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UNLV / Economics / ECON 102 / What is perfectly inelastic demand?

What is perfectly inelastic demand?

What is perfectly inelastic demand?

Description

School: University of Nevada - Las Vegas
Department: Economics
Course: Principles of Microeconomics
Professor: Herman li
Term: Fall 2018
Tags: ECON102 and Microeconomics
Cost: 50
Name: Econ 102, Exam Two Study Guide
Description: This guide covers the major concepts from chapters 6, 10, 11, and 12.
Uploaded: 11/01/2018
6 Pages 8 Views 9 Unlocks
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Exam Two Study Guide


What is perfectly inelastic demand?



Thursday, November 1, 2018 1:31 PM

Chapter Six 

Equivalence of a Tax on Buyers and Sellers

The Market With No Tax: the normal demand and supply curves we've worked with so far.  P S

 6

D

350

Q

A Tax On Sellers: the tax increases cost of production, so in turn supply will decrease, or shift up. The new supply curve is  shifted according to the tax; add the tax amount to the minimum price that sellers are willing to accept at each quantity.  In other words, shift the supply curve up by the tax amount.

 P S + tax S

 8

 6

 5

Q

D

325 350


What is perfectly elastic supply?



Tax = $3, because $8 (new equilibrium price) - $5 (minimum price willing to sell at) = $3

Old equilibrium price was $6; buyers paid $6 and sellers received $6. Since buyers now pay $2 more, and  sellers receive $1 less (because all $3 of the tax go to government), the tax is felt mainly by consumers.

A Tax on Buyers: the tax increases price of good, and therefore lowers demand and the demand curve shifts down. The  

new demand curve will shift according to the tax; subtract the tax amount from the maximum price buyers are willing to  

pay for each quantity. In other words, shift the demand curve down by the tax amount.

 P S

 8 Tax = $3, because $8 (max price willing to buy for) - $5 (new equilibrium price) = $3

 6


What are lower transaction costs?



Old equilibrium price was $6; buyers paid $6 and sellers received $6. Since buyers now pay $2 more, and  

 5

325

350

sellers receive $1 less, the tax is felt mainly by consumers.  

D

D - tax

Q

Tax influence of the Elasticity of Demand We also discuss several other topics like What is a classical conditioning in psychology?

Perfectly Inelastic Demand: if the demand is perfectly inelastic then the buyer will pay the entirety of the tax, since  regardless of price, the quantity demanded remains constant.  If you want to learn more check out What is the meaning of prometheus?

Perfectly Elastic Demand: if the demand is perfectly elastic then the seller will suffer from the tax since the price buyers  will pay is constant, but sellers will receive less money since it will go to the tax.

Tax Influence of the Elasticity of Supply 

Perfectly Inelastic Supply: the sellers feel the burden of the tax since the quantity produced is constant and the buyers  pay the same equilibrium price, because they will not pay more for the product. Therefore, sellers end up receiving less  since a portion of the profits go to tax. If you want to learn more check out vmgv durkh,

Perfectly Elastic Supply: the buyers feel the burden of the tax since the amount the sellers receive is constant, so in  order to satisfy the tax buyers must pay more. If you want to learn more check out latn 1003 study guide

Chapter Ten 

Firm: an institution that hires factors of production and organizes those factors to produce and sell goods/services ~A firm's goal is to maximize profit~ Don't forget about the age old question of buact

Accounting Profit: profit made after accounting (giving out wages, expenses, and the like). Accountants measure a firm's  profit to ensure the firm pays correct income tax and to show investors how their funds are being used Economic Profit: economists measure profit to predict a firm's decisions, and the goal is to maximize economic profit  (EP) If you want to learn more check out psychology 1301

Economic Profit = Total Revenue (TR) - Total Cost (TC) 

Total Cost: the opportunity cost of production

Opportunity Cost of Production: value of best alternative use of resources used in production

The Firm's Decisions 

1. What to produce and in what quantities

 Exam 2 Study Guide Page 1

Opportunity Cost of Production: value of best alternative use of resources used in production

The Firm's Decisions 

1. What to produce and in what quantities

2. How to produce

3. How to organize and compensate managers and workers

4. How to market and price products

5. What to produce itself and buy from others

Why Firms? 

Lower Transaction Costs: transaction costs are costs that arise from finding someone to do business with, reaching  agreements on prices and other aspects of the exchange, and ensuring the agreed upon terms are fulfilled. Firm reduces  the number of individual transactions

Economies of Scale: when production cost of a unit falls as its output rate increases. Has a size benefit, where a bigger  firm can produce more at a cheaper cost

Economies of Scope: a firm experiences economies of scope when it uses specialized (and usually expensive) resources  to produce a range of goods/services. They can produce more at a lower cost than an individual can Economies of Team Production: production process in which individuals in a group specialize in mutually supportive  tasks

Chapter Eleven 

Decision Time Frames 

Short Run: time frame in which the quantity of at least one factor of production is fixed

• Usually capital, land, and entrepreneurship are fixed and labor is variable

Plant: fixed factors of production

Long Run: time frame in which the quantities of all factors of production are variable

• When a firm can change its plant

Product Schedules 

Total Product (TP): the max output that a given quantity of labor can produce

Marginal Product (MP): the increase in TP that results from a one-unit increase in the quantity employed with all other  inputs constant

Average Product (AP): TP/Total Quantity of Labor Employed

~MP can affect AP, but AP has no effect on MP~ 

Product Curves 

Total Product Curve: similar to PPF; depicts the attainable and unattainable outputs based on amount of employed  labor. After a certain point, increasing labor will decrease output.

 Q (Output) TP Unattainable

Attainable

Max Efficiency

 L (Labor)

Marginal Product Curve:

 Q

 MP

 L

Increasing Marginal Returns: MP of additional workers is greater than MP of previous workers • Results from increased specialization and division of labor

Diminishing Marginal Returns: MP of additional workers is less than MP of previous workers Law of Diminishing Returns: as a firm uses more of a variable factor of production with a given quantity of the fixed  factor of production, the MP of the variable factor eventually diminishes

Average Product Curve Vs. Marginal Product Curve:

 Q

 Max AP

AP

 MP

 Exam 2 Study Guide Page 2

AP

 MP

 L

~When MP > AP, AP is increasing~ 

~When MP < AP, AP is decreasing~ 

Short-Run Costs 

Total Cost (TC): cost of all factors of production a firm uses

Total Fixed Cost (TFC): cost of all fixed factors (plant). Does not change with output Total Variable Cost (TVC): cost of all variable factors. Does change with output ~TC = TFC + TVC~ 

 Cost TC

 TVC

 TFC

 Q

Marginal Cost: increase in TC that results from one-unit increase in output ~ Change in TC ~ 

 Change in Q

 C MC

 Q

Average Total Cost (ATC): TC per unit of output

Average Fixed Cost (AFC): TFC per unit of output

Average Variable Cost (AVC): TVC per unit of output

ATC

 C

 Q

MC AVC

~When MC < ATC or AVC, ATC or AVC is decreasing~ ~When MC > ATC or AVC, ATC or AVC is increasing~ 

Cost Cost AP

MP

MC (Marginal Cost)

AVC (Average Variable Cost)

Labor Labor

Marginal Product crosses Average Product at the Maximum Average Product Marginal Cost crosses Average Cost at the Minimum Average Variable Cost

Marginal Product and Marginal Cost are inversely related

Long Run Costs 

The long run average cost curve is a planning curve that is used to minimize the cost of production  at a given output range

The LRAC (long run average cost) curve depicts the relationship between the lowest attainable  ATC (average total cost) and output when plant and labor are both varied.

 Exam 2 Study Guide Page 3

at a given output range

The LRAC (long run average cost) curve depicts the relationship between the lowest attainable  ATC (average total cost) and output when plant and labor are both varied.

 AC ATC1 ATC2

 AC LRAC  

 ATC3

 

 

 

 ATC4

Each individual ATC curve shows the minimum price for each output, which can then be depicted in one  

graph that shows the minimum cost curve, or the long range average cost curve.

Diminishing Returns: at each plant size (each ATC), as the firm increases the quantity of labor employed,  

the marginal product of labor eventually diminishes

Diminishing Marginal Product of Capital: the change in total product divided by the change in capital  

when the quantity of labor is constant.

 LRAC

 

 

Smooths out to:

 LRAC Has three sections: Decreasing Cost (increasing returns to scale)

 Constant Cost (constant returns to scale)

 Increasing Cost (decreasing returns to scale)

Chapter Twelve 

Perfect Competition 

Perfect Competition: a market in which

□ Many firms sell identical products to many buyers --> zero market power for an individual firm (a price taker)

◆ Price Taker: a firm that cannot influence the market price because its production is an insignificant part of the total market □ No restrictions on market entry/exit

◆ Can only exit or enter a market in the long run

□ Established firms do not have an advantage over new ones

◆ Homogenous goods results in no product differentiation

□ Sellers and buyers are well informed about prices

Economic Profit and Revenue 

Total Revenue = P * Q

Marginal Revenue = Change in TR 

 Q sold

~In perfect competition, a firm's MR = market price~ 

The Firm's Decisions 

1. How to produce at minimum cost (answered by LRAC)

2. What quantity to produce

3. Whether to enter/exit a market

Marginal Analysis and the Supply Decision 

• If MR > MC, revenue from selling one more unit exceeds cost of producing one more unit, and an increase in  

output will result in an increase in profit 

• If MR < MC, a decrease in output will result in an increase in profit because the cost of producing one more unit  exceeds the revenue from selling one more unit

• If MR = MC, the profit is maximized and increasing or decreasing output will decrease revenue 

Temporary Shutdown Decision 

Loss Comparisons:  

Economic Loss = TFC + (TVC - TR)

 Exam 2 Study Guide Page 4

Temporary Shutdown Decision 

Loss Comparisons:  

Economic Loss = TFC + (TVC - TR)

TVC = AVC * Q

TR = P * Q

EL = TFC + (AVC - P)Q 

○ If a firm shuts down, Q = 0, and EL = TFC

○ If a firm keeps producing, EL = TFC + (TVC - TR)

○ If TVC > TR, the loss > TFC and the firm shuts down

○ Similarly, if AVC > P, the loss > TFC and the firm shuts down

Shutdown Point: The P and Q at which firm is indifferent to continuing production or shutting down • Occurs when AVC is at minimum

• Firm is minimizing loss when loss = TFC

~ Marginal revenue = market price. This means that the graph for marginal revenue is a horizontal line at that price~ 

P MR 

Q

A firm decides how much it will produce based off of the MC and MR

MC

Profit Max

P MR 

Q

If ATC > MR, then the firm will experience economic loss 

MC ATC

P1

P MR

Q1

TR = P * Q1

Q

TC = ATC * Q = P1 * Q1

If TC > TR, then economic loss is experienced because Economic Loss = TC - TR

If ATC = MR, then the firm will break even 

MC ATC

P MR

Q1

TR = P * Q1

Q

TC = ATC * Q1 = P * Q1

TR = TC

If ATC < MR, then the firm will experience economic profit. 

MC

ATC

P MR

P2

Q1

Q

 Exam 2 Study Guide Page 5

P MR

P2

Q1 Q

TR = P * Q1

TC = ATC * Q1 = P2 * Q1

If TC < TR, then economic profit is experienced by the firm because EP = TR - TC

Shutdown Point (SR) = Minimum Average Variable Cost

Break Even Point (LR) = Minimum Average Total Cost

In the Short Run:

• If the firm is at the shutdown point, the firm is indifferent to shutting down or to producing • If the firm is above the SR but below the LR, then the firm maintains production, but is in economic loss • If the firm is below the SR, then the firm shuts down

~As long as the firm earns enough to cover the minimum average variable cost it maintains production~ In the Long Run:

• If the firm is above the LR, then the firm will remain in the market

• If the firm is below the LR, then the firm exits the market

Short Run Supply Curve = Short Run Marginal Cost Curve 

Long Run Supply Curve = Long Run Marginal Cost Curve 

 P

MC

ATC

AVC

D

C

B

A

 Q

Short Run Marginal Cost Curve/Supply Curve is from point B and above Long Run Marginal Cost Curve/Supply Curve is from point D and above 

 P

 Min AVC pt.

SC/MC

 Q

 Firm 1

Practice Questions:

1. The profit maximizing output condition for a perfectly competitive firm is:

a. MR = P

b. P = MC

c. P = ATC

d. TR = TC

2. The firm's short run supply curve is equal to the:

a. Entire marginal cost curve

b. Marginal cost curve above the AVC

c. Marginal cost curve above the ATC

d. Marginal cost curve above the AFC

3. A perfectly competitive firm's short run shutdown point is the level or output at: a. Price equals average total cost

b. Price equals average fixed cost

c. Price equals the minimum average variable cost

d. Price is above the minimum average total cost but below the minimum average fixed cost

Answers:

1. B

2. B

3. C

 Exam 2 Study Guide Page 6

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