Questions and Answers
What is the Price Elasticity of Demand Formula?
(∆QDa/∆Pa)*(Pa/Qda)
What is the Income Elasticity of Demand Formula?
(∆QDa/∆Inc)*(Inc/QDa)
What is the Cross-Price Elasticity of Demand Formula?
(∆Qda/∆Pb)*(Pb/QDa)
What is Accounting Profit?
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What is Economic Profit?
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What is Normal Profit?
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What is Total Revenue (TR)?
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What is Average Revenue (AR)?
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What is Marginal Revenue (MR)?
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What is Total Cost (TC)?
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What is Marginal Cost (MC)?
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What is Average Total Cost (ATC)?
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What is Average Fixed Cost (AFC)?
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What is Average Variable Cost (AVC)?
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What is the Break-even point for perfect competition?
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What is the Break-even point for imperfect competition?
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What is the Short-Run shutdown point for perfect competition?
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What is the Short-Run shutdown point for imperfect competition?
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Study Notes
Price Elasticity of Demand
- Formula: (∆QDa/∆Pa)*(Pa/Qda) determines the responsiveness of quantity demanded to price changes.
Income Elasticity of Demand
- Formula: (∆QDa/∆Inc)*(Inc/QDa) measures how quantity demanded changes as consumer income changes.
Cross-Price Elasticity of Demand
- Formula: (∆Qda/∆Pb)*(Pb/QDa) assesses the responsiveness of demand for one good when the price of another good changes.
Accounting Profit
- Defined as Total Revenue minus Total Accounting (Explicit) Costs, representing profit based solely on direct costs.
Economic Profit
- Calculated as Accounting Profit minus Implicit Opportunity Costs.
- Alternative expressions: AP = TR - Total Economic Costs, AP = TR - EC - IC indicate profit after considering opportunity costs.
Normal Profit
- Represents a situation where Accounting Profit equals Economic Profit, meaning the firm is covering all costs, including opportunity costs.
Total Revenue (TR)
- Total Revenue is calculated by multiplying price (P) by quantity (Q), indicating the total earnings from sales.
Average Revenue (AR)
- Average Revenue is computed by dividing Total Revenue (TR) by quantity sold (Q), indicating the revenue per unit sold.
Marginal Revenue (MR)
- Marginal Revenue is the change in Total Revenue divided by the change in quantity (∆TR/∆Q), reflecting the revenue generated from selling one additional unit.
Total Cost (TC)
- Total Cost is the sum of Total Fixed Costs and Total Variable Costs, representing overall costs incurred by a firm.
Marginal Cost (MC)
- Marginal Cost is defined as the change in Total Cost (∆TC) divided by the change in quantity (∆Q), indicating the cost of producing one more unit.
Average Total Cost (ATC)
- Average Total Cost is the Total Cost (TC) divided by quantity produced (Q), showing the cost per unit.
Average Fixed Cost (AFC)
- Average Fixed Cost is calculated by dividing Total Fixed Cost by quantity produced (Q), showcasing the fixed cost burden per unit.
Average Variable Cost (AVC)
- Average Variable Cost is obtained by dividing Total Variable Cost by quantity produced (Q), reflecting the variable cost per unit.
Break Even for Perfect Competition
- Occurs when Average Revenue (AR) equals Average Total Cost (ATC), indicating no economic profit or loss.
Break Even for Imperfect Competition
- Achieved when Total Revenue (TR) equals Total Cost (TC), signaling that the firm covers all expenses.
Short-Run Shutdown Point for Perfect Competition
- Identified when Average Revenue (AR) is less than Average Variable Cost (AVC), signifying a loss situation.
Short-Run Shutdown Point for Imperfect Competition
- Reflected in Total Revenue covering enough to meet variable costs; if TR falls below variable costs, the firm should consider shutting down operations.
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Test your knowledge of essential economics formulas with these flashcards. Each card highlights key concepts such as price elasticity, income elasticity, and profit definitions. Perfect for economics students wanting to solidify their understanding of fundamental principles.
