how much demand curve shifts with an in come change *do not take abs value!!
PES: price elasticity of supply tells us about ...
the shape of the supply curve
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
vertical line on graph... Q=0
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
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
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
PES>0 and PES<1
PES = 1
what affects PES?
1. availability of inputs (if available = elastic) 2. times: supply = inelastic in short run
a quantity tax (like on gas or cigs)
excises reduces what in a competitive market?
efficiency because it is another intervention
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.
incidence falls on ____when PED = low
incidence falls on ____when PED = high
tax incidence depends on ..
*depends on PED and PES 1. lower PED = more consumers pay 2. lower PES = more suppliers pay
tax per unit change
tax rate * quantity sold
Does tripling taxes mean that the revenue triples also ?
NO because as taxes increase, quantity sold decreases
tax on alcohol and gas *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
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
fixed rate (aka: flat tax)
tax rate declines with income
tax rate inclines with income
marginal tax rate
tax rate on an additional dollar (increases with progressive and decreases with regressive)
what must be given up to get something else = explicit + implicit
those that require the direct outlay of money (tuition, books, laptop)
those that are forgone still demoninated in money (forgone salary to go to school) *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
comparing the costs and benefits of on more
cost of adding one more
benefit of adding one more *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
consume as long as MB>/=MC
incurred but inrecoverable costs
FV = ($X)*(1+r)^t
PV = ($X)/(!+r)^t
we assume that firms want to max____while consumers want to max____
increases on the graph
decreases on the graph *represents the marginal benefit to consumers
factors or production/inputs are either...
fixed of variable
relationship between inputs and outputs --given in a table *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
costs that do not depend on the quantity of output produced (bldg/land)
costs that depend on the quantity of output produced (labor/materials)
change in total cost for producing one more unit of output MC= delta TC/delta Q
average total cost ATC
TC/Q or AVC+AFC
average variable cost AVC
average fixed cost AFC
specialization causes MC and AVS to....in the beginning of their graphs
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 taking consumers
a consumer whose actions have no effect on the market price *price is taken as given
a market where all producers and consumers are price takers *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
total revenue - total cost TR-TC
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
TR>TC or P>ATC
TR=TC or P=ATC
TR<TC or P<ATC
the min of the ATC curve tells us the min. ____ for a firm to be profitable
optimal does not always mean...
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.
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)
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.
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