Equations, Micro

Question 1

Allocative efficiency conditions

Answer 1

D = S, MSB = MSC, P = MC

Question 2

Productive efficiency condition

Answer 2

Any point of the PPF

min. of AC

Question 3

X efficiency

Answer 3

AC₂ = AC + x, X inefficiency shifts the AC curve up

Question 4

Dynamic efficiency

Answer 4

LR supernormal profit (from reinvesting short term profits)

Question 5

Minimum efficient scale (MES)

Answer 5

The lowest quantity where AC is minimised and all the economies of scale are exploited

Question 6

Shutdown Condition

Answer 6

The condition: AR (price) = AVC

The variables:
AR = (price*quantity) /quantity = price

AC (Average Cost) = Total Cost (TC) / Output (Q)
Includes both fixed costs (e.g., rent) and variable costs (e.g., raw materials, wages).
AC is always higher than or equal to AVC because it includes AFC (Average Fixed Cost) as well.

AVC (Average Variable Cost) = Total Variable Cost (TVC) / Output (Q)
Only includes variable costs, ignoring fixed costs.
AVC is always below AC since it excludes fixed costs.

Condition explained:
A firm needs to make normal profit or supernormal profit in the long run, which is TR>=TC. Because otherwise, even if the firm is making some profit each quarter (TR>TVC), the firm should still close because the factors of production could be used to better effect elsewhere. However, in the short term, a firm has fixed costs that it has to pay, whether or not it produces any output - so they will continue operating providing AR (price) > AVC, since this would mean any additional unit sold contributes towards paying off the fixed costs, furthermore, if price=AVC, then the firm may or may not stay open - depending on wether or not the expected conditions to improve. Lastly, if price < AVC, the firm will immediately shutdown since continuing operations worsens the losses.

Question 7

Concentration ratio

Answer 7

An ‘n market share’ is the market share of the top n largest markets added together

Question 8

Average utility

Answer 8

TU(total utility)/quantity

Question 9

Marginal utility

Answer 9

∆TU/∆Q

Question 10

Utility maximisation

Answer 10

MU = P

Question 11

PED

Answer 11

% ∆Q(quantity demanded)/% ∆P

Question 12

PES

Answer 12

% ∆Q(quantity supplied)/% ∆P

Question 13

XED

Answer 13

% ∆Q(quantity demanded of good A)/% ∆P(price of good B)

Question 14

YED

Answer 14

% ∆Q(quantity demanded)/% ∆Y(income)

Question 15

Percentage change

Answer 15

Difference/original *100

Question 16

Index number

Answer 16

Raw number in current year/raw number in the base year (*100)

Question 17

Profit Max Employer

Answer 17

MRP = MCl

Question 18

Gini Coefficient

Answer 18

A/(A+B)

Question 19

Total cost (TC)

Answer 19

TFC + TVC

Question 20

Average cost

Answer 20

Total cost/quantity

Question 21

Marginal Cost

Answer 21

∆TC/∆Q

Question 22

Total Revenue

Answer 22

P*Q

Question 23

Marginal Revenue

Answer 23

∆TR/∆Q

Question 24

Average Product

Answer 24

TP/Q

Question 25

Marginal Product

Answer 25

∆TP/∆Q

Question 26

Returns to scale

Answer 26

%∆output > %∆input, increasing returns to scale %∆output = %∆input, constant returns to scale %∆output < %∆input, decreasing returns to scale

Question 27

Profit

Answer 27

TR-TC

Question 28

Profit Maximisation

Answer 28

MR = MC

Question 29

Revenue maximisation

Answer 29

MR = 0

Question 30

Sales maximisation

Answer 30

AR = AC This the highest level of output a firm can sustain in the long run, otherwise the firm would be making a loss

Question 31

Profit satisficing

Answer 31

Between profit max. and sales max.

Question 32

Interpretation of the values of PED, PES, XED, and YED

Answer 32

PED > 1 Elastic demand (responsive to price changes) PED < 1 Inelastic demand (less responsive to price changes) PED = 1 Unitary elastic (proportional response) PED = 0 Perfectly inelastic (no response to price change) PED = infinity Perfectly elastic (consumers switch entirely) PES > 1 Elastic supply (responsive to price changes) PES < 1 Inelastic supply (less responsive to price changes) PES = 1 Unitary elastic (proportional response) PES = 0 Perfectly inelastic (fixed supply) PES = infinity Perfectly elastic (unlimited supply at a price) XED > 0 Substitutes (positive relationship) XED < 0 Complements (negative relationship) XED = 0 No relationship between goods YED > 1 Luxury good (income elastic) 0 < YED < 1 Normal good (income inelastic) YED < 0 Inferior good (demand falls as income rises)