Micro Test 2
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What is income elasticitiy of demand?
- percentage change in quantity demanded / percentage change in people's income
- + coefficient = normal good
- - coefficient = inferior good
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
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
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
How do agricultural price supports work?
- Consumer pays higher price support
- Creates surplus
- Government buys surplus
Supply and demand curve shows surplus
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
Capacity to produce is fixed
Capacity to produce is flexible
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
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
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
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
- 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
Opportunity Cost of Capital
Return that could have been earned on next best investment opportuntiy
Total Revenue - Total Cost
Total Revenue - Explicit Cost
Zero Economic Profit
- Total Revenue - Total cost = 0
- TR = TC
- Earning just enough to stay in business
Positive Economic Profit
- Total Revenue - Total Cost > 0
- TR > TC
- Earning more than enough to stay in business
Negative Economic Profit
- Total Revenue - Total Cost < 0
- TR < TC
- Not earning enought to stay in business
Total Fixed Cost
When production level changes come cost stay the same
Total Variable Cost
when production level changes some cost will change
Total variable cost + total fixed cost
Average total cost
average fixed cost + average variable cost / quantity
Average variable cost
Total variable cost / quantity
Average Fixed Cost
Total fixed cost / quantity
change in total cost from producing one more unit
Explain why firms at first experience decreasing marginal cost in the short-run
increasing marginal return
Explain why firms eventually experience increasing marginal Cost in the short-run
increasing marginal return
Whe does Average fixed cost continually decrease as output increaes
Total fixed cost is spread over more units so per unit fixed cost falls
Economies of Scale
As capacity to produce increase, average total cost decrease (long-run)
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
Constant Returns to Scale
as capacity to produce increases average total cost stay the same
Diseconomies of Scale
As capacity to produce increase, average toal cost increase
Cause of Diseconomies of Scale
- overspecialization of management
- 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
Perfectly Competitive firm
Single firm selling in a perfect competition
The degree to which a firm can influence its own price
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