CFA Economics

The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same.

= (ΔQ/Qaverage)/(ΔP/Paverage)

Quantity demanded is the same regardless of price

Elasticity = 1

If prices changes at all, nothing is demanded

At the mid-point of the curve, demand is unit elastic. Above the mid-point,
demand is elastic. Below the mid-point, demand is inelastic.

The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same.

The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same.

It is positive for a substitute and negative for a complement.

a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same.

Great than 1--elastic
Between 1 and 0--inelactic
Less than 0--Inferior good

When income rises, your demand for that good falls. (Top Ramen)

The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same.

= %ΔQ / %ΔP

When marginal cost = marginal benefit

The market demand curve

A consumer surplus is the value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought.

The market supply curve

A producer surplus is the price received for a good minus its minimum supply- price (or marginal cost), summed over the quantity sold.

the decrease in total surplus that results from an inefficient level of production.

Utilitarianism is a principle that states that we should strive to achieve “the greatest happiness for the greatest number.”

Tax incidence is the division of the burden of a tax between the buyer and the seller.

Inelastic = Buyer
Elastic = Seller

Inelastic = Supplier
Elastic = Buyer

A production quota is an upper limit to the quantity of a good that may be produced in a specified period.

Economic depreciation is the change in the market value of capital over a given period. It is calculated as the market price of the capital at the beginning of the period minus its market price at the end of the period.

the return that an entrepreneur can expect to receive on the average is called normal profit.

The principal-agent problem is the problem of devising compensation rules that induce an agent to act in the best interest of a principal.

Making a prod- uct slightly different from the product of a competing firm is called product differentiation.

The four-firm concentration ratio is the percentage of the value of sales accounted for by the four largest firms in an industry.

The Herfindahl-Hirschman Index—also called the HHI—is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market.

When the cost of producing a unit of a good falls as its output rate increases, economies of scale exist.

A firm experiences economies of scope when it uses specialized (and often expensive) resources to produce a range of goods and services.

A firm’s opportunity cost of production is the sum of explicit costs and the implicit costs of using the firm’s capital and the owner’s resources.

Economic depreciation is the change in market value of an asset over a period, and is the implicit cost of using the asset.

Economic profit = Total revenue - Opportunity cost

technological efficiency is defined as that process which requires the least inputs for a given output, while economic efficiency is defined as that process which is accomplished with the least cost for a given output.

The short run is a time frame in which the quantity of at least one factor of pro- duction is fixed.

As a firm uses more of a variable factor of production, with a given quan- tity of the fixed factor of production, the marginal product of the vari- able factor eventually diminishes.

We calculate marginal cost as the increase in total cost divided by the increase in output.

No

which is the relationship between the maximum output attainable and the quan- tities of both labor and capital.

The long-run average cost curve is the relationship between the lowest attainable average total cost and output when both the plant size and labor are varied.

With given factor prices, diseconomies of scale occur if the percentage increase in output is less than the percentage increase in all factors of produc- tion.

Constant returns to scale occur if the percentage increase in output equals the percentage increase in all factors of production.

A firm’s minimum efficient scale is the smallest quantity of output at which long-run aver- age cost reaches its lowest level.

A price taker is a firm that cannot influence the market price and that sets its own price at the market price.

1. Labor (wages)
2. Capital (interest rate)
3. Land (rental rate)
4. Entrepreneurship (normal profit)

Demand for a factor of production (since it is derived from the demand for the goods produced by the factor)

the change in total revenue that results from employing one more unit of labor

MRP = M Rev x M Product

The lowest wage at which one is willing to supply labor

a backwards C

A market in which there is a single buyer

A wage rate that firms pay above the competitive equilibrium wage rate in order to attract the most productive workers

The income received by the owner of a factor of production over and above the amount required to induce that owner to offer the factor for use