EXAM 2
Economics 201 with Menchik at Michigan State University
About this deck
By: Kara Brockhaus
Textbook:
Principles of Microeconomics
Created: 2010-03-18
Size: 95 flashcards
Views: 82
Textbook:
Principles of MicroeconomicsCreated: 2010-03-18
Size: 95 flashcards
Views: 82
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REVENUE
price*quantity
PED: price elasticity of demand tells us...
about the shape of the demand curve
IED: income elasticity of demand tells us...
how much demand curve shifts with an in come change
*do not take abs value!!
*do not take abs value!!
PES: price elasticity of supply tells us about ...
the shape of the supply curve
elasticity
responsiveness of one variable to another
PED: pric eelasticity of demand
(change in Q) /(change in P) --> If percents
otherwise: (Change in Q/avg Q)/ (change in P/avg P)
TAKE ABS VALUE
otherwise: (Change in Q/avg Q)/ (change in P/avg P)
TAKE ABS VALUE
perfectly inelastic
vertical line on graph... Q=0
inelastic
PED<1
unit (elastic)
PED=1
elastic
PED>1
perfectly elastic
horizontal line on the graph...PED = infinity because Q = infinity
goods that are necessities (with no substitutes) ten to be...
have an inelastic demand
the price effect and quantity effect on revenue always move...
IN OPP DIRECTIONS
if elastic demand...
increase in price = revenue decreases
if inelastic demand
increase in price = increase in revenue
factors determining PED
1. whether close substitutes exist --> PED =higher if sub exists
2. where the good is a necessity or a luxury--> PED higher for luxury
3. share of income spent on good--> PED = higher for goods that compose most of your income
4.time--> PED is higher in the long run than the short
2. where the good is a necessity or a luxury--> PED higher for luxury
3. share of income spent on good--> PED = higher for goods that compose most of your income
4.time--> PED is higher in the long run than the short
cross price elasticity of demand (CPED)
measures how the price of one good affects the demand of another DO NOT TAKE ABS VALUE
CPED = positive
substitutes are in consumption
CPED = neg
compliments are in consumption
IED<0
inferior good --> demand decreases when income increases
IED>0 and IED<1
income is inelastic--> demand increases a little when income increases
IED > 1
income elastic--> demand increases a lot when income increases
PES = 0
perfectly inelastic
PES>0 and PES<1
inealastic
PES = 1
unit elastic
PES= infinity
perfectly elastic
what affects PES?
1. availability of inputs (if available = elastic)
2. times: supply = inelastic in short run
2. times: supply = inelastic in short run
excise
a quantity tax (like on gas or cigs)
excises reduces what in a competitive market?
efficiency because it is another intervention
tax incidcence
a measure of who pays the tax
*when comparing the supply and demand curves, the more inelastic curve is where the burden of tax falls.
*when comparing the supply and demand curves, the more inelastic curve is where the burden of tax falls.
incidence falls on ____when PED = low
demander
incidence falls on ____when PED = high
suppliers
tax incidence depends on ..
*depends on PED and PES
1. lower PED = more consumers pay
2. lower PES = more suppliers pay
1. lower PED = more consumers pay
2. lower PES = more suppliers pay
tax rate
tax per unit change
tax revenue
tax rate * quantity sold
Does tripling taxes mean that the revenue triples also ?
NO because as taxes increase, quantity sold decreases
Sin taxes
tax on alcohol and gas
*way to regulate what is purchased in the states
*way to regulate what is purchased in the states
Total surplus formula with taxation..
CS+PC+GR (governments revenue)
taxes cause ...
dead wt loss
DWL: increases when...
demand/supply is elastic
DWL: decreases when...
demand/supply = inelastic
why do we have DWL?
due to changes in Q
*Q changes less with inelastic curves
*Q changes less with inelastic curves
types of taxes:
1. income = depends on income of person
2. payroll= depends on earnings
3. depends on value of goods sold (aka: consumption taxes)
4. profits = depends on a firms profits
5. property = depends on a property value
6. capital gains tax= depends on appreciation of asset when sold
7. estate = depends on value of state bequeathed
2. payroll= depends on earnings
3. depends on value of goods sold (aka: consumption taxes)
4. profits = depends on a firms profits
5. property = depends on a property value
6. capital gains tax= depends on appreciation of asset when sold
7. estate = depends on value of state bequeathed
proportional tax
fixed rate (aka: flat tax)
regressive tax
tax rate declines with income
progressive tax
tax rate inclines with income
marginal tax rate
tax rate on an additional dollar
(increases with progressive and decreases with regressive)
(increases with progressive and decreases with regressive)
opp. cost
what must be given up to get something else
= explicit + implicit
= explicit + implicit
explicit
those that require the direct outlay of money (tuition, books, laptop)
implicit
those that are forgone still demoninated in money (forgone salary to go to school)
*includes forgone costs of labor and capital
*includes forgone costs of labor and capital
economic profits are usually ____ than accounting profits bc...
LESS
they tink of the alt. uses of labor and capital
they tink of the alt. uses of labor and capital
marginal analysis
comparing the costs and benefits of on more
marginal cost
cost of adding one more
marginal benefits
benefit of adding one more
*can be calculated from willingness to pay.
*can be calculated from willingness to pay.
principle of marginal analysis says that the optimal Q is the Q at which...
1. MB = MC
2. MB is higher or equal to MC
2. MB is higher or equal to MC
optimal decision
consume as long as MB>/=MC
sunk costs
incurred but inrecoverable costs
future value
FV = ($X)*(1+r)^t
present value
PV = ($X)/(!+r)^t
we assume that firms want to max____while consumers want to max____
PROFIT
UTILITIES
UTILITIES
total utility
increases on the graph
marginal utility
decreases on the graph
*represents the marginal benefit to consumers
*represents the marginal benefit to consumers
factors or production/inputs are either...
fixed of variable
production function
relationship between inputs and outputs --given in a table
*tells us inputs necessary to produce a given level of output
*tells us inputs necessary to produce a given level of output
time horizon: long run
the time period in which all factors are variable
time horizon: short run
the time period in which at least one variable is fixed
fixed cost
costs that do not depend on the quantity of output produced (bldg/land)
variable cost
costs that depend on the quantity of output produced (labor/materials)
total cost
FC+VC
marginal cost
change in total cost for producing one more unit of output
MC= delta TC/delta Q
MC= delta TC/delta Q
average total cost ATC
TC/Q
or
AVC+AFC
or
AVC+AFC
average variable cost AVC
VC/Q
average fixed cost AFC
FC/Q
specialization causes MC and AVS to....in the beginning of their graphs
decline
LRATC - long run average total cost
for each Q the min of all possible ATC curve
price taking producers
a producer whose actions have no effect on the market price
*price is taken as given
*price is taken as given
price taking consumers
a consumer whose actions have no effect on the market price
*price is taken as given
*price is taken as given
perfect competition
a market where all producers and consumers are price takers
*usually consumers though
*usually consumers though
key characteristics of price taking producers
*the market is comprised of a standardized prdt
*producers each have a sm. market/share of total output
*free entry/exit: no obstacles due to govt. regulations (licenses) or limited access to key resources
*producers each have a sm. market/share of total output
*free entry/exit: no obstacles due to govt. regulations (licenses) or limited access to key resources
profit
total revenue - total cost
TR-TC
TR-TC
marginal revenue
MR = delta TR/delta Q
optimal production rule for perfect competition
MB=MR=Avg Revenue=P
*produce as long as P is = or > than MC
*produce as long as P is = or > than MC
profitable
TR>TC or P>ATC
break even
TR=TC or P=ATC
loss
TR<TC or P<ATC
optimal does not always mean...
profitable
shutdown price
min of AVC curve
individual supply curve
the MC ABOVE the AVC tells us the production level that is optimal for the firm
P> min AVC
firm produces in the short run
*If P< min ATC, firm covers variable costs but not all fixed costs.
*If P>min ATC, firm covers all variable and fixed costs.
*If P< min ATC, firm covers variable costs but not all fixed costs.
*If P>min ATC, firm covers all variable and fixed costs.
P = min AVC
firm is indifferent between producing in the short run or not. Just covers variable cost
P< min AVC
firm shuts down in the short run, doesn't cover variable costs
industry supply curve
the horiztonal sum of ind. supply curves
in general, LRS slope is _______than SRS slope
more elastic (flatter)
in equillibrium...
1. mc = same for all firms bc all firms face same P and all firms produce until p=mc
2. if firms have same ost structure, all firms make zero economic profits in long run bc of entry and exit
3. market = flexible in that all mutually agreeable transactions will take place.
2. if firms have same ost structure, all firms make zero economic profits in long run bc of entry and exit
3. market = flexible in that all mutually agreeable transactions will take place.
About this deck
By: Kara Brockhaus
Textbook: Principles of Microeconomics
Created: 2010-03-18
Size: 95 flashcards
Views: 82
Textbook:
Principles of MicroeconomicsCreated: 2010-03-18
Size: 95 flashcards
Views: 82
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“I have used this website for three exams, and I see a huge difference in my test results.”
Naj
Naj