Microeconomics Midterm 2 - Custom Scholars
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# Microeconomics Midterm 2

question
inelastic demand
when demand or quantity supplied isn't sensitive to a change in price good
question
elastic demand
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?
straight, horizontal line
question
What does a perfectly inelastic supply curve look like?
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
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
- Inelastic
- Unitelastic
- Elastic
question
income elasticity of demand & formula
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?
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
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
- 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
Measure of additional satisfaction you get from consuming an additional good
question
Law of diminishing marginal utility
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
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
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
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
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
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)
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
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
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
a cost that does not change as output is increased or decreased /

ex. mortgage
question
variable cost
production cost that varies as output changes; labor, energy, raw materials
question
Law of Diminishing Marginal Returns
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
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
fixed:

variable:
question
Average Variable Cost equation
total variable cost per unit produced by a company

AVC = VC/Q
question
Average Total Cost
ATC = TC/Q or VC+FC or AVC+AFC
--------
Q
question
Short Run Costs
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
all costs are variable, no fixed costs
question
economies of scale
forces that reduce a firm's average cost as the scale of operation increases in the long run
question
diseconomies of scale
forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
question
perfectly competitive market
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
horizontal line because it is equal to the equilibrium price of the entire market, perfectly elastic
question
how to calculate marginal revenue
change in total revenue / change in quantity
question
how to calculate average revenue
total revenue/quantity
question
Monopoly
Only one seller and many buyers, barriers to entry are low
question
long run/short run in perfect competition
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
when demand or quantity supplied isn't sensitive to a change in price good
question
elastic demand
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?
straight, horizontal line
question
What does a perfectly inelastic supply curve look like?
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
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
- Inelastic
- Unitelastic
- Elastic
question
income elasticity of demand & formula
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?
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
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
- 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
Measure of additional satisfaction you get from consuming an additional good
question
Law of diminishing marginal utility
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
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
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
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
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
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)
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
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
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
a cost that does not change as output is increased or decreased /

ex. mortgage
question
variable cost
production cost that varies as output changes; labor, energy, raw materials
question
Law of Diminishing Marginal Returns
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
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
fixed:

variable:
question
Average Variable Cost equation
total variable cost per unit produced by a company

AVC = VC/Q
question
Average Total Cost
ATC = TC/Q or VC+FC or AVC+AFC
--------
Q
question
Short Run Costs
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
all costs are variable, no fixed costs
question
economies of scale
forces that reduce a firm's average cost as the scale of operation increases in the long run
question
diseconomies of scale
forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
question
perfectly competitive market
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
horizontal line because it is equal to the equilibrium price of the entire market, perfectly elastic
question
how to calculate marginal revenue
change in total revenue / change in quantity
question
how to calculate average revenue
total revenue/quantity
question
Monopoly
Only one seller and many buyers, barriers to entry are low
question
long run/short run in perfect competition
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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