Micro Quiz/Test #2 Flashcards by Unknown Unknown

Price Elasticity
Income Elasticity
_____________

Cross-price elasticity of demand

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Symbol of cross-price elasticity of demand

Exy

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What is Exy

Looks at how responsive the demand for good x is to change in the price of good y

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Define Exy

% change in demand for good x over % change in price of good y

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A(n) ____ in the price of good y leads to a(n) ____ in the demand for good x
Exy > 0

increase, increase
or
decrease, decrease

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When Exy > 0 tells us that goods x and y are _____ goods.

substitute

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A(n) ____ in the price of good y leads to a(n) _____ in the demand for good x
Exy < 0

decrease, increase
or
increase, decrease

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When Exy < 0 tells us that goods x and y are _____ goods.

complementary

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A(n) ____ in the price of good y leads to _____
Exy = 0

increase or decrease, no change

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When Exy = 0 tells us that goods x and y are _____ goods.

unrelated

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Consumer Theory

Maximum Total utility

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Total Utility

The total happiness or the total satisfaction from consuming a given quantity of a good

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Marginal Utility

The change in total utility from consuming an additional unit of a good

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Law of Diminishing Utility

The more of a good consumed at some point, total utility will rise by less and less.

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Production Theory

maximize profits

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How can producers maximize profits

Productivity of Inputs
Costs of Production

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Total Product

the total amount of output produced by a firm

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Productivity of Inputs: 2 factors

Labor and Capital

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Symbols of Labor and Capital

L and K

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Function of Total Product

A firm’s output is a function of the amount of labor and capital that it employs
TP F(L,K)

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Marginal Product of Labor (MPL)

the change in a firm’s output from employing an additional unit of labor

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Marginal Product of Capital (MPK)

the change in a firm’s output from employing an additional unit of capital

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Short Run

a period of time that is not long enough for a firm to change all of its inputs

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3 points of short run:

it takes a longer period of time to change capital than it does to change labor.
in the short run a firm has enough time to change labor
in the short run the firm does not have enough time to change capital

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Short-run production formula

TP = F(L *K) capital amount is changed in the short run

Long Run

a period of time that is long enough for a firm to change all of its inputs. Labor and capital can change in the long run

Long-run production function formula

TP = F(L*K)

Costs of production Equation

Total Cost = Explicit Costs + Implicit Costs

Explicits Costs (EC)

Any money spent by a firm.

Examples of EC

labor costs, capital costs, training, materials, etc.

Implicit Costs (IC)

opportunity costs of any money spent by the firm The value of the best thing given up whenever the firm spends money

Objective of Firm is to ______

maximize profits

Define profit

Profit = Total revenue - total cost π = TR - TC

When π > 0 the firm has earned ________

an economic profit

When π = 0 the firm has earned ________

a normal profit

When π < 0 the firm has incurred ________

an economic loss

Total Fixed Costs (TFC)

costs that do not change as a firm either increases or decreases its output. costs that are not a function how much output the firm produces

What does AFC stand for and formula?

Average Fixed Costs TFC/TP (total fixed costs/total product)

What does AVC stand for and formula?

Average Variable Costs TVC/TP (total variable costs/total product)

What does ATC stand for and formula?

TC/TP (total costs/total product) or AFC + AVC (average fixed costs + average variable costs)

What does TVC stand for and mean?

Total variable costs Costs that are direct function of how much output the firm produces

What happens to TVC between 0 and TP1

- labor decreases more productive MPL increases - TVC increases at a decreasing rate

What happened to TVC beyond TP1

- labor is less productive - MPL decreases, TVC increases at increasing rate

What does MC stand for and mean

Marginal Cost The change in total cost from producing an additional unit of output

Relation between AVC to ATC

ATC = AFC + AVC - any output ATC > AVC by the amount of AFC - output increases, AFC decreases - output grows the distance between ATC and AVC gets smaller minimum ATC occurs at a greater output

Relation between MC to AVC and ATC

- MC intersects AVC at minimum AVC - MC intersects ATC at minimum ATC - If MCAVC, then AC increases

Four types of competition

1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly

What defines perfect competition?

- many small firms - firms produce homogeneous output - price is known by all consumers and all producers - no barriers to entry/exit

In a perfectly competitive market, the forces of ____ and _____ determine _____.

demand, supply, price

What is represented by Uppercase X

total market output of all firms

What is represented by Lowercase x

output of a single firm

Each firm determines how much ____ to sell at the ______

output, market price

perfectly competitive firms are "_____"

price takers

Total Revenue

Formula of TR

TR = Price * Total Product

Average Revenue

Formula of AR

AR = Total Revenue / Total Product (TR/TP)

What does MR stand for and what does it mean

Marginal Revenue The addition to total revenue from selling an additional unit of output

For a perfectly competitive firm, Price ___ AR ____MR

=,=,=

In a perfectly competitive firm TR is shaped as an

linear upward sloping function

What are the two ways to identify a perfect competition firm's profit maximizing output

1. use total revenue and total cost 2. use marginal revenue and marginal cost

For Method 1 for output >TP1 TC __ TR π __ 0 Economic Loss or Normal Profit or Economic Profit

>,<, Economic Loss

For Method 1 Between 0-TP0 TC __ TR π __ 0 Economic Loss or Normal Profit or Economic Profit

>,<, Economic Loss

For Method 1 At TP0 or at TP1 TC __ TR π __ 0 Economic Loss or Normal Profit or Economic Profit

=,=, Normal Profit

For Method 1 Between TP0-TP1 TC __ TR π __ 0 Economic Loss or Normal Profit or Economic Profit

<,>, Economic Profit

For Method 1 at TP☆ TR __ TC by the _____ amount Profit is _____

>, greatest, maximized