- 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
- % 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
- 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)
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.
Factors of Price Elasticity of supply*
- Availability of Inputs: large when there is lots available
- Time: More elastic the more time they have
Measure of the satisfaction the consumer derives from consumption of goods and services
Individual consumption bundle
Collection of all goods and services consumed by that individual
Individual Utility function
Total utility generated by the consumption bundle
- Change in total utlilty generated by consuming one additional unit of that good or service
- Increases by less each time
Marginal Utility curve*
- Downward sloping
- It is the slope of total curve
- Rise over run: Change in Total utility/ Change in quantity
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.
Cost of a consumers consumptionm bundle be no more than the consumers budget
Set of all consumption bundles that can be consumed given the consumer's income and the price
- Downward sloping line
- Top: B/P1
- Middle: the slope; -P2/P1
- Bottom: B/P1
Optimal consumbion buget
- Consumption bundle that maximses cusomers total utlitiy given his or her budget constraint
- Slope of budget line and indifernce curve
- how much we get for one additonal of somthing else
- Marginal utility/price
- How much marginal utitly we get per dollar.
The change in quantity consumed as the consumer substitues the expensive good with a cheaper good.
- When prices changes, purchasing power changes
- Price goes down, more power
A dome shape because of diminishing marginal utility-joy of satisfaction
- Contour line that maps consumption bundles yielding the same amount of total utility.
- Incresaess to the NorthEast
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
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
2 buget questions
- Do I want it
- Can I afford it
Cause for the flattening of the indifference curves as you slide down themn to the right
- 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.
- straight downward sloping lines
- Small price changes lead to large changes in consumption bundle
- When a consumer likes to consume two goods in the same ratio regardles of their price.
- These form a corner shape
Relationship between quantity of inputs a firm uses and the maximum quantity of output it produces
- An input whose quantity is fixed for a period of time and cannot be varied.
- Land, machines, buildings
Quantity can be changes at any time
- Time period in which al inputs can be varied
- Fixed costs are 0
Time period in which at least one input is fixed
Total Product Curves
Shows how quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
- Slope of the Total curve
- Additional quantity of output that is producec by using one more unity of that input
Marginal Product of labor
Change in Quantity of output/ Change in quantity of labor
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.
- Fixed cost plus variable cost
- Explicit + Implicit costs
- esplici: write a check
- implicit: opportunity cost
- Do not depend on the quantity of ouput produced
- Renting, heating
Depend upon quaqntiy of output of production
- 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
Average Total Cost
- Total Cost/ Quantity of output
- Tells how much the average or typical unit of output costs to produce.
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
Average Total Cost Curves
- U-Shaped curves
- Fixed in the beginning and Variable on end
Average Fixed Costs
Fixed costs/ quantity of output
Average Variable Costs
Variable Cost/ Qof output
- 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
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.
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
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
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
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
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
Producer whose actions have no effect on the market price of the good or service it sells
A consumer whose actions have no effect on the market price of the good or service he or she buys
Perfectly Competetive Market*
Both consumers and producers are price takers
Perfectly competitive Industry
Industry inwhich producers are price-takers
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
- 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
Price > ATC
Firm is profitable
When Price is below AVC
Company should shut down so shut down price = AVC
When Price is greater > or = to AVC
Produce in short run
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.
- When the market price is below minimum average variable cost.
- The Minimum average variable cost is equalt to the shut-down price.
Producing in the short Run
When the market price is greater than or equal to minimum average variable cost.
Production in Longrun
- When quantity supplied equals quantity demanded.
- Where the price equals average total cost at it's minimum
- MR = P
- This says we are producing the right amount
Price = ATC min which is cheepest we can get it in the long run
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
What are the four market structures*
- Perfect competition
- Monopolistic Comp
What are the two dimensions of the market structure
- Number of producers
- If the products are differenciated or not
- A single producer
- Selling a single undifferenciated product
- A few producers
- Can sell either identical or differenciated
Many producers each selling differenciated products
- Many buyers and sellers
- All selling differenciated products
- Ability to raise the price of a product
- Ex. Monoposlists can restrict the supply, which increases the price
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
When an increasing returns to scale provicde a large cosgt advangtae toa single firm that produces all of an industrys outputs
Monopoly/Olopoly demand curve*
Downward sloping since it is the market demand curve
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.
Pure competition Demand Curve
Curve is horizontal since it is purley elastic
What makes an Ologopoly?*
Few sellers, relaxing the many sellers and bariers to entry
What makes Monopolisct comp*
Relaxing the assumption of differenciated products