Explict Costs
Requires an outlay of $
EX: paying wages
Variable Costs
Vary w/ quantity produced
Fixed Cost
Does not vary w/ quantity of out put produced
Marginal Cost
Charge in total costs divided by charge in extra unit of production
Economic Profit
ED=Accounting Profit-Implict Costs (Opp. cost of time)
Accounting Profit
Total Revenue-Total Explict Costs (wages)
Implict Costs
Dosnt require outlay of money
EX: Opportunity cost time
Diseconomies of Sale
ATC Rises and Q Increases
Constant Returns to Scale
ATC stays the same and Q Increases
Economies of Scale
ATC falls and Q Increases
In Longrun:
Supply and demand are more price elastic and this creates shortage
Non-binding Price Ceiling
Price ceiling that is above equalibrium price, thus having now effect on current market
Non-binding Price Floor
A price floor below equalibrium price, thus having no effect on current market
Binding Price Floor
Price Floor above equalibrium price thus causing a supply surplus
Surplus
Excess Supply
*Binding Price Floor
Binding Price Ceiling
Price ceiling that is below equalibrium price thus creating excess demand in market and causes shortage*
*Non-normal
Shortage
Excess Demand
Creates a binding price ceiling
*Sellers must ration goods among buyers by long-lines and discrimination according to sellers
Burden of tax falls more heavily on buyers:
Demand is inelastic
Supply is more elastic
Burden of tax falls more heavily on sellers:
Demand is more elastic
Supply is more inelastic
Inferior Goods
Income Elasticity<0
Income rises demand for inferior goods decreases (shifts left)
Normal Goods
Income Elasticity>0
Income rises demand for normal goods increases (shifts right)
Law of Supply States:
Increase quantity supplied for that good
Law of Demand State
Decreases the quantity demanded for that good
Cross-price elasticity of demand: Substitutes
*Have positive cross-price elasticity
Cross-price elasticity of demand: Complements
*Have negative cross-price elasticity
For which pairs of goods is cross-price elasticity most likely to be negative
Pencils and Eraser (complements)
Cross-price Elasticity of Demand
% change for Q good 1/% change for price good 2
Luxeries
Elastic
Necessities
Inelastic
Revenue
PricexQuantity
Unit Elastic
1
Elastic
ED>1
Inelastic
ED<1 (Vertical)
Midpoint Method
EV-SV/Midpointx100%
Price Elasticity of Demand
% change in Q/% change in P
3 Steps to Analyzing Changes in Equalibrium:
1. Decide weather to effects supply/demand
2. Decide which direction curve shifts
3. Draw out
A dress manufacturer recent has come to expect higher prices for dresses in the near future. We would expect to:
Dress manufacturer to supply fewer dresses now than it was supplying previously
Variables that effect supply curve: Technology
Tech. increases supply increases
Holding the nonprice determinants of demand constant, a change in price would:
Result in a movement along stationary demand curve
Variables that effect demand curve: Expectations
When consumer expects something to happen in the future, affecting present demand
EX: when consumers plan for high income demand for goods slightly increase
Variables that effect demand curve: Preferences
When desire to have good is based on preference
EX: Ice cream in the summer is much higher preference than in winter
People prefer more demand goes up
Variables that effect demand curve: Substitutes
2 goods for which an increase in price on one leads to the increase in demand for the other
EX: Price of tea goes up demand for coffee increases
Variables that effect demand curve: Compliments
2 goods for which an increase in price on one leads to the decrease in demand for other
EX: Price of latte increases than demand for muffins decreases
Variables that effect demand curve: Own Price
Normal good: Increase in income leads to increase in demand EX: coffee bike
Inferior good: increase in income leads to decrease in demand EX: Bus Pass (income increases want less)
Demand/Supply Decrease
Shift left
Demand/Supply Increase
Shift right
If an economy is producing efficently then:
There is no way to produce more of one good without producing less of another good
Circular Flow Diagram
Actors- households, firms
Markets- goods/services, factors of production
Positive Statements
Descriptive
Attempt to describe what would is
Normative Statements
Perscriptive
Attempt to describe what would should/ought to be
Production Possibility Frontier
Graph that shows the combos of outputs that economy can possibly produce given available factors of production and available production technology
Opportunity Cost
Whatever must be given up to obtain something else
Expensive
Elastic
Cheap
Inelastic
A lot of substitutions:
Elastic
Not a lot of substitutions
Inelastic