Chapter 5,6,7,8 Flashcards Preview

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Flashcards in Chapter 5,6,7,8 Deck (67):
1

constant unitary elasticity

when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied

2

cross-price elasticity of demand

the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B. substitute goods have positive cross-price elasticities of demand: if good A is a substitute for good B, like coffee and tea, then a higher price for B will mean a greater quantity consumed of A. Complement goods have negative cross-price elasticities: if good A is a complement of good B, like coffee and sugar, then a higher price for B will mean a lower quantity consumed of A.

3

elastic demand

when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

4

elastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

5

elasticity

an economics concept that measures responsiveness of one variable to changes in another variable

6

elasticity of savings

the percentage change in the quantity of savings divided by the percentage change in interest rates. sometimes laws are proposed that seek to increase the quantity of savings by offering tax breaks so that the return on savings is higher. will increase supply curve if it is elastic.

7

inelastic demand

when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes. example: the demand for cigarettes is relatively inelastic among regular smokers. in order to reduce the quantity of cigarettes demanded, it must be achieved by shifting this inelastic demand back to the left, perhaps with public programs to discourage the use of cigarettes or to help people to quit.

8

inelastic supply

when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)

9

infinite elasticity/perfect elasticity

the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance

10

price elasticity

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

11

price elasticity of demand

percentage change in the quantity demanded of a good or service divided the percentage change in price

12

price elasticity of supply

percentage change in the quantity supplied divided by the percentage change in price

13

tax incidence

manner in which the tax burden is divided between buyers and sellers. If demand is more inelastic than supply, consumers bear most of the tax burden, and if supply is more inelastic than demand, sellers bear most of the tax burden. example of cigarette taxes showed that because demand is inelastic, taxes are not effective at reducing the equilibrium quantity of smoking and are passed along to consumers in the form of higher prices.

14

unitary elasticity

when the calculated elasticity is equal to one indicating that a change in price of a good or service results in a proportional change in the quantity demanded or supplied

15

wage elasticity of labor supply

the percentage change in hours worked divided by the percentage change in wages. the wage elasticity of labor supply for teenage workers is generally thought to be fairly elastic; that is, a certain percentage change in wages will lead to a larger percentage change in quantity of hours worked. for adults in 30s, it is inelastic

16

zero inelasticity/perfect inelasticity

the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance

17

backward-bending supply curve for labor

the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours

18

behavioral economics

a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation

19

budget constraint line

shows the possible combinations of two goods that are affordable given a consumer's limited income

20

consumer equilibrium

when the ratio of the prices of goods is equal to the ratio of the marginal utilities (point at which the consumer can get the most satisfaction)

21

diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit. example: the more barbers you add to work in a barber the more crowded the shop gets and the less jobs one can do. another example would be added water to a field. at first the water would help the field and give you a positive output but the more water you add the more flooded the field will become, giving you a negative output.

22

fungible

the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual

23

income effect

a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect

24

marginal utility

the additional utility provided by one additional unit of consumption

25

marginal utility per dollar

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price

26

substitution effect

when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect

27

total utility

satisfaction derived from consumer choices

28

accounting profit

total revenues minus explicit costs, including depreciation

29

average profit

profit divided by the quantity of output produced; profit margin

30

average total cost

total cost divided by the quantity of output. average cost curves are typically U-shaped. Average total cost starts off relatively high because at low levels of output total costs are dominated by the fixed cost. ATC then declines, as the fixed cost are spread over an increasing quantity of output. but as output expands, the average cost begins to rise. at the right side of the average cost curve, total costs begin rising more rapidly as diminishing returns kick in.

31

average variable cost

variable cost divided by the quantity of output. note that at any level of output, the average variable cost curve will always lie below the curve for average total cost

32

constant returns of scale

expanding all inputs proportionately does not change the average cost of production

33

diseconomies of scale

the long-run average cost of producing each individual unit increases as total output increases

34

economic profit

total revenues minus total cost (explicit plus implicit costs)

35

explicit costs

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

36

firm

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs

37

fixed cost

expenditure that must be made before production starts and that does not change regardless of the level of production. example: rent on a factory

38

implicit costs

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

39

long-run average cost (LRAC) curve

shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

40

marginal cost

the additional cost of producing one more unit. so it is not the cost per unit of all units being produced, but only the next one. the marginal cost curve is generally upward-sloping, because diminishing marginal returns implies that additional units are more costly to produce.

41

private enterprise

the ownership of businesses by private individuals

42

production

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

43

production technologies

alternative methods of combining inputs to produce output

44

revenue

income from selling a firm's product; defined as price times quantity sold

45

short-run average cost (SRAC) curve

the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

46

total cost

the sum of fixed and variable costs of production

47

variable cost

cost of production that increases with the quantity produced. the more you produce the greater the variable cost. labor is an example of a variable cost

48

entry

the long-run process of firms entering an industry in response to industry profits

49

exit

the long-run process of firms reducing production and shutting down in response to industry losses

50

long-run equilibrium

where all firms earn zero economic profits producing the output level where P=MR=MC and P=AC

51

marginal revenue

the additional revenue gained from selling one more unit

52

market structure

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold.

53

perfect competition

each firm faces many competitors that sell identical products... 1) Perfect information-all buyers and sellers have complete and current information on the prices being asked and offered in all parts of the market 2) perfect freedom of entry- new sellers are able to enter the market and sell the products on the same terms as existing sellers 3) absence of all economic friction/perfect mobility- including transportation costs from one part of the market to another

54

price taker

a firm in a perfectly competitive market that must take the prevailing market price as given

55

shutdown point

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point AVC; if the price is below this point, the firm should shut down immediately

56

law of supply in labor markets

a higher price for labor leads to a higher quantity of labor supplied; a lower price leads to a lower quantity supplied

57

law of demand in labor markets

a higher price in the labor market leads to a decrease in the quantity of labor demanded by employers, while a lower salary or wage leads to an increase in the quantity of labor demanded

58

under perfect competition (benefits)

1) consumer satisfaction is maximized
2) profits are maximized for individual producers
3) output of the desired goods are maximized

59

pure competition

1) large number of sellers-many firms in the industry
2) large number of buyers
3) no control over price by either seller or buyer. their demand and supply is too small to total traded to affect prices (prices are determined by the market)
4) homogenous or standardized product- no buyer has any reason for preferring to deal with any particular seller. no non-price competition
5) objective of each is either to maximize utility or profits

60

determinants of demand

1) change in buyers taste
2) change in number of buyers
3) change in income
4) change in the prices of related goods
5) change in expectations

61

determinants of aggregate demand

1) change in consumer spending
2)change in investment spending
3) change in government spending
4) change in net export spending

62

determinants of supply

1) change in resource prices
2) change in technology
3) changes in taxes and subsidies
4) change in prices of other goods
5) change in expectations
6) change in number of suppliers

63

determinants of aggregate supply

1) change in input prices
2) change in productivity
3) change in legal-institutional environment

64

consumers benefit more, in general, when the demand curve is more inelastic because the shift in the supply results in a much lower price for consumers

note

65

the more elastic the demand curve, the easier it is for consumers to reduce quantity instead of paying higher prices. the more elastic the supply curve, the easier it is for sellers to reduce the quantity sold, instead of taking lower prices.

note

66

normal goods

for most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. a higher level of income for a normal good causes a demand curve to shift to the right

67

inferior goods

when the income elasticity of demand is negative. higher level of income would cause the demand curve to shift to the left