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| Elasticity of Demand formula |
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| %change Quantity demanded / % change price demanded |
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as price increases TR decreases
(Ed>1) |
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as P increases TR increases
(Ed<1) |
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-responsiveness of Qd to changes in Income
-Ey= %^Qd / %^I |
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Income Elasticity
-Normal Good |
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Income Elasticity
Inferior Good |
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| Determinants for Price Elasticity of Demand |
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-More substitutes for a good-higher price elasticity of demand
-More a good is considered a luxary instead of a necessity the higher the price Elasticity of Demand
-the higher the % of one's budget goes to purchase a good the higher the price elasticity of demand
-the more time that passes (w/o a price change) the higher the Price Elasticity of demand |
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| total satisfaction one receives from consuming a particular quantity of a good |
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| cost of fixed inputs, things that don't change as quantity changes |
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| non refundable costs you've already invested |
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| When inputs are increased by some % and outputs are increased by a greater %, causing unit costs to fall |
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| inputs increased to some % and outputs increase to the same %, unit costs remain constant |
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| inputs increased to some percent and outputs increase to less %, unit costs rise |
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| Short Run Supply Curve (firm) |
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| portion of the firms marginal costs curve that lies above AVC curve |
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| Resource Allocative Efficency |
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| P=MC, perfectly competitive firms are |
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| Conditions for Long run competitive equilibrium |
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-no incentive for firms to enter /exit industry (Econ profit=0)
-no incentive for firms to produce more or less output (firms produce at output where P=MC)
-no incentive for firms to change plant size (SRATC=LRATC at quantity of output where P=MC) |
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| Short Run- perfectly competitive firm shuts down when |
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| Four assumptions behind the theory of perfect competition |
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- many sellers and buyers, none of which is large in relation to total sales or purchases
-each firm produces and sells homogenous product
-buyers and sellers all have relevant information
-easy entry and exit from industry |
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| In short run firms maximize profit by producing when... |
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| Perfect comp... how many sellers? |
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| 4 firm concentration ratio |
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| % of industry sales accounted for by 4 largest firms |
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| assumptions monopolistic competitor |
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-many sellers and buyers
-each firm produces and sells a slightly different product
-easy entry and exit |
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| demand curve of monopolistic competitor |
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=MR* MPP
=^TR/^Q of the factor |
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| =^Q of output/ ^Q of the factor |
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| 2 factors require firm to purchase factors at a ratio where |
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| MRP curve for a perfectly competitive firm |
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| same as VMP curve b/c P=MR |
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| Price searcher firms (Monop, Monop comp, olig) MRP curve |
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| lies below VMP curve b/c P>MR |
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| MRP curve shifts right and vice versa |
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| MRP curve shifts right and vice versa |
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| firm that can purchase all of the factor it wants at equilibrium price, horizontal supply curve of factor |
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| Elasticity of Demand for Labor |
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E L = %^Ql/ %^W
- the higher the elasticity demand is for that product the higher the elasticity demand for labor that produces that product and vice versa
-the higher the labor cost total ratio, the higher the El and vice versa
-more substitutes for labor = a higher El |
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| Individual Supply of Labor |
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| -depends on the degree of the income and substitution effects for each person |
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| as you are offered a higher wage, you might want to work more hours to make more $ |
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| as wage rate rises you might want to work less because you can make what you did before or more and buy more |
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| 4 assumptions for wages to remain the same for everyone |
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-demand for every type of labor is the same
-no special non pecuniary aspects to any job
-all labor is homogeneous and can be trained for different types of employment at no cost
-all labor is mobile at zero cost |
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| situation where market does not provide the ideal or optimal amount of a good |
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| side effect of an action that affects the well being of 3rd parties |
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- person's or groups actions cause a cost felt by others
-market overproduces |
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person's or groups actions cause a benefit felt by others
-market underproduces |
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| adjusting for externalities |
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-persuasion
-assignment of property rights
-voluntary agreements
-taxes and subsidies
-regulations |
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| Marginal Social Costs (MSC) |
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= Marginal Private Costs + Marginal External Costs
=MPC+MEC |
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| Marginal Social Benefits MSB |
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| Socially optimal amount (efficient amount) |
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| good that is non rivalry in consumption |
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| goods that while non rivalrous can be denied to people if they do not pay for them |
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| cannot be denied to people who do not pay for them |
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| -anyone who receives goods with paying for them |
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