Micro Test 2

  1. What is income elasticitiy of demand?
    • percentage change in quantity demanded / percentage change in people's income
    • + coefficient = normal good
    • - coefficient = inferior good
  2. What is cross elasticity of demand?
    • percentage change in quantity demanded (good A) / percentage change in price (good B)
    • + coefficient = 2 goods are substitutes
    • - coefficient = 2 goods are complimentary
  3. What is price elasticity of supply?
    • percentage change in quantity supplies / percentage change in price
    • over a shorter time period (steep inelastic) limited capacity
    • over a longer period of time (flat elastic) seller can make changees to produce more
  4. Use a supply-demand graph to show how an excise tax would affect the equilibrium proce of a product
    • Supply and Demand curve.
    • Demand curve can shift from perfectly inelastic to a more elastic curve.
    • Depending on the curve depends on how much the buyer pays of the excise tax or the seller pays
  5. How do agricultural price supports work?
    • Consumer pays higher price support
    • Creates surplus
    • Government buys surplus

    Supply and demand curve shows surplus
  6. How do agricultural target prices (direct payments) work?
    • Government promises farmers a target price $2.5
    • consumer pays market price-no surplus $1.5
    • government pays difference $1
  7. Short Run
    Capacity to produce is fixed
  8. Long Run
    Capacity to produce is flexible
  9. What is production function?
    Tells us the physical rellationship between number of variable inputs used and number of output produced

    Example 1 worker(variable input) produces 20 cars(output), 2 worker produce 50 cars
  10. Marginal product of labor(MP)
    Change in output from using one more variable input

    • example 0 worker 0 cars, 1 worker 20 cars MP 20
    • 2 workers 50 cars mp 30
  11. Describe increasing marginal returns.
    • When adding more and more variable inputs into a fixed capacity at first marginal product increases
    • Why? gains from teamwork(specialization)-division of labor
  12. What is the law of diminishing marginal returns?
    • When adding more and more variable inputs into a fixed capacity eventually the increases in production will get smaller.
    • Why? crowding, approaching maximum
  13. Sunk Cost
    • Cost already paid and cannot be changed
    • (should not be used in short-run decisions, irrelevent)
  14. Opportunity Cost
    Value placed on opportunities given up
  15. Total Cost
    Total Cost = Explicit Cost + Implicit Cost
  16. Explicit Cost
    Any cost that involve a dollar payment
  17. Implicit Cost
    Cost implied by giving up an opportunity
  18. Opportunity Cost of Capital
    Return that could have been earned on next best investment opportuntiy
  19. Economic Profit
    Total Revenue - Total Cost
  20. Net Revenue
    Total Revenue - Explicit Cost
  21. Zero Economic Profit
    • Total Revenue - Total cost = 0
    • TR = TC
    • Earning just enough to stay in business
  22. Positive Economic Profit
    • Total Revenue - Total Cost > 0
    • TR > TC
    • Earning more than enough to stay in business
  23. Negative Economic Profit
    • Total Revenue - Total Cost < 0
    • TR < TC
    • Not earning enought to stay in business
  24. Total Fixed Cost
    When production level changes come cost stay the same
  25. Total Variable Cost
    when production level changes some cost will change
  26. Total Cost
    Total variable cost + total fixed cost
  27. Average total cost
    average fixed cost + average variable cost / quantity
  28. Average variable cost
    Total variable cost / quantity
  29. Average Fixed Cost
    Total fixed cost / quantity
  30. Marginal Cost
    change in total cost from producing one more unit
  31. Explain why firms at first experience decreasing marginal cost in the short-run
    increasing marginal return
  32. Explain why firms eventually experience increasing marginal Cost in the short-run
    increasing marginal return
  33. Whe does Average fixed cost continually decrease as output increaes
    Total fixed cost is spread over more units so per unit fixed cost falls
  34. Economies of Scale
    As capacity to produce increase, average total cost decrease (long-run)
  35. Cause of Economies of Scale
    • Quantity discounts on parts
    • certain set cost can be spread over more units
    • greater specialization of management
    • avoid duplicate costs
  36. Constant Returns to Scale
    as capacity to produce increases average total cost stay the same
  37. Diseconomies of Scale
    As capacity to produce increase, average toal cost increase
  38. Cause of Diseconomies of Scale
    • overspecialization of management
    • miscommunication
    • bureauratic
    • overspecialization of labor
  39. Perfect Competition
    • industry consist of large number of small sellers, selling products that are identical
    • Each firms faces a perfectly elasitc demand
    • each firm has no market power
    • each firm takes market price as given
  40. Perfectly Competitive firm
    Single firm selling in a perfect competition
  41. Market Power
    The degree to which a firm can influence its own price
Card Set
Micro Test 2
SG#2 q26-31,SG#3