Micro Test 2

• percentage change in quantity demanded / percentage change in people's income
• + coefficient = normal good
• - coefficient = inferior good

• percentage change in quantity demanded (good A) / percentage change in price (good B)
• + coefficient = 2 goods are substitutes
• - coefficient = 2 goods are complimentary

• 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

• 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

• Consumer pays higher price support
• Creates surplus
• Government buys surplus

Supply and demand curve shows surplus

• Government promises farmers a target price $2.5
• consumer pays market price-no surplus $1.5
• government pays difference $1

Capacity to produce is fixed

Capacity to produce is flexible

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

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

• When adding more and more variable inputs into a fixed capacity at first marginal product increases
• Why? gains from teamwork(specialization)-division of labor

• When adding more and more variable inputs into a fixed capacity eventually the increases in production will get smaller.
• Why? crowding, approaching maximum

• Cost already paid and cannot be changed
• (should not be used in short-run decisions, irrelevent)

Value placed on opportunities given up

Total Cost = Explicit Cost + Implicit Cost

Any cost that involve a dollar payment

Cost implied by giving up an opportunity

Return that could have been earned on next best investment opportuntiy

Total Revenue - Total Cost

Total Revenue - Explicit Cost

• Total Revenue - Total cost = 0
• TR = TC
• Earning just enough to stay in business

• Total Revenue - Total Cost > 0
• TR > TC
• Earning more than enough to stay in business

• Total Revenue - Total Cost < 0
• TR < TC
• Not earning enought to stay in business

When production level changes come cost stay the same

when production level changes some cost will change

Total variable cost + total fixed cost

average fixed cost + average variable cost / quantity

Total variable cost / quantity

Total fixed cost / quantity

change in total cost from producing one more unit

increasing marginal return

increasing marginal return

Total fixed cost is spread over more units so per unit fixed cost falls

As capacity to produce increase, average total cost decrease (long-run)

• Quantity discounts on parts
• certain set cost can be spread over more units
• greater specialization of management
• avoid duplicate costs

as capacity to produce increases average total cost stay the same

As capacity to produce increase, average toal cost increase

• overspecialization of management
• miscommunication
• bureauratic
• overspecialization of labor

• 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

Single firm selling in a perfect competition

The degree to which a firm can influence its own price