The document summarizes key economic concepts related to production possibilities curves, opportunity cost, actual and potential growth, demand and supply, equilibrium price and quantity, changes in demand and supply, price controls, taxes, costs of production, revenues, profits, and price discrimination. It provides graphs and explanations for each concept.
2. Production Possibilities Curve (PPC)
shows the maximum combination of goods or services that can be produced by an economy in a give time period,
if all the resources in the economy are being used fully and effectively.
3. Opportunity cost is the next best alternative foregone when an economic decision is made.
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Y2
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5. Actual growth occurs when previously unemployed factors of production are brought into use.
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6. Potential growth occurs when the quantity and/or quality of factors of production within an economy is increased.
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7. Demand
is the willingness and ability to purchase a quantity of a good or service
at a certain price over a given time of period.
The law of demand states that as the price of a good or service rises, the quantity demanded decreases, ceteris paribus.
9. Supply
is the willingness and ability of a producer to produce a quantity of a good or service
at a certain price over a given period of time.
The law of supply states that as the price of a good rises, the quantity supplied increases, ceteris paribus.
16. Price ceiling is a price set by the government, above which the market price is not allowed to rise.
Price ($)
S
P
Pc
{ Shortage
D
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Q1 Q Q2 Quantity
17. Price floor is a price set by the government, below which the market price is not allowed to fall.
Price ($)
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Surplus
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P
D
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Q1 Q Q2 Quantity
18. Buffer stock scheme sets a maximum and a minimum price in a market to stabilize prices.
Price ($)
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D1
P1
P2
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Q1 Q2 Q3 Quantity
19. Price Elasticity of Demand (PED)
is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
20. Inelastic demand means that a change in the price of a good or service will cause a smaller change in quantity demanded.
Price ($)
P1
P2
D
O
Q1 Q2 Quantity
21. Elastic demand means that a change in the price of a good or service will cause a larger change in quantity demanded.
Price ($)
P1
P2
D
O
Q1 Q2 Quantity
22. Indirect Tax
is an expenditure tax on a good or service.
An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve,
where the vertical distance between the two supply curves represents the amount of the tax.
23. Specific tax is shown as a parallel shift.
Price ($)
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ST
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consumers
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24. Ad valorem tax is shown as a divergent shift.
Price ($)
D
ST
S
ET
PT
consumers
PE suppliers E
P
revenue
O
Q2Q1 Quantity
26. Fixed costs are costs of production that do not change with the level of output. They will be the same for the one or any other number of units.
Variable costs are costs are costs of production that vary with the level of output.
Total costs are the total costs of producing a certain level of output–fixed costs plus variable costs.
Cost ($)
TC
VC
FC
O
Output
27. Average cost is the average (total) cost of production per unit. It is calculated by dividing the total cost by the quantity produced.
Marginal cost is the additional cost of producing an additional unit of output.
Cost ($)
MC
ATC
AVC
AFC
O
Output
28. Long run
is the period of time in which all factors of production are variable.
29. Economies of scale are any fall in long-run average costs that come about as a result of a firm increasing its scale of production.
Diseconomies of scale are any increase in long-run average costs that come about as a result of a firm increasing its scale of production.
Cost ($)
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Output
31. Total revenue is the aggregate revenue gained by a firm from the scale of a particular quantity of output (equal to price times quantity sold).
Average revenue is total revenue received divided by the number of units sold. Usually, price is equal to average revenue.
Marginal revenue is the extra revenue gained from selling an additional unit of a good or service.
Revenue ($)
TR
AR
MR
O
Output
33. Normal profits are the amount of revenue needed to cover the total costs of production, including the opportunity costs.
Price and Cost ($)
MC
AC
C=P
MR AR = D
O
Q Output
34. Abnormal profits
are any level of profit that is greater than the required to ensure that a firm will continue to supply its existing good or service.
Price and Cost ($)
MC
AC
P
C
MR AR = D
O
Q Output
35. Revenue maximizing point is the point where marginal revenue is zero.
Price and Cost ($)
MC
AC
P
C
AR = D
MR
O
Q Output
36. Sales maximizing point is the point where average revenue equals average cost.
Price and Cost ($)
MC
AC
C=P
MR AR = D
O
Q Output