Microeconomics

Question 1

How is price elasticity of demand measured?

Answer 1

Percentage change in quantity of product demanded as a result of a given percentage change in price of product

Elasticity = Percentage change in quantity demanded /
Percentage change in price

Less than 1 = inelastic: quantity percentage change is less than the percentage change in price.
Equal to 1 = unitary: quantity percentage change is the same as the percentage change in price.
Greater than 1 = elastic: quantity percentage change is more than the percentage change in price.

Question 2

Utility Theory

Answer 2

Measurement of satisfaction derived from the acquisition of a good or service

Question 3

Total Utility (TU)

Answer 3

Increases with quantity acquired

Question 4

Marginal Utility (MU)

Answer 4

Decreases with quantity acquired (Law of Diminishing Returns) U= Y Q=X

Question 5

Indifference Curve

Answer 5

Quantities of two commodities give the same satisfaction

Question 6

Periods of Analysis

Answer 6

Short-run = Period at which one input is fixed (Cannot be varied)

Long-run = Period during which all inputs can be varied

Question 7

Short-run Cost Concepts what is TC = ?

Answer 7

TC = VC + FC

AFC = Total fixed cost/Units Produced

ATC = AFC = AVC

AFC is downward sloping (U) - Numerator constant so more units produced = decrease

AVC is (U) shaped because law of diminishing returns; reaches a point when it begins to increase because initially variable input you get benefits as production increases, but at some point, level of production is reached where additional units only increase average cost. EX - increase more employees you lose benefits and cost increases and they get in the way

Law of Diminishing Returns - System with fixed and variable inputs; adding more variable inputs will eventually result in less output per unit of input…. Variable inputs overwhelm fixed factors

Question 8

Marginal Cost

Answer 8

Cost of last acquired unit of input (U) shaped

Change in successive variable cost, or change in successive total cost

It first decreases then increases. MC will intersect ATC and AVC at lowest points

Question 9

Long-run Cost Concepts

Answer 9

All costs are variable; LR AVC = Developed as minimum points on a series of short-run average cost curves (multiple plants)

It is U shaped because concept of economies of scale. Long run curve increases = diseconomies of scale

Minimum = quantity of cost is proportional to quantity

When slope-upward = diseconomies output in lesser proportion than quantity of inputs

Question 10

Economies of scale

Answer 10

Efficiency you can operate