Economics Key Concepts: Opportunity, Demand, and Elasticity
Key Economic Concepts
Opportunity Cost
Opportunity Cost – Value of the next best alternative (ratio of goods where the cost is the second good in the denominator).
Absolute Advantage
Absolute Advantage – Can produce more with fewer resources or in the same time.
Comparative Advantage
Comparative Advantage – Lower opportunity cost for a good.
Maximum Willingness to Trade
- Write a country’s ratio with the desired item in the denominator.
- Multiply by the amount of the desired product.
Minimum Willingness to Give
- Dimensional
Exchange Rate Impact on Import and Export Dynamics
1. Revaluation Effects on Imports:
An imported good’s price (Pi) is determined by the exchange rate (tc) multiplied by the foreign price (Pe): Pi = tc * Pe. The autarky price is Pa. When Pi < Pa, demand exceeds supply (qd > qo), resulting in imports (qd – qo). A revaluation decreases tc, lowering Pi. This increases demand and decreases supply, leading to qd’ > qo’, and thus increased imports (qd’ – qo’ > qd – qo). Therefore, the initial conclusion that revaluation decreases imports is
Read MoreKey Concepts in Microeconomics: Market Structures and Resource Demand
Chapter 3: Supply and Demand Fundamentals
An increase in income decreases the demand for an inferior good. A surplus refers to an excess supply. Excess demand situations push prices up toward equilibrium. The ceteris paribus clause in the law of demand allows only the price of the good to change. Changes in the price of a good change the quantity demanded of a good, not the demand for the good. An increase in the price of a substitute good will increase the demand for a good. A decrease in the price
Read MoreUnderstanding Firm Supply and Average Costs in Economics
Average Costs
Average Costs represent the cost per unit of output produced. It is calculated as: AC = Total Cost / Output. The average cost graph can be divided into three sections:
- Economies of Scale (Increasing Returns to Scale): This occurs when output increases by more than the proportional change in costs.
- Constant Returns to Scale (CRS): This occurs when output increases by the same proportional change as all average costs.
- Diseconomies of Scale (Decreasing Returns to Scale): This occurs when
Key Economic Principles: Elasticity, Equilibrium, and Market Structures
Key Economic Concepts
Part 1 – Percentage Change & Elasticity
- % Change: ((End Value – Start Value) / Start Value) * 100%
- Midpoint Method: ((End Value – Start Value) / Average of Values) * 100%
Price Elasticity of Demand
(Always positive):
- Determines the steepness of the demand curve.
- % Change in Quantity Demanded / % Change in Price
- If demand is inelastic: price change = small change in demand (essential goods).
- If demand is elastic: small price change = large change in demand (non-essential goods).
Income
Price-Taker Markets and Firm Profit Maximization
The Long-Run Average Total Cost Curve
The long-run average total cost curve is an envelope-shaped curve mapped out by the short-run average total cost curves.
Short-Run Cost Calculations
In the short run, if average variable costs equal $45, average total costs equal $50, and output equals 100, the total fixed costs will equal $500.
In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be $2,500.
If fixed cost at quantity
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