Chapter 3 Circular Flow Model Chapter 5 Price Elasticity of Demand ED Change in QD Change in P Higher ED means quantity demanded is more sensitive to chagne in price Change in P Change in P PAV Average price is the average of the old price and new price Change in QD Change in QD QD old quantity and new quantity AV Average quantity demanded is the average of the Inelastic Demand ED between 0 and 1 price increase TR increases price decrease TR decreases Elastic Demand ED greater than 1 price increase TR decreases price decrease TR increase Unit Elastic Demand ED 1 no change in TR with an change in price Perfectly Inelastic ED is horizontal Total Revenue TR P Q Price Elasticity of Supply Change in Qs Change in P Income Elasticity Change in Quantity Demanded Change in Income Cross Price Elasticity of Demand Change in Quantity Demanded of X Change in Price of Z Chapter 6 If Py is the good on the vertical axis and Px is the good on the horizontal axis Px Py is the relative price of good x the opportunity cost of one more unit of good x and the absolute value of the slope of the consumer s budget line Marginal utility per dollar spent on a good is the MUx Px this tells us the gain in utility from each dollar spent To maximize utility consumers will try to have MUx Px MUy Py When MUx Px is greater than MUy Py a consumer should spend more on good X Market demand curve is the sum of all individual demand curves Salience Consumers make decisions on salience or the extent to which something jumps out at them Preference for Default People tend to stick to default choices Decision Making Environment Decisions influenced by setting Self Binding People bind themselves to narrower set of choices for their own long run good Not buying ice cream or not allowing themselves the option of ice cream to lose weight Chapter 7 Total Product The maximum quantity of output that can be produced from a given combination of outputs Marginal Product of Labor MPL Change in Q Change in L tells us the rise in output from the hiring of one more worker Total Fixed Cost TFC The cost of all inputs that are fixed in the short run Total Variable Cost TVC The cost of all variable inputs used in producing a particular level of output Total Cost TC TFC TVC Average Fixed Cost AFC TFC Q AFC will always decrease as output rises because TFC is constant but Q is increasing also the distance between the ATC and AVC curves Average Variable Cost AVC TVC Q AVC usually decreases and then begins to increase giving it a typical U shape the cost of the variable inputs per unit of output Average Total Cost ATC TC Q total cost per unit of output also has a U shape and since AFC is decreases as Q increases ATC and AVC curves get closer and closer as Q increases Marginal Cost MC Change in TC Change in Q tells us how much cost rises per unit increase in output the MC curve first decreases and then increases Nike check mark shape because of the MPL At low levels of employment and output MPL is rising increasing marginal returns of labor but eventually MPL begins to decrease diminishing marginal returns of labor So if MPL is rising MC is falling if MPL is falling MC is rising If the MC of the next unit is lower than the average cost so far producing the next unit will lower the average cost If the MC is greater the average cost will increase This is why MC cuts the AVC curve at its minimum point While the MC is lower than the AVC the AVC is decreasing but after MC begins to rise and go over AVC the AVC line begins to curve up forming the U shape with the MC intersecting at its minimum The relationship for MC and ATC is similar to that of MC and AVC but since ATC is the sum of AFC and AVC at low levels when both AFC and AVC are decreasing ATC is decreasing But when AVC begins to rise AVC and AFC begin competing Eventually the rise in AVC will win out and ATC will begin to rise as well forming its U shape In both cases MC will intersect wit ATC and AVC at their respective minimums Long Run Total Cost LRTC is the cost of producing each quantity of output when all inputs are variable and the least cost input is chosen Long Run Average Total Cost LRATC LRTC Q Long run total cost of producing can be less than or equal to but not greater than short run total cost LRTC is less than or equal to TC Long run average cost can be less than or equal to but not greater than short run average total cost LRATC is less than or equal to ATC The LRATC curve combines portions of each ATC curve available to the firm in the long run For each output level the firm will always choose to operate in the ATC curve with the lowest possible cost In the short run a firm can only move along its current ATC curve In the long run it can move from one ATC to another by varying the size of its plant If it does this it will be moving along its LRATC curve Economies of Scale Long run total cost decreases as output increases This is represented by the decreasing portion of the LRATC curve where cost rises less than output Lumpy Inputs An input whose quantity cannot be increased gradually as output increases but must be adjusted in large jumps For example a dentist has to buy a whole new X ray machine they can t just buy part of one But if they serve more patients the cost of the machine per patient will be lower Spreading lumpy inputs across more inputs is likely to create economies of scales at lower levels of output This is also why the LRATC slopes downward at lower levels of output Diseconomies of Scale Long run total cost increases as output increases This is the upward sloping portion of the LRATC curve This occurs when a firm reaches a point of bigness that begins to cause problems Miscommunication hiring unskilled workers and so on Constant Returns to Scale This is when both long run total cost and output rise by the same proportion This is the flat part of the LRATC curve Minimum Efficient Scale The lowest output level at which the firms LRATC curve hits the bottom or flat portion Accounting Profit Total Revenue Accounting Costs does NOT include implicit costs Economic Profit Total Revenue ALL costs of production Total Revenue Explicit Implicit Costs Total Revenue TR P Q Marginal Revenue MR Change in TR Chang in Q this is the change in revenue from producing one more unit of output when a firm faces a downward sloping demand curve each …