Terms, Definitions, & Formulae

Terms, Definitions, & Formulae

termdefinitionformulanotes

Price elasticity of demandPercentage change in quantity demanded that results from a 1% change in product price

Notice the basic structure is the same for all the elasticity formulae.

Price elasticity of supplyPercentage change in quantity supplied that results from a 1% change in product price

Income elasticity of demandPercentage change in quantity demanded that results from a 1% change in income

Cross elasticity of demandPercentage change in quantity demanded of good X that results from a 1% change in price of good Y

Marginal UtilityThe addition to utility that results from consuming one more unit of a goodMU = (TU / (Q

Average UtilityThe utility per unit of a goodAU = TU / Q

Total RevenueThe total paid by consumers for all units of a good purchasedTR = PQ

Marginal RevenueThe addition to revenue that results from producing one more unit of a goodMR = (TR / (QIf a firm is perfectly competitive

in the product market, MR = the price of the product

Marginal CostThe addition to cost that results from producing one more unit of a goodMC = (TC / (Q

Average Fixed CostThe fixed cost per unit of a goodAFC = TFC / Q

Average Variable CostThe variable cost per unit of a goodAVC = TVC / Q

Average Total CostThe total cost per unit of a goodATC = TC / QATC = AVC + AFC

ProfitThe amount by which revenue earned exceeds cost incurred( = TR TCA negative profit is a loss.

Four-Firm Concentration RatioThe sum of the shares of the 4 largest firms in the industryCR = s1 + s2 + s3 + s4Notice: for CR, you use only 4 largest firms & shares are not squared; for H, all firms are used & the shares are squared.

Herfindahl IndexThe sum of the squares of the shares of all firms in the industryH = s12 + s22 + ... + sn2

Marginal Physical Product(or just Marginal Product)The additional output that results from hiring one more unit of an inputMPP = (Q / (L

Marginal Revenue ProductThe additional revenue that results from hiring one more unit of an inputMRP = (TR / (LAlternative formula: MRP=MRMPPCaution: Do not confuse with MR.

Marginal Resource CostThe additional cost that results from hiring one more unit of an inputMRC = (TC / (LCaution: Do not confuse with MC.

Real Interest RateRate of interest adjusted for inflationreal i = money i inflation rate

Future Value through compoundingValue of money after interest has accumulatedFV = PVt (1+i)tNotice relationship between compounding and discounting formulae.

Present Value (Discounting)for single time periodCurrent value of income received in the futurePV = FVt / (1+i)t

Present Value

for multi-time periodCurrent value of income received in the futurePV = FV1/(1+i)1+FV2 /(1+i)2+ ... + FVn/(1+i)n

PV of an annuity which pays a fixed amount R every year from now onCurrent value of an annuityAnnuity PV = R/i

Balance of trade on goods & servicesExcess of exports over importsExports ImportsTrade deficit means more imports than exports; trade surplus means more exports than imports.

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