ALL CHAPTERS Flashcards
(156 cards)
1
Q
What is a positive statement?
A
A testable hypothesis of cause and effect.
2
Q
What is a normative statement?
A
A statement which is based on opinion, not testable.
- “you should go to college”
3
Q
The market supply curve of a good is found by?
A
Horizontally summing all the individual supply curves.
4
Q
What is the demand curve said to be when it’s elasticity e = -1.
A
Unitary elastic
5
Q
What is the demand curve said to be when 0>e>-1.
A
Demand curve is said to be inelastic.
6
Q
What is the demand curve said to be when it’s elasticity e < -1
A
The demand curve is said to be elastic.
7
Q
How do you calculate revenues?
A
R=p*Q
8
Q
If cross price elasticity of two goods is negatives that means?
A
That the goods are complements.
9
Q
If the cross price elasticity of two goods is positive that means that?
A
That the goods are substitutes.
10
Q
Are the elasticity of supply equation and the elasticity of demand equation the same?
A
Same equation, however when working demand, Q stands for Quantity demanded. When working on supply, Q stands for quantity supplied.
And the elasticity for demand is negative as its downward sloping.
11
Q
Are the ranges of elasticity/inelastic the same?
A
Yes however demand ranges are negative, supply are positive (due to the shape of the curves). i.e for demand unitary elasticity is e=-1, however for supply it is n=1.
12
Q
What is the equation for the incidence of a tax that falls on consumers?
A
change.in (p) / change.in t (f)
This is also equal to in terms elasticities n / ( n - e )
13
Q
What is the equation form of the “marginal rate of substitution”?
A
MRS = change.in A / change.in B
Where A is on the vertical axis and B is on the horizontal axis.
14
Q
What shape is a indifference curve? Convex or concave?
A
Go against your scientific intuition, it is Convex Marcelo…
15
Q
Define perfect substitutes.
A
Two goods where a consumer is completely indifferent as to which to consume.
16
Q
Define perfect complements.
A
A right angle curve, good which a consumer is interested in consuming only fixed proportions. One left shoe and one right shoe.
17
Q
Define completeness.
A
Consumers can rank the two or more goods, therefore they must be able to decide.
18
Q
Define transitivity.
A
If completeness and transitivity hold the preference relation is said to be rational. It means that if a consumer says a>b and b>c, it must mean that a>c.
19
Q
Define more is better.
A
More of a good is better than less of a good, the consumer will always pick a bundle which gives them more as it gives them more utility.
20
Q
What is the endowment effect?
A
The endowment effect states that people place a higher value on a good if they own it than they do if they are considering buying it.
21
Q
Bounded rationality
A
Is when people have a limited capacity to anticipate, solve complex problems and or understand complex phenomena.
22
Q
Along the linear demand curve, the lower the price, is it more price elastic or less price elastic?
A
The less price elastic demand is.
P | \ | \ e = - 3 | \ | --\ e = - 1 | |\ | | \ e = - 0.3 | | \ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Q
23
Q
Define a Giffen good.
A
A commodity for which a decrease in its price causes the quantity demanded to fall.
24
Q
Define a normal good.
A
A commodity of which as much or more is demanded as income rises.
25
Define a inferior good.
A commodity of which less is demanded as income rises.
26
Define what an Engel curve is.
The relationship between the quantity demanded of a single good and income, holding prices constant.
27
Define compensating variation (CV)
The amount of money one would have to give a consumer to offset completely the harm from a price increase.
28
Define equivalent variation (EV).
The amount of money one would have to take from a consumer to harm the consumer by as much as the price increase.
29
Define efficient production.
The current level of output cannot be produced with fewer inputs, given existing knowledge about the organization of production.
30
Define a production function.
The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization.
31
Define the marginal product of labor (MPL) and give the equation for it.
The change in total output, chg.q, resulting from using an extra unit of labor, chg.L, holding other factors constant:
MPL = chg.q / chg.L
MLP = Change in quantity / change in labor.
32
Define and provide the equation for average product of labor (APL).
The ratio of output, q, to the number of workers, L, used to produce that output:
APL = q / L
33
Define isoquant.
A curve that shows the efficient combinations of labor and capital that can produce a single (iso) level of output (quantity).
34
Define and provide the equation of marginal rate of technical substitution (MRTS).
The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.
MRTS = dL / dK = MPL / MPK
35
Define economies of scope.
Situation in which it is less expensive to produce goods jointly than separately.
36
Define the production possibility frontier.
The maximum amount of outputs that can be produced from a fixed amount of input.
37
What three trade-offs does society face?
* which goods and services to produce
* how to produce
* who gets the goods and services
38
Define a model.
A description of the relationship between two or more economic variables
39
Why do economists use models?
To predict how a change in one variable will affect another.
40
Define the law of demand.
Consumers demand more of a goos the lower its price, holding constant tastes, the prices of other goods, and other factors that influence consumption.
41
Define what a quota is.
The limit that a government sets on the quality of a foreign-produced good that may be imported
42
Define elasticity
The percentage change in a variable in response to a given percentage change in another variable
43
What is the equation for the elasticity of demand?
Normal form
Simplified form
e = ch.Q/ch.P * P/Q
e = -b * P/Q
44
what does a elasticity of demand equal to 0 mean?
e = 0
Perfectly inelastic demand
45
what does a elasticity of demand equal to 0 mean?
e = - infinity
Perfectly elastic demand
46
Define income elasticity of demand.
The percentage change in the quantity demanded in response to a given percentage change in income
47
What is the equation of income elasticity of demand?
Epsilon = ch.Q / ch.Y * Y/Q
Where Y = Income
48
What is income elasticity of demand, Xi, when income increases and quantity demanded remains the same?
Xi = 0
49
What is income elasticity of demand, Xi, when income increases and quantity demanded increases?
Xi = (+)
50
What is income elasticity of demand, Xi, when income increases and quantity demanded decreases?
Xi = (-)
51
Define cross-price elasticity of demand.
The percentage change in quantity demanded in response to a given percentage change in the price of another good.
52
What is the formula for cross-price elasticity of demand?
%Change = ch.Q / Po * Po / Q
53
What does it mean if the cross-price elasticity is negative?
The two goods are complements.
Bread and butter, bread’s price goes up and and the demand for butter is negatively affected.
54
What does it mean if the cross-price elasticity is positive?
The two goods are substitutes.
If the price of white bread goes up, you buy more brown bread. The affect of white breads price positively increases brown breads demand.
55
What is the equation for the price elasticity of supply?
n (eta) = ch.Q / ch.P * P/Q
56
What does it mean if price elasticity of supply is: n > 0 ?
Supply elasticity is positive.
57
What does it mean if price elasticity of supply is: n < 0 ?
Supply elasticity is negative.
58
What does it mean if price elasticity of supply is: n = 0 ?
Supply elasticity is perfectly inelastic
59
What does it mean if price elasticity of supply is: 0 < n < 1 ?
Supply elasticity is inelastic
60
What does it mean if price elasticity of supply is: n = 1 ?
Supply elasticity is unitary elastic.
61
What does it mean if price elasticity of supply is: n > 1 ?
Supply elasticity is elastic.
62
What does it mean if price elasticity of supply is: n = infinity ?
Supply is perfectly elastic
63
Define incidence of a tax on consumers.
The share of the tax that falls on consumers.
64
Define incidence of a tax on producers.
The share of the tax that falls on consumers
65
What is the equation for incidence of a tax on consumers (consumer share of a tax)?
n / n - e = % of tax which falls on consumer
```
n = elasticity of supply
e = elasticity of demand
```
66
What is the equation for incidence of a tax on producers (consumer share of a tax)?
-e / n - e = % of tax which falls on producer
```
n = elasticity of supply
e = elasticity of demand
```
67
What is the formula for calculating the tax rate, alpha.
a (alpha) = $tax amount / $new price
68
What is a subsidy?
A subsidy is a negative tax.
69
Define is indifference curve.
The set of all bundles of goods that a consumer views as being equally desirable.
70
Define indifference map (or preferable map).
A complete set of indifference curves that summarize a consumers tastes of preferences.
71
What three typed of indifference curves can you not have (impossible)?
* Crossing indifference curves
* upward sloping indifference curves
* thick indifference curves
72
Define the marginal rate of substitution.
The maximum amount of one good a consumer will sacrifice to obtain one more unit of another good.
73
Define perfect substitutes.
Goods that a consumer is completely indifferent as to which to consume.
74
Define perfect complements.
Goods that a consumer is interested in consuming only in fixed proportions.
75
Define utility function.
The relationship between utility values and every possible bundle of goods.
76
Define opportunity set.
All the bundles a consumer can buy, including all the bundles inside the budget constraint and on the budget constraint.
77
Define the marginal rate of transformation (MRT).
The trade-off the market imposes on the consumer in terms of the amount of one good the consumer must give up to obtain more of the other good.
Rate at which you CAN trade (subject to prices, rate of what the market lets you)
* Subject to budget constraint
78
What is the slope of the indifference curve?
The marginal rate of substitution.
79
Verbally, what does the marginal rate of substitution measure?
MRS measures the rate at which a consumer is willing to trade good A for good B.
MRS = - MUb / MUa
80
What is the formula for MRS?
MRS = - MUb / MUa
Rate at which you trade good A for B.
81
What is the formula for MRT?
MRT = - Px / Py
82
What implications does MRS = MRT have?
* A consumer is willing to trade one good for the other at the same rate as the market allows the consumer to.
* The consumer values the last unit of each good equally.
* The consumer will equate the amounts spent on all goods consumed.
83
What is a corner solution?
When a consumer chooses to buy only one of the two goods. They so prefer one good to another that they only purchase the preferred good.
So the indifference curve touches the budget Lin (constraint) at one of the two corners where all of one good, and zero of the other good is consumed.
84
Define the endowment effect.
People place a higher value on a good if they own it than they do if they are considering buying it.
85
Define salience.
People are more likely to consider information if it is presented in a way that grabs their attention or if it takes relatively little thought or calculation to understand.
Economists use the term salience, in the sense of striking or obvious, to describe the idea.
86
Define bounded rationality.
People have a limited capacity to anticipate, solve complex problems, or enumerate all options.
87
Define imperfect substitutes.
Imperfect substitutes lies between perfect substitutes and perfect complements.
Straight line (perfect substitutes) , convex indifference curve (imperfect substitutes), L shaped indifference curve (perfect complements.
88
Define the Price Consumption Curve (PCC).
As price of one good falls, with the price of the second good held constant, there is a line through the optimal bundles, such that it passes equilibrium(s) 1, 2 and 3.
89
Define the Engel curve.
The relationship between the quantity demanded of a single good and income, holding prices constant.
90
Define a normal good.
A commodity of which as much or more is demanded as income rises.
91
Define a inferior good.
A commodity of which less is demanded as income increases.
92
Define the Income-consumption curve (ICC).
As INCOME increases, with the price of both goods held constant, there is a line through the optimal bundles, such that it passes equilibrium(s) 1, 2 and 3.
93
What type of good is it if the income elasticity of demand is, Xi >/= 0?
Normal good, as income increases, demand for that good either remains the same or increases.
94
What type of good is it if the income elasticity of demand is, Xi < 0?
Inferior good, as income increases demand strictly decreases for that good.
95
What goes on the y and x axis of a Engel curve?
Y axis - income
X axis - Good A
96
What does a backward sloping Engel curve represent?
That as income rises demand for the good increases, until which, you reach a point where if income continues to rise, demand begins to decrease.
Example: fast food meals
97
Define the substitution effect.
The change in the quantity of a good that a consumer demands when the goods price changes, holding other prices and the consumers utility constant.
98
Define the income effect.
The change in the quantity of a good a consumer demands because of a change in income, holding prices constant.
99
Graphically explain the substitution effect.
With the original bundle, expand in a parallel fashion the budget constraint to meet the new indifference curve, the difference between this point at the new equilibrium bundle on the new indifference curve is the substitution effect.
The substitution effect causes a movement along the indifference curve.
100
Graphically explain the income effect.
With the original bundle, expand in a parallel fashion the budget constraint to meet the new indifference curve, the difference between this point at the old equilibrium bundle is the income effect.
101
Define the compensating variable (CV).
The amount of money one would have to give a consumer to offset completely the harm from a price increase.
102
Define equivalent variation (EV).
The amount of money one would have to take from a consumer to harm the consumer by as much as the price increase
103
Define CPI.
Consumer price index, the cost of a standard bundle (basket) of goods.
104
What is the formula for profit?
Pi = R - C
R = revenue = PQ
105
Define efficient production.
The current level of output cannot be produced with fewer inputs, given existing knowledge about technology and the organization of production.
106
Verbally define the production function.
The relationship between the quantities of inputs used and the maximum quantity of output that can be produced, given current knowledge about technology and organization.
107
In a production function what do the following variables represent?
* K
* L
* M
K = Capital (factories, machinery)
L = Labour (human services)
M = Materials (raw goods)
108
Verbally define the short run.
A period of time so brief that at least one factor of production cannot be varied practically.
One factor of production is fixed essentially.
109
Verbally define fixed input.
A factor of production that cannot be varied practically in the short run.
Fixed in the short-run.
110
Verbally define variable input.
A factor of production whose quantity can be changed readily by the firm during the relevant time period.
111
Verbally define the long run.
A length enough period of time that all inputs can be varied.
112
What is the formula for MPL (marginal product of labour)?
MPL = ch.q / ch.L
113
Define the MPL.
The change in total output, ch.q, resulting from using an extra unit of labor, ch.L, holding other factors constant.
114
Verbally define APL (Average product of Labor).
The ratio of output, q, to the number of workers, L, used to produce that output.
115
What is the formula for APL?
APL = q / L
116
Define isoquant.
A curve that shows the efficient combinations of labor and capital that can produce a single (iso) level of output (quantity).
117
How does a isoquant look like?
It looks like a indifference curve, however, instead of holding utility constant, a isoquant curve holds production constant.
The farther an isoquant is from the origin, the greater the level of output.
118
What does the curvature (slope) of an isoquant show?
How readily a firm can substitute on input for another.
119
Define a fixed-proportions production function.
When it is impossible to substitute one input for another, inputs must be used in fixed proportions.
120
Verbally define the marginal rate of technical substitution (MRTS).
The number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.
121
What is the formula for the Marginal rate of technical substitution (MRTS)?
MRTS = ch.K / ch.L = - M(PL)/MP(K)
Also, MRTS = - w / r
MRTS is negative, this is because isoquants slope downwards.
122
Define economically efficient.
Minimizing the cost of producing a specified amount of output.
123
What is the formula for Marginal Cost (MC).
MC = ch.C / ch.q
Cost can be nominal or also variable costs with increasing output produced.
Another example could be:
MC = ch.VC / ch.q
Where variable cost in the short run us wL, wage times labour amount.
MC = w / MPL , MPL = ch.q / ch.L
124
What is the formula for average fixed cost (AFC)?
AFC = F / q
125
What is the formula for average variable cost (AVC)?
AVC = VC / q
126
What does long run total costs (LRTC) equal?
LRTC = VC
This is because fixed costs (FC) are zero in the long run because all factors of production are changeable (variable) in the long run, therefore all costs become variable costs.
127
Verbally define the isocost line.
All the combinations of inputs that require the same (iso) total expenditure (cost).
128
What is the formula for a isocost line?
C = wL + rK
129
Under the Short-Run cost curves, where does MC intercept AVC?
The MC curve intercepts at AVC’s minimum point.
130
Under the Short-Run cost curves, where does MC intercept AC?
The MC curve intercepts at AC’s minimum point.
131
What three equivalent approaches can a firm take to minimize its cost?
1) lowest-isocost rule
2) Tangency Rule
3) Last-Dollar rule
132
Define the lowest-isocost rule.
Pick the bundle of inputs where the lowest isocost line touches the isoquant.
133
Define the tangency rule and provide its formula.
Pick the bundle of inputs where the isoquant is tangent to the isocost line.
MRTS = - w / r
134
Define the last-dollar rule and provide its formula.
Pick the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
MPL / w = MPK / r
135
What is the long run expansion path?
The curve through the tangency points between isocost lines and isoquants.
The cost-minimizing combination of labor and capital for each output level. These points are the cost-minimizing combinations.
136
What shape does the LRAC curve typically have?
U - shaped average cost curve.
137
What shape does the SRAC curve typically have?
It looks like a indifference, however slightly increases towards the end.
138
Define economies of scale.
Property of a cost function whereby the average cost of production falls as output expands.
139
Define diseconomies of scale.
Property of a cost function whereby the average cost of production ries when output increases.
140
What inequality describes the relation between LRAC and SRAC?
LRAC = SRAC
141
What shape is the demand curve for perfectly competitive firms?
Perfectly competitive firms face a horizontal demand curve.
142
Define residual demand, in a competitive market setting.
The market demand that is not met by other sellers at any given price.
143
What is the formula for residual demand (in a competitive market setting) ?
Dr(P) = D(p) - So(p)
Residual demand = quantity market demands - supply of all other firms (supply curve)
144
What is the formula for the elasticity of demand a firm faces when the market has N identical firms?
What happens to a firms residual demand curve when the numbers firm firms increase within the market?
1) ei = ne - (n - 1)ńo
```
ei = elasticity of demand facing the firm
n = number of firms in the market
e = market elasticity of demand
ńo = elasticity of supply
```
2) the equation above shows us that a firms residual demand curve is more elastic the more firms, n, are in the market, the more elastic the market demand, e, and the larger the elasticity of supply of the other firms, ńo.
145
What is the output rule 1?
The firm sets its output where its profit is maximized.
146
What is the output rule 2?
A firm sets its output where its marginal output is zero.
NOTE: this is the point where producing more does not increase their profits, therefore only incurring extra costs. This is the point where profit is maximized.
147
What is the equation for marginal profit (MP)?
Marginal profit (MP) = MR - MC
148
What is the output rule 3?
A firm sets its output where its marginal revenue equals its marginal cost.
MR = MC
149
What is the shutdown rule 1?
The firm shuts down only if it can reduce its loss by doing so.
150
When does a firm shut down in the long run? And explain why.
If the firm faces any losses it shuts down.
This is because in the long run a firm can avoid all costs/losses.
151
How much does a profit maximizing competitive firm produce?
It produces the amount of output at which its marginal cost equals the market price.
MC = p
152
Mathematically, using the formula, when does a competitive firm shut down? (in the short run)
Revenue (R) < Variable cost (VC)
pq < VC
Rearranged:
p < VC / q
p < AVC
The firm shuts down only if its revenue is less than its avoidable variable cost.
153
When should a firm in the short run shut down? (Relate Price and AVC)
When the market price is less than the minimum AVC.
A competitive firm shuts down in the short run only if the market price is less than the minimum of its average variable cost curve.
154
In a market with free entry and exit in the long run, what holds for firms to enter or exit?
A firm enters the market if it can make a long-run profit , pi > 0
A firm exits the market to avoid a long-run loss, pi < 0
155
In the long-run, what shape does the market supply curve have when there are many firms in the market?
With many firms in the market in the long run, the market supply curve is effectively flat.
156
In the long run, what factors can make the market supply curve horizontal?
* free entry and exit.
* unlimited number of firms which have the same costs.
* input prices are constant.
