explicit costs

answer

Cost involving monetary payment a firm makes to its factors of production and other suppliers.

ex. employee wages, equipment

question

sunk cost (and sunk cost fallacy)

answer

question

accounting profit and how to calculate it

answer

question

economic profit and how to calculate it

answer

question

fixed cost

answer

a cost that does not change as output is increased or decreased /

ex. mortgage

question

variable cost

answer

production cost that varies as output changes; labor, energy, raw materials

question

Law of Diminishing Marginal Returns

answer

question

marginal product of labor

answer

Change in production output/change in input labor This can help a company determine if a new employee has a positive effect on production or if a new piece of equipment increases production output

question

how to calculate fixed cost and variable cost

answer

fixed:

variable:

question

Average Variable Cost equation

answer

total variable cost per unit produced by a company

AVC = VC/Q

question

Average Total Cost

answer

ATC = TC/Q or VC+FC or AVC+AFC
--------
Q

question

Short Run Costs

answer

question

Long Run Costs

answer

all costs are variable, no fixed costs

question

economies of scale

answer

forces that reduce a firm's average cost as the scale of operation increases in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

perfectly competitive market

answer

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

question

Shape of the demand curve in perfect competition

answer

horizontal line because it is equal to the equilibrium price of the entire market, perfectly elastic

question

how to calculate marginal revenue

answer

change in total revenue / change in quantity

question

how to calculate average revenue

answer

total revenue/quantity

question

Monopoly

answer

Only one seller and many buyers, barriers to entry are low

question

long run/short run in perfect competition

answer

long run: firms enter/exit the market, adjust scale of operations until economic profit is 0, all resources are variable

short run: attracts new firms to enter the market

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Microeconomics Midterm 2

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