1. Total Revnue
    • The price multiplied by the quantity sold
    • Unit-elastic means Total Rev doesn't change
    • Inelastic means price and Total Rev move together
    • Elastic means price and Total Rev move opposite
  2. Cross-Price Elasticity
    • % change in Quantity demanded/ % change in goods price
    • If Positive, move in same direction so Substitute
    • If negative, move down so know they are compliments
  3. Income Elasticity
    • Sensitity of quantity demanded to income
    • If Positive, it is a normal good( demand increases when income rises)
    • If Negative, it is an inferior good( demand decreases when income rises)
  4. Price Elasticity of Supply
    • % change in Quantity suplied/ % change in price
    • Perfect Elastic Supply-Horizonal line
    • Perfect inelastic supply- Vertical Line; Only have that amount no matter what they pay will still be same quantity.
  5. Factors of Price Elasticity of supply*
    • Availability of Inputs: large when there is lots available
    • Time: More elastic the more time they have
  6. Utility*
    Measure of the satisfaction the consumer derives from consumption of goods and services
  7. Individual consumption bundle
    Collection of all goods and services consumed by that individual
  8. Individual Utility function
    Total utility generated by the consumption bundle
  9. Marginal utility
    • Change in total utlilty generated by consuming one additional unit of that good or service
    • Increases by less each time
  10. Marginal Utility curve*
    • Downward sloping
    • It is the slope of total curve
    • Rise over run: Change in Total utility/ Change in quantity
  11. Principle of diminishing marginal utiltity
    The additional satifaction a consumer gets from one more unit of a good or service declines as the amount of that good or service cosumed rises.
  12. Budget Constraint
    Cost of a consumers consumptionm bundle be no more than the consumers budget
  13. Consumption possibilites
    Set of all consumption bundles that can be consumed given the consumer's income and the price
  14. Buget Line*
    • Downward sloping line
    • Top: B/P1
    • Middle: the slope; -P2/P1
    • Bottom: B/P1
  15. Optimal consumbion buget
    • Consumption bundle that maximses cusomers total utlitiy given his or her budget constraint
    • Slope of budget line and indifernce curve
  16. Marginal
    • how much we get for one additonal of somthing else
    • Marginal utility/price
    • How much marginal utitly we get per dollar.
  17. Substitution Effect
    The change in quantity consumed as the consumer substitues the expensive good with a cheaper good.
  18. Income Effect
    • When prices changes, purchasing power changes
    • Price goes down, more power
  19. Utility Function
    A dome shape because of diminishing marginal utility-joy of satisfaction
  20. Indifference Curve*
    • Contour line that maps consumption bundles yielding the same amount of total utility.
    • Incresaess to the NorthEast
  21. Properties of Indifference curves*
    • Never cross
    • The farther out from origin, higher level of total utility
    • Downward sloping
    • They are convex because of diminishing marginal utitliy
  22. Marginal rate of subsitution*
    • How much we must give up to get one more unit of the other
    • Slope of indiference curve = slope of the budget line
    • -P2/P1 = -MRS= -MU2/MU1
  23. 2 buget questions
    • Do I want it
    • Can I afford it
  24. Diminishing MRS
    Cause for the flattening of the indifference curves as you slide down themn to the right
  25. Ordinary goods
    • Consumer requires more of one good to conpensate for les of the other
    • Consumer experiinnces a diminishing marginal rate of sustitutiko when subsitituing one good in place of the other.
  26. Perfect Substitues
    • straight downward sloping lines
    • Small price changes lead to large changes in consumption bundle
  27. Perfect Compliments
    • When a consumer likes to consume two goods in the same ratio regardles of their price.
    • These form a corner shape
  28. Production Function
    Relationship between quantity of inputs a firm uses and the maximum quantity of output it produces
  29. Fixed input
    • An input whose quantity is fixed for a period of time and cannot be varied.
    • Land, machines, buildings
  30. Variable Input
    Quantity can be changes at any time
  31. Long Run
    • Time period in which al inputs can be varied
    • Fixed costs are 0
  32. Short Run
    Time period in which at least one input is fixed
  33. Total Product Curves
    Shows how quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
  34. Marginal Product*
    • Slope of the Total curve
    • Additional quantity of output that is producec by using one more unity of that input
  35. Marginal Product of labor
    Change in Quantity of output/ Change in quantity of labor
  36. Diminishing Returns to an Input*
    When an increase in the quaqntity of the input, holding the levels of all other fised, leas to a decline in marginal product of that input.
  37. Total Cost*
    • Fixed cost plus variable cost
    • Explicit + Implicit costs
    • esplici: write a check
    • implicit: opportunity cost
  38. Fixed Cost
    • Do not depend on the quantity of ouput produced
    • Renting, heating
  39. Variable Costs
    Depend upon quaqntiy of output of production
  40. Marginal Cost
    • Change in total cost/ Change in output
    • You can just caculate change in variable cost on top since fixed doesn't change.
    • Slope of total cost curve
  41. Average Total Cost
    • Total Cost/ Quantity of output
    • TC/Q
    • Tells how much the average or typical unit of output costs to produce.
  42. ATC vs Marginal
    • Average tells how much typical unit will cost
    • Marginal tells how much one more unit will cost
    • Marginl cost curve intersects ATC at it's lowest
  43. Average Total Cost Curves
    • U-Shaped curves
    • Fixed in the beginning and Variable on end
  44. Average Fixed Costs
    Fixed costs/ quantity of output
  45. Average Variable Costs
    Variable Cost/ Qof output
  46. Spreading Effect*
    • The larger the output, the great the quantity of output over which fixed costs is spread leading to lower fixed costs.
    • Accounts for the sloping down of the U curve
  47. Diminishing Returns Effect*
    • The larger the output, the greater the amount of variable input required to produce addional units leads to higher average variable costs.
    • Accounts for the sloping up of U curve.
  48. Minimum cost output
    • Qunatity of output at which total cost is lowest.
    • Bottom of the U-shaped average total cost curve
    • At Min, ATC = Marginal Cost
  49. Long Run average total cost curve*
    • Relationship between output and average total cost when fixed cost has been choses to minimize average total cost for each level of output.
    • Composite of a bunch of short run curves
    • It is the lowest parf of all the short run Total cost curves
  50. Increasing returns to scale
    Aka Economies of Scale*
    • The beginning of the curve LRATC
    • When long run average total cost declines as output increases.
    • Saying as we move larger, our ATC goes down
  51. Decreasing Returens to scale
    AKA Diseconomies of scale*
    • When Long run average total cost increases as output increases.
    • Eventually goes back up because it starts to cost more to get bigger
  52. Minimum Effienent scale
    • The bottom lowest point
    • It is the minimum scale needed to achieve the lowest average total cost in the long run.
    • Minimum quantity
  53. Price-Taking Producer
    Producer whose actions have no effect on the market price of the good or service it sells
  54. Price-taking Consumer
    A consumer whose actions have no effect on the market price of the good or service he or she buys
  55. Perfectly Competetive Market*
    Both consumers and producers are price takers
  56. Perfectly competitive Industry
    Industry inwhich producers are price-takers
  57. Conditions for Perfect Comp*
    • Many buyers and sellers and are all price takers
    • The good must be a standardized product, known as a comodity
    • No barriers to Entry or exit
    • There is complete info, so every seller and buyer knows the market price
  58. Marginal Revenue*
    • Change in total revenue generated by an additional unit of output.
    • This represents the price in Pure comp.
    • Change in total rev/ Change in quantity of output
    • Slope of total curve
  59. Price > ATC
    Firm is profitable
  60. Price = ATC
    Break even
  61. Price < ATC
  62. When Price is below AVC
    Company should shut down so shut down price = AVC
  63. When Price is greater > or = to AVC
    Produce in short run
  64. Optimal Output Rule
    • Profit is maximized by producing the quantity at which the marginal reveune of the last unit produced is equal to its marginal cost.
    • This is done by dividing units into small small pieces. can't always do.
  65. Shut-dwon Price
    • When the market price is below minimum average variable cost.
    • The Minimum average variable cost is equalt to the shut-down price.
  66. Producing in the short Run
    When the market price is greater than or equal to minimum average variable cost.
  67. Production in Longrun
    • When quantity supplied equals quantity demanded.
    • Where the price equals average total cost at it's minimum
  68. Allocative Efficiency*
    • MR = P
    • This says we are producing the right amount
  69. Techniccal Efficency*
    Price = ATC min which is cheepest we can get it in the long run
  70. Long-run Market equilibruim
    • When P = ATCmin
    • The long run is always flatter because in short run there is not sufficient time to enter and exit where in long run there is time so you wont earn ecoomic profit
  71. What are the four market structures*
    • Perfect competition
    • Monopoly
    • Oligopoly
    • Monopolistic Comp
  72. What are the two dimensions of the market structure
    • Number of producers
    • If the products are differenciated or not
  73. Monopoly
    • A single producer
    • Selling a single undifferenciated product
  74. Oligopoly
    • A few producers
    • Can sell either identical or differenciated
  75. Perfect Competition
    Many producers each selling differenciated products
  76. Monopolistic Competition
    • Many buyers and sellers
    • All selling differenciated products
  77. Market Power
    • Ability to raise the price of a product
    • Ex. Monoposlists can restrict the supply, which increases the price
  78. Why Monopolies Exist?*
    • There are Barriers to entry
    • Control of a scarce resource or input
    • Increasing returns to scale
    • Technological superiority
    • Government created barries; patents, copyrights
  79. Natural Monopoly
    When an increasing returns to scale provicde a large cosgt advangtae toa single firm that produces all of an industrys outputs
  80. Monopoly/Olopoly demand curve*
    Downward sloping since it is the market demand curve
  81. MR = MC*
    • Marginal Revenue=Marginal cost
    • Marginal Revenue bisects the Market demand
    • To find price, know market cost then go up to demand curve and over for price.
  82. Pure competition Demand Curve
    Curve is horizontal since it is purley elastic
  83. What makes an Ologopoly?*
    Few sellers, relaxing the many sellers and bariers to entry
  84. What makes Monopolisct comp*
    Relaxing the assumption of differenciated products
Card Set
Econ Midterm 2