Eco211-Exam 2

Question Answer
Explicit Cost Require an outlay of moneyex. PAying wages
Implicit Cost Do not require an outlay of money
ex. Opp. Cost
Accounting Profit Total revenue–total Explicit Cost(ignores implicit cost)
Economic Profit Total revenue–total cost (Including explicit and implicit cost)
The production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output for that good
Marginal Product Increase in output is the increase in output arising from an additional unit of that input, holding all other things constant MP=Q/L
Property of Diminishing Marginal Product Marginal product of an input declines as the quantity of input increases(other things equal)
Fixed cost Do not vary with quantity fo output produced
Variable Cost Vary with quantity produced
Property of diminishing Product Marginal product of an input declines as the quantity of the input increases
MB>MC Rational People think at the margin
Marginal Cost is the increase in total cost from producing one more unit
Averaged Fixed Cost is the fixed cost determined by the quantity of the output AFC=Fc/Q
Average Variable Cost Variable Cost divided by quantity output AVC=VC/Q
Average Total Cost Equals total cost divided by the quantity of the output
Efficent Scale Quantity that Minimizes ATC
Elasticity -measures how much one variable responds to change in another variable -numerical measure of responsivness of Qd and Qs to one of its determinants.
Price Elasticity of Demand Measures how Qd responds to a change in P%change Qd/%changeP
Price Elasticity of Demand Calculation (3step method)midpoint method1.Pd=%change Qd/%changeP2.Change in Qd3.Change in Price
Elastic Good Pd>1
Inelastic Good Pd<1
Short Run v. Long Run Elasticity Short run( <1year)inelasticLong Run (>1 year) Elastic
Flat Curve (Vertically)Demand Perfectly inElastic Demamnd
Steep curve, Demand, smaller elasticity
Elasticity of a Linear Demand Curve Slope of a linear demand curve is constant, but elasticity is not
Revenue PxQ
Price increase on Revenue(2) 1. Higher price=more revenue on every product2.sell fewer units (low Q—>Law of Demand)
Price elasticity of demand is greater than 1%change in Q>% change in Price IF demand is elastic,
Income Elasticity of Demand MEasures the reponse of Qd to a change in consumer income %changeQd/ %change income
increased income… increase demand for normal good
normal good income elasticity>0
Inferior good income elasticity <0
Cross-Price Elasticity of Demand MEasures the response of demand for one good to changes in the price of another good %chang in Qd for G1/%change in P for G2
Substitutes Elasticity>0
Complements Elasticity <0
Price Elasticity of Supply Measures how much Qs responds to change in P%change in Qs/%change in PMEasures sellers sensativity to price
Price Ceiling legal maximum of the price
Price Floor legal minimum of price
Short Run some inputs are fixed –cost is fixed
Long run All inputs are variable –cost is variable
LRATC Long Run Average Total Cost
SRATC Short Run Average Total Cost
Economies of Scales LRATC falls as Q increases
Constant Returns of Scale LRATC stays the same as Q increases
Diseconomies of Scale LRATC Rises as Q increases
Economies of Scale (DEF) when increasing Production allows greater specialization:Workers are more efficient -More common when Q is low
Diseconomies of Scale(DEF) are due to cooperation problems in large organizations -more common when Q is high
Willingness to pay is the maximum amount the buyer will pay for that good
Welfare Economics studies how the allocation of resources affects economic wellbeing
Marginal Buyer Buyer who would leave the market if price was any higher(LAST person who doesn't pay)
Consumer Surplus amount a buyer is willing to pay minus the amount the buyer actually pays ( WTP-AP=CS)
Total Consumer Surplus Total CS=area under Demand Curve, but above WTP
Cost the value of everything a seller must give up to produce a good
Marginal Seller the one who would leave if the price was any lower
Producer Surplus the amount a seller is paid for a good minus the sellers cost (PS=P-Cost)
Total Producer Surplus Area above the supply curve under Price, From
Producer surplus= PROFIT
An allocation of resources is efficient… it maximizes total surplus
Efficiency -Goods are consumed by the buyers who value them most highly -Goods are produced with lowest cost-Raising or Lowering the quality of a good would not increase total surplus.

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