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25 Cards in this Set
- Front
- Back
Substitution Effect
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The change of quantity demanded of a good or service caused by a change in its price relative to substitutes
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Income Effect
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Income Effect
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Indifference curve
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is a graph showing different bundles of goods, each measured as to quantity, between which a consumer is indifferent
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Budget line
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a line that shows the different combination of two goods a consumer can purchase with a given amount of money and prices for the goods
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Consumer equilibrium
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a condition in which total utility can not increase by spending more of a given budget on one good and spending less on another good
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Elasticity
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Sensitivity or responsiveness to changes in stimuli
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Explain the 4 types of elasticity
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1. Price elasticity of supply - sensitivity of quantity supply to a change in price
Positive curve (law of supply) 2. Income elasticity of demand - sensitivity of quantity demand to a change in income. positive for normal goods and services ; negative for inferior goods and services 3. Cross elasticity of demand - Sensitivity of quantity demand to a change in the price of a substitute or compliment. Positive for subs, negative for compliments 4. Price elasticity of demand - sensitivity of quantity demand to a change in price. |% change of QD/ % change in price|. Negative (law of demand) but take absolute value |
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What are the 4 determinants of price elasticity of demand? (ranked in order of importance)
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1. Necessity vs. luxury
2. number of substitutes 3. fraction of income 4. time elapse |
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What is a unit of elasticity, what are the units of elastic and inelastic curves and how would they appear graphically?
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Ed=1, unit elastic. Ed>1 elastic (flat). 0<Ed<1 inelastic (steep)
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A low price elasticity of demand would give a(n) ___________ curve
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inelastic
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Why would firms care about price elasticity of demand?
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to maximize profit
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why would governments care about price elasticity of demand?
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to maximize tax revenue by taxing inelastic demands
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why would courts care about price elasticity of demand?
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so they could adjudicate inter-firm conflict
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what are 3 necessary Conditions for a Successful Illustration of the individual demand curve?
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1. an adequate way to measure happiness
2. choose between two distinct types of products 3. a budget constraint |
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explain the 1st Illustration of the individual demand curve and the reason for its rejection
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Income effect and substitution effect. It doesn't meet the budget constraint conditions
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What is the formula for when individuals maximize happiness?
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MU1/MU2=P1/P2
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What is average fixed cost?
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Average fixed cost (AFC) is an economics term used to describe the total fixed costs (TFC) divided by the quantity (Q) of units produced.
AFC=\frac{TFC}{Q} |
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What is the difference between fixed costs and variable costs?
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In economics, fixed costs are business expenses that are not dependent on the activities of the business. They tend to be time-related, such as salaries or rents being paid per month. This is in contrast to variable costs, which are volume-related (and are paid per quantity).
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what is the difference between the long run and short run?
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The short run is the period of time in which one or more inputs are fixed. The long run is the period in which all inputs are variable
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What is marginal cost?
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In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit
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The sum of all marginal costs equals the _____________
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variable costs
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What is meant by economies of scale and diseconomies of scale?
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Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility, or scale, increases.[1] Diseconomies of scale are the opposite
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What are returns to scale?
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In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs. If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS)
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What is the Lorenz curve? What policy issue is it used for?
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In economics, the Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth. It is used for progressive taxes policy because it shows income distribution.
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What is the Pareto Optimal Point?
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Any point along the PPC curve. If an economic system is Pareto efficient, then it is the case that no individual can be made better off without another being made worse of
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