Midterm 2 Study Guide
Midterm 2 Study Guide ECON 1010
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This 5 page Study Guide was uploaded by Michael Notetaker on Sunday October 18, 2015. The Study Guide belongs to ECON 1010 at Tulane University taught by Toni Weiss in Fall 2015. Since its upload, it has received 39 views. For similar materials see Intro to Microeconomics in Economcs at Tulane University.
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Date Created: 10/18/15
Chapter 5Elasticity First Chapter on Midterm 2 Elasticity The general measure of responsiveness between variables usually price and quantity demanded Elasticity of A with respect to B Percent change in APercent change in B Long term demand curves are more elastic as consumers have more choices The steeper the curve the more inelastic the demand or supply is Price Elasticity of Demand always negative The ratio of the percent increase in quantity demanded to the percentage change in price measures the responsiveness of quantity demanded to changes in price PED Change in QD Change in Price Change in QD Q2Q1Q1Q22 X100 Change in Price is calculated in the same fashion Perfectly Inelastic Demand Quantity demanded does not respond to price changes at all Perfectly Elastic Demand Quantity demanded drops to 0 at the slightest increase in price Elastic Demand The change in QD is larger than the change in Price elasticitygt1 Inelastic Demand The change in QD is smaller than the change in Price elasticitylt1 Unitary Elasticity The change in QDchange in Price elasticity1 Midpoint Formula A more precise way of calculating percentages by using the midpoint of QD1amp2 and Price1amp2 Point Elasticity A measure of elasticity that uses the slope measurement Multiply the inverse of the slope at a point by PlQ1 Total Revenue Price X Quantity Price increase on Inelastic Good Total revenue increases Price increase on Elastic Good Total revenue decreases Price cut on Inelastic Good Total revenue decreases Price cut on Elastic Good Total revenue increases Determinants of Demand Elasticity Availability of substitutes goods that make up a small portion of our budget are inelastic Income Elasticity of Demand A measure of the responsiveness of demand to changes in income IEDChange in QDChange in Income Income elasticity is positive for normal goods and negative for inferior goods Cross Price Elasticity of Demand A measure of the response of QD of one good to the price change in another good CPEDChange in QD of GoodlChange in Price of Good2 Substitutes have positive CPED Complements have negative CPED Elasticity of Supply A measure of the response of QS to a change in price of that good Usually positive in output markets ES Change in QSChange in Price Elasticity of Labor Supply A measure of the response in labor supplied to a change in the price of labor ELSChange in QS of Labor Change in Wage Rate Chapter 6 Household Behavior and Consumer Choice Assumptions Perfect Knowledge All households know the quantity and price of everything available in the market and all firms have all available information concerning wage rates capital costs technology and output prices Perfect Competition There are many firms each being small relative to the industry and producing virtually identical products and no firm is large enough to control prices Homogenous Products Undifferentiated outputs that are identical to or indistinguishable from one another 3 basic decisions of all households How much of each product to demand how much labor to supply and how much money to spend now and how much to save for later Household Decisions in the Output Market Budget Constraint The limits imposed on household choices by income wealth and product prices The available choices to a household within the budget constraint is called the Opportunity or Choice Set Budget Line The graph of the possible combinations of two goods one can buy The slope of the budget line is price of the good on the horizontal axisthe price of the good on the vertical axis Changes in income cause parallel shifts in the budget line changes in the price of the goods causes pivots Indifference Curves All the combinations of goods for which the total utility is the same therefore the consumer is completely indifferent Indifference curves exist at all income levels and maximizing ones money is to buy the combination of goods at the point where an indifference curve touches ones budget line Real Income The set of opportunities to purchase real goods and services available to households as determined by prices and income Utility The satisfaction a product yields measured in utils Marginal Utility MU The utility gained only from the last good consumed Utility Maximizing Rule MUxPxMUyPy for all goods where X and y are goods DiamondWater Paradox Things with greatest value in use often have little value in exchange air water etc and things with little value in use often have great value in exchange diamonds gold Income Effect of a Price Change The change in the consumption of good X due to higher income or price fall Substitution Effect Change in consumption of substitutes due to a price change of a good Opportunity cost of this good decreases Household Decisions in the Labor Market Household choices in the labor market whether to work how much to work what type of job to work at How much labor to supply is in uenced by availability of jobs market wage rates skills they possess time The price of labor one39s hourly wage Substitution and Income Effects of Wage Increases Whichever effect dominates determines the graph shape Substitution Effect The opportunity cost of leisure increases so the individual works more exponential graph Income Effect Increase in income allows for more leisure time to be consumed so the individual works less Exponentially decreasing graph Financial Capital Market Institutions where suppliers of capital households that save interact with demanders of capital firms that want to invest Law of Demand Explained by the fact that for normal goods the marginal utility decreases and both the income and substitution effects of a price decrease lead to a higher quantity consumed Chapter 7 The Production Behavior Process The Behavior of ProfitMaximizing Firms 3 Decisions all Firms must make How much output to supply how to produce that output how much of each input to demand Basis for Decisions The market price of the output the techniques of production available the prices of inputs Profit Total Revenue P x Q Total Cost Explicit costs opportunity costs for all factors of production Normal Rate of Return A rate of return on capital that is just sufficient to keep owners and investors happy it should be nearly the same as the interest rate on riskfree government bonds Risky companies need higher rates of returns to keep investors happy A firm earning the normal rate of return has no economic profit as the normal rate of return is considered a cost Short Run The period of time where the firm is operating under a fixed scale of production and firms can neither enter not exit an industry Long Run The period of time for which there are no fixed factors of production Firms can increase or decrease the scale of operations and new firms can enter or exit the industry Production Process Optimal Method of Production The production method that minimizes cost for a given level of output Production Technology The quantitative relationship between inputs and outputs Labor Intensive and Capital Intensive Technology Technology that relies heavily on either labor or capital Production or Total Product Function A mathematical expression of the relationship between inputs and outputs that shows units of total product as a function of units of inputs Average Product The average amount of product produced by each unit of a variable factor of production total producttotal units of labor Marginal Product The additional output that can be produced by adding one more unit of a specific input labor or resource The marginal product curve graph is the derivative of the total product curve Adding capital makes workers more effective as it gives them the resources to perform more tasks 5 grills more people can grill Law of Diminishing Returns When additional units of a variable input are added to fixed inputs after a certain point the marginal product of the variable declines Diminishing returns always apply in the short run and in the short run all firms face diminishing returns it is harder to increase output the closer to carrying capacity you are Choices of Technology Factors of Production inputs are complementary in that additional labor makes capital more productive and Vice versa For example hiring more workers to use idle grills increases productivity as does giving idle workers more grills to cook food Inputs are substitutable in that machines can replace laborers and laborers can replace machines For example if labor is high companies replace workers with machines ATMs and Bank Tellers but if the cost of capital is high companies replace machines with workers Lifeguards instead of hightech robots at the beach
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