R12 Topics in Demand and Supply Analysis 01

Economics: r. 12 topics in demand and supply analysis

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1. unit elastic price elasticity of demand 11. income the phenomenon in which, as a good's price
coefficient is -1 effect falls, real income rises and. if this good is
normal, more of it will be purchased (AND if it
2. price elasticity, a measure of the sensitivity of
is inferior, less of it will be purchased and
elasticity and demand to changes in price
substituted for a normal good). REFER TO
inelasticity
GRAPH
elasticity: demand IS sensitive to
price changes (WHEAT) 12. 2 exceptions Giffen goods are inferior make up a large
to the law of portion of budget. As price falls, the
inelastic: demand is not sensitive to demand, substitution effect tends to cause more of the
price changes (i.e., they will be Giffen and good to be consumed, but the highly negative
bought regardless of price). (APPLE Veblen income effect overwhelms the substitution
products) goods effect. Demand curves for Giffen goods are
positively sloped.
3. own price elasticity of the ratio of percentage change in
demand quantity demanded to percentage
Veblen goods: consumers will buy more as
change in a good's price
pice increases (status-items)
%^y / %^x 13. if income if positive: the good is normal
elasticity of
4. if own price elasticity elastic (i.e., a decline in price will
demand is
of demand is greater result in a higher total expenditure
positive, if negative: the good is inferior
than 1 in absolute (revenue) on that good). APPLE
then the
terms, then demand is products
good is
5. if own-price elasticity inelastic (i.e., a decline in price will (normal or
of demand is less than result in a lower total expenditure inferior)?
one in absolute terms, (revenue) on that good). WHEAT
then demand is if it is
6. if own price elasticity unit elastic (i.e., total expenditure on negative,
of demand is equal to that good is independent of price). then the
negative 1, then good is
demand is (normal or
inferior)?
7. own price elasticity of negative
demand will usually be 14. cross price the ratio of the percentage change in quantity
(positive or negative)? elasticity of demanded of one good to the percentage
demand change in the price of a related good
8. income elasticity of the ratio of the percentage change
REFER equation
demand in quantity demanded to the
percentage change in consumer 15. if cross price if positive they are substitutes
income elasticity of
demand if negative they are complements (demand for
9. demand is negatively the substitution effect or the income
between 2 automobiles will reduce if there is a significant
sloped because 1 of 2 effect
goods is rise in price of gasoline)
things
positive they
10. susbtitution effect the phenomenon in which as a are ( )
good's price falls, more of this
good is substituted for other, more If it is
expensive goods REFER TO GRAPH negative
they are ( )
 R12 Topics in Demand and Supply Analysis 02

16. law of demand ... 27. marginal revenue (MR) the change in total
states that a revenue
decrease in price associated with
will cause an selling one more
increase in unit of output
quantity
demanded ^ TR / ^ output
17. total product of total quantity that is able to be
often the "output"
labor is a short- produced for each level of labor input,
here = 1 (as is
run concept that holding all other inputs constant.
stated in the
is the:
definition above
18. average product total product of labor / # labor hours because 1 more
of labor (APL) unit is being
19. marginal product ^ in total product / ^ in labor hours produced (e.g., 23
of labor (MPL) - 22 = 1)
MPL may or may not rise as more labor 28. firms under conditions of perfect ...
is added to a fixed amount of capital. competitions have no pricing power
20. law of diminishing and, therefore, face a perfectly
returns horizontal demand curve at the market
price. For firms under conditions of
perfect competition, price is identical
to MR
29. Firms under conditions of imperfect because on a
competition face a negatively sloped negatively sloped
dictates that additional output must demand curve and have pricing power. demand curve
eventually fall as more labor is added For firms under conditions of (granted it is not
to a fixed amount of capital. imperfect competition, MR is less than purely imperfect
price... competition/pure
21. productive costs as input prices rise and fall as inputs monopoly)
increase become more productive you must lower
22. short-run cost total expenditure on fixed capital + total the price to sell
(STC) expenditure on labor more product

23. short-run wage / marginal product of labor (MPL) 30. economic profit TR - total
marginal cost economic costs
(SMC) MPL = ^ in total product / ^ in labor accounting profit
hours TR - total
accounting costs
24. average variable wage / average product of labor
cost (AVC) 31. economic costs take into account the ...
total opportunity cost of all factors of
25. average total cost total cost (TC) / # units
production
(ATC)
32. opportunity cost the next best
26. revenue (total price (P) * quantity sold (Q)
alternative that is
revenue (TR))
forgone in making
a decision.
33. maximum economic profit requires that 1. marginal
#2 revenue (MR) =
marginal cost
(MC)

2. MC not be
falling with output
 R12 Topics in Demand and Supply Analysis 03

34. breakeven point occurs when total revenue 43. the minimum point on the long-run average total cost ...
= total cost curve defines the minimum coefficient scale for a firm
otherwise
stated...
the output
quantity (Q)
at which
average total
cost (ATC) =
Price (P)
35. shutdown occurs when a firm is better off... not
operating.

operating
would result
in loss
36. if all fixed costs are sunk costs, then ...
shutdown occurs when the market price
falls below minimum Average Variable Costs
(AVC).

this way, you only incur fixed losses instead

of fixed AND variable costs by operating.
37. in the short run (NOT the long-run), it may ...
be rational for a firm to continue to operate
while earning negative economic profit if a
portion of unavoidable fixed costs are
covered in addition to the AVC.
38. economies of scale decreasing
long-run
cost per unit
as output
increases.
39. diseconomies of scale increasing
long-run
cost per unit
as output
increases
40. long-run average total cost is the cost of ...
production per unit of output under
conditions in which all inputs are variable.
41. specialization efficiencies and bargaining ...
power in input price can lead to economies
of scale
42. bureaucratic and communication ...
breakdowns and bottlenecks that raise
input prices can lead to diseconomies of
scale.