Basic Microeconomics PDF

# Elasticity - A general concept used to quantify the response in one variable when another variable changes. - Refers to responsiveness of one economic variable due to change in another economic variable. - Refers to change in demand when the price for a good or service changes. ## Price Elasticit...

# Elasticity - A general concept used to quantify the response in one variable when another variable changes. - Refers to responsiveness of one economic variable due to change in another economic variable. - Refers to change in demand when the price for a good or service changes. ## Price Elasticity of Demand - The ratio percentage of change in quantity demanded to the percentage of change in price. RESPONSIVENESS ## Perfectly Inelastic Demand - Demand which quantity demanded does not respond at all to a change in price ## Perfectly Elastic Demand - Demand which quantity drops to Zero at the slightest increase in price. ## Elastic Demand - Demand relationship which the percentage change in quantity demanded is larger than the percentage change in price in absolute value (greater than 1) ## Inelastic Demand - Demand that responds somewhat, but not a great deal, to changes in price. (value between 0 and 1) ## Unitary Elasticity - Demand relationship which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value ## Point Elasticity - A measure of elasticity that uses the slope measurement. ## Income Elasticity of Demand - A measure of elasticity that uses the slope measurement. ## Cross Price Elasticity of Demand - A measurement to the response of the quantity of one good demanded to a change in the price of another good. # Elasticity of Supply - A measure of the response of quantity of a good supplied to a change in price of that good. ## Elasticity of Labor Supply - A measure of the response of labor supplied to a change in the price of labor. # Elasticity - A general concept used to quantify the response in one variable when another variable changes - Refers to responsiveness of one economic variable due to change in another economic variable - Refers to change in demand when the price for a good or service changes. ## Price - Is the most common economic factor used when determining elasticity or inelasticity. Other factors include income level and substitute availability ## Elastic - Will fall as prices rise and vice versa. - Examples are soft drinks, cereal, clothing, electronics, and cars - Is when people reduce their purchase of items when the prices go up. ## Inelastic - Does not change 'much' when price changes. - Examples are life-saving medication, gas, electricity, water, and post-secondary education - Is when the prices does not greatly affect sales when the price changes or consumers income changes they will not change their buying habits and usually do not have substitutes they can easily be replaced with. # Elasticity of Demand - Refers to how sensitive demand for a good is compared to changes in other economic factor, such as price or income. - It is commonly referred to as price elasticity of demand because the price of a good or service is the most common economic factor used to measure it. ## Elastic Good - Is defined as one where a change in price leads to a significant shift in demand. The more substitutes there are for an item, the more elastic demand for it will be. # Elasticity ## Income Elasticity - Measures the responsiveness of demand for a particular good to changes in consumer income. ### Normal Goods - Have a positive income elasticity of demand as incomes rises, more goods are demanded at each price level. - A rise in income will lead to a rise in demand. - Between Zero and one are typically referred to as necessity good. Example are rice, milk products, haircuts, water, and electricity. ### Inferior Goods - Have a negative income elasticity of demand. - As consumers income rises they buy fewer inferior goods. ### Luxury Goods - Represent normal goods associated with income elasticities of demand greater than one. Consumers will buy proportionately more of a particular good compared to a percentage change in their income. ## Cross Elasticity - How sensitive people's purchase of one product are in response to changes in the price of a different product. - Always positive, substitute or complement is negative. - When a change in demand is greater than the change in price the demand for the product is said to be elastic - Inelastic refers to the change in demand being less than the change in price on the product for good. - Goods that are considered unitary in terms of elasticity are goods that result in no effect in demand even when prices change. # Household Behaviour ## Perfect Knowledge - The assumption that households possess a knowledge of the qualities and prices of everything available in the market and that films have all available information concerning wage rates, capital costs, and output prices. ## Perfect Competition - An industry structure in which there are many firms each small relative to the industry and producing virtually identical products and in which no firm is large enough to have any control over prices. ## Homogeneous Products - Undifferentiated outputs products; that are identical to or distinguishable from one another. ## Factors influencing consumer behavior ### Cultural - Cultures, social class ### Social - Reference groups (groups that have a direct/indirect influence on the person's attitudes or behavior), family, roles, and status ### Personal - Age, occupation, lifestyle, economic circumstances. ### Psychological - Motivation, perception, learning, beliefs, and attitude. ### Perception - Process by which an individual selects, organizes and interprets information to create a picture of something. ### Beliefs - A descriptive thought that the person holds about something. ### Attitude - Persons enduring cognitive evaluations, emotional feelings, and action tendencies towards some object or ideas ## Budget Constraint - The limits imposed on household choices by income, wealth, and product prices. ## Income - Sum of household earnings within a given period. ## Wealth/Net Worth - Is what a household owns less what it owes at a given period in time ## Budget Line/Budget Constraints - Also referred as Consumption Possibilities Frontier. - Is the maximum combination of goods that can be purchased from a given budget amount. ### Income effect - Occurs when the given budget can no longer purchase the same amount of goods before his income has decline. ### Substitution effect - Finding an alternative good to consume that will decrease his consumption of the first choice of good had its prices not change. ## Choice Set or Opportunity Set - The set up options that is defined and limited by a budget constraint. ## Trade Off - Is a situation in which more of one good thing can be obtained only by giving off another thing. ## Opportunity Cost - Costs that are incured by not putting the resources in its optimum use. ## Real Income - Set of opportunities to purchase real goods and services available to household as determine by prices and money income. ## Utility - The satisfaction obtain from the goods and services that the consumer consumes. A product yields. ## Marginal Utility - The additional satisfaction gained by the consumption or use of one more unit of something. ## Total Utility - The tatal amount of satisfaction obtained from consumption of a good their service. ## Law of Diminishing Marginal Utility - The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good. ## Labor Supply Curve - A curve that shows the quantity of labor supplied at different wage rates. It shape depends on how household react to changes in the wage rate. # Household Behaviour ## Financial Capital Market - The complex set of institutions in which suppliers of capital (household that save) and the demand for capital (firms wanting to invest) interact. ## Production Process ### Production - Transformation of inputs into outputs with the use of technology. - The process by which inputs are combined, transformed, and turned into outputs. ### Firm - An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. ### Profit - Difference between total revenue and total cost. ### Total Revenue - The amount received from the sale of production. Quantity x price ### Total Cost - The total (1) out-of-pocket costs and (2) opportunity cost of all factors of production. ### Out-of-Pocket Expenses - Refers to costs that individuals pay out of their own cash reserves. ### Explicit Costs - Are out-of-pocket costs for a firm such as wages, salaries, rent, and materials. ### Implicit Costs - Are specific type of opportunity cost the cost of resources already owned by the firm that could have been put to some other use. Example, an entrepreneur who owns a business could use her labor to earn income at a job. ### Opportunity Costs - Are the profits that a business misses out when choosing between alternatives. ### Accounting Profit - The total revenues minus explicit costs, including depreciation. ### Perfectly Inelastic Demand - Demand which quantity demanded does not respond at all to a change in price. ### Factors of Production #### Fixed Factor - Remains constant regardless of the volume of production. Including capital, interest, professional fees charged to clients. #### Variable Factor - Changes in accordance with the volume of production. ### Optimal Method of Production - The production method that minimizes cost for a given level of output. ### Short-Run - The use of at least on factor of production cannot be changed. ### Production Technology - Quantitative relationship between inputs and outputs. ### Factors of Production #### Labor - Intensive Technology - A technology that relies on heavily human labor instead of capital. #### Capital - Intensive Technology - A technology that relies heavily on capital instead of human labor. ### Long-run - All factors can be changed. #### Short-run - Total Product - is the total quantity of a good produced in a given period. - Average Product is the total product per worker employed. - Marginal Product - is the changed in total product that resulths from a one unit increase in the quantity of labor employed. ### Marginal Product - The additional output that can be produced by adding one more unit of a specific unit, ceteris paribus. ### Law of Diminishing Returns - When additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines. ### David Riccardo - British economist who first formulated The law of diminishing returns based on agricultural observations in 19th century. ### Average Product - The average amount produced by each unit of a variable factor of production. ### Stage of Production - Stage of Increasing Return - Stage of Decreasing Returns - Stage of Negative Returns ### Short-Run Cost #### Economic Costs - Are forward looking cost which have major repercussions on the potential profitability of the firm. #### Accounting Costs - Are costs properly recorded on a journal or ledger. # Short-Run Cost ## Revenue - The amount earned through the sales of goods or services. ## Profit - The positive net effect or difference between revenue and cost. ## Loss - The negative difference between revenue and cost. ## Economic Costs - Are forward looking costs which have major repercussions on the potential prontability of the firm. ## Accounting Costs - Are cost properly recorded on a journal or larger. ## Explicit Cost - Is a cost paid in money. It refers to the actual expenses of the firm in purchasing the inputs it need. ## Implicit Cost - Is an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment. ## Economic Depreciation - Is an opportunity cost of a firm using capital that it owns - measured as the change in market value of capital over a given period. ## Normal Profit - Is the return to entrepreneurship. ## Economic Profit - Equals total revenue minus total cost. ## Total Cost - Is the sum of the explicit costs and implicit costs and is the opportunity cost of production. ## Short Run Cost - A firm employs more labors which means the firm must increase its costs. ## Elasticity of Labor Supply - A measure of the response of labor supplied to a change in the price of labor. ## Total Cost - Is the cost of all the factors of production the firm uses. ## Total Fixed Cost - Is the cost of firms fixed factors of production used by a firm-the cost of land, capital, and entrepreneurship. ## Total Variable Cost - Is the cost of the variable factor of production used by affirm - the cost of labor. ## Marginal Cost - Is the change in total cost that results from a one unit increase in total product. ## Average Fixed Cost - Is total fixed cost per unit of output. ## Average Variable Cost - Is total variable cost per unit. ## Average Total Cost - Is total cost per unit of output. # Short-Run Cost ## Short Run Cost - A firm employs more labors which means the firm must increase its costs. ## Elasticity of Labor Supply - A measure of the response of labor supplied to a change in the price of labor. ## Total Cost - Is the cost of all the factors of production the firm uses. ## Total Fixed Cost - Is the cost of firms fixed factors of production used by a firm-the cost of land, capital, and entrepreneurship. ## Total Variable Cost - Is the cost of the variable factor of production used by affirm - the cost of labor. ## Marginal Cost - Is the change in total cost that results from a one unit increase in total product. ## Average Fixed Cost - Is total fixed cost per unit of output. ## Average Variable Cost - Is total variable cost per unit. ## Average Total Cost - Is total cost per unit of output.