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Flashcards in Microeconomics Deck (10):

How is price elasticity of demand measured?

Percentage change in quantity of product demanded as a result of a given percentage change in price of product

Elasticity = Percentage change in quantity demanded /
Percentage change in price

Less than 1 = inelastic: quantity percentage change is less than the percentage change in price.
Equal to 1 = unitary: quantity percentage change is the same as the percentage change in price.
Greater than 1 = elastic: quantity percentage change is more than the percentage change in price.


Utility Theory

Measurement of satisfaction derived from the acquisition of a good or service


Total Utility (TU)

Increases with quantity acquired


Marginal Utility (MU)

Decreases with quantity acquired (Law of Diminishing Returns) U= Y Q=X


Indifference Curve

Quantities of two commodities give the same satisfaction


Periods of Analysis

Short-run = Period at which one input is fixed (Cannot be varied)

Long-run = Period during which all inputs can be varied


Short-run Cost Concepts what is TC = ?

TC = VC + FC

AFC = Total fixed cost/Units Produced


AFC is downward sloping (U) - Numerator constant so more units produced = decrease

AVC is (U) shaped because law of diminishing returns; reaches a point when it begins to increase because initially variable input you get benefits as production increases, but at some point, level of production is reached where additional units only increase average cost. EX - increase more employees you lose benefits and cost increases and they get in the way

Law of Diminishing Returns - System with fixed and variable inputs; adding more variable inputs will eventually result in less output per unit of input.... Variable inputs overwhelm fixed factors


Marginal Cost

Cost of last acquired unit of input (U) shaped

Change in successive variable cost, or change in successive total cost

It first decreases then increases. MC will intersect ATC and AVC at lowest points


Long-run Cost Concepts

All costs are variable; LR AVC = Developed as minimum points on a series of short-run average cost curves (multiple plants)

It is U shaped because concept of economies of scale. Long run curve increases = diseconomies of scale

Minimum = quantity of cost is proportional to quantity

When slope-upward = diseconomies output in lesser proportion than quantity of inputs


Economies of scale

Efficiency you can operate

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