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Econ 221 Final Study Guide

by: Shelby Kolb

Econ 221 Final Study Guide ECON 221 001

Shelby Kolb
Cal Poly
GPA 3.6

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These notes cover mainly the second half of the quarter lecture material in preparation for the final. Towards the end, there are also notes on specific topics/questions she has on her study guid...
Principles of Microeconomics
Solina Lindahl
Study Guide
Econ, Microecon, Lindahl, 221
50 ?




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This 10 page Study Guide was uploaded by Shelby Kolb on Wednesday April 6, 2016. The Study Guide belongs to ECON 221 001 at California Polytechnic State University San Luis Obispo taught by Solina Lindahl in Spring 2016. Since its upload, it has received 158 views. For similar materials see Principles of Microeconomics in Economcs at California Polytechnic State University San Luis Obispo.


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Date Created: 04/06/16
Econ 221 Study Guide Lindahl Chapter 11 - BEHIND THE SUPPLY CURVE: INPUTS AND COSTS : *Production Function = -short run : quantity of a FIXED INPUT cannot be varied, but quantity of a variable input can. -long run : quantities of FIXED and VARIABLE inputs can be varied. -total product curve = shows how the quantity of output changes and the quantity of the VARIABLE input changes. -marginal product (of an input) = increase in output from using one more unit of that input. -diminishing returns to an input = when its marginal product declines as more of the input is used, holding the quantity of all other inputs fixed. -total cost = fixed cost + variable cost -due to diminishing returns, marginal cost (the increase in total cost generated by producing one more unit of output), normally increases as output increases. *Average Total Cost = TOTAL COST / QUANTITY OF OUTPUT -note: U-shaped average total cost curves because total cost consists of: -average fixed cost (falls when output increases) -average variable cost (rises with output) -the bottom of the U = level of output at which average total cost is minimized (this is where MC intersects) *Long run ; producer can change fixed input & level of fixed cost. long run average total cost curve= relationship between output and average total cost when fixed cost has been chosen to minimize aberage total cost at each level of output. a firm moves along its short-run average total cost curve as it changes the Q of output, returns to a point on both short-run and long-run average total cost curve once it has adjusted fixed cost to its new output level. *Increasing returns to scale = output increases and long run average total cost declines *Decreasing returns to scale= output increases and long run average total cost increases *adding more and more workers yields less and less additional output and at some point marginal cost increases Chapter 12 - PERFECT COMPETITION AND THE SUPPLY CURVE : *Perfectly Competitive Market = all producers are price-taking producers / consumers are price-taking consumers (No one’s actions can influence the market price). *Perfectly Competitive Industry = all producers are price-takers 1. there are many producers, none of whom have a large market share 2. the industry produces a standardized product 3. free entry and exit into and from the industry -Optimal output rule = produce the quantity at which MARGINAL REVENUE = MARGINAL COST -Profitable when P - ATC ; unprofitable when ATC - P *Industry supply curve (short run) = given that the # of firms is fixed *Industry supply curve (long run) = given sufficient time for entry into and exit from industry. (more elastic than short run) *in short run, after a point the marginal cost rises because law of diminishing returns *law of diminishing marginal benefit= after a point, marginal benefit decreases and consumers marginal utility drops. for most producers, MR slopes downward. Chapter 13 - MONOPOLY : -Monopolist= producer who is the sole supplier of a good w/out close substitutes *Difference between monopoly & perfectly competitive industry = single perfectly competitive forms HORIZONTAL DEMAND CURVE , monopolist DOWNWARD-SLOPING DEMAND CURVE. -Market power= ability to raise market price by reducing output compared to perfectly competitive firm. -Monopolist must be protected by barrier to entry (i.e.; control of natural resource/input, increasing returns to scale, technological superiority, network externality, government rules (patents/copyrights) ) - increasing returns to scale > > natural monopoly -Price effect = monopolist’s marginal revenue is always LESS than market price, and marginal revenue curve lies BELOW demand curve. ` - MONOPOLIST PROFIT-MAXIMIZING OUTPUT LEVEL ; MARGINAL COST = MARGINAL REVENUE < MARKET PRICE vs. PERFECLTY COMPETITIVE FIRM PROFIT-MAXIMIZING OUTPUT LEVEL ; MARGINAL COST = MARKET PRICE -Monopolies produce LESS, charge HIGHER prices, and earn profits short and long fun -Monopoly produces DEADWEIGHT losses by charging price above marginal cost : loss in consumer surplus exceeds monopolists profit. *Monopsony = industry in which there is only one buyer of a good. -Monopsonist can affect price of good it buys : surplus from sellers by reducing how much it purchases >> lowers price. Creates deadweight loss by reducing level of good transacted to inefficiently low levels. *Price discrimination = oligopolist and monopolistic competitors engage to make higher profits using various techniques to differentiate consumers based on sensitivity to price/charging those with less elastic demand higher prices. *Perfect price discrimination = charges each consumer a price = to his willingness to pay & captures total surplus in market. Chapter 14 - OLIGOPOLY : *Oligopolies= only a few sellers. -Imperfect competition= firms compete but possess market power. *Cartel= setting output levels for each firm as if they were a single monopolist; to the extent that firms manage to do this, they engage in COLLUSION. *Dominant Strategy= action that is always the best regardless of the other players actions. *Prisoners dilemma= faced by duopolists if each acts independently in its own interest, the resulting NASH EQUILIBRIUM or NON COOPERATIVE EQUILIBRIUM will be bad for both. *Tactic Collusion/Tit for Tat= try to influence each others future actions *Product Differentiation/Price Leadership= one firm sets prices for the industry to avoid price wars. Chapter 15 - MONOPOLISTIC COMPETITION & PRODUCT DIFFERENTIATION : *Monopolistic competition= market structure in which there are many competing producers, each producing a differentiated product, free entry & exit in long run. -product differentiation forms: style/type, location, or quality -products of competing sellers = imperfect substitutes with their own downward-sloping demand curve and marginal revenue curve -Short-run profits > attract entry of new firms in long-run > reduces quantity each existing producer sells at any given price > shifts its demand curve to left -Short-run losses > induce exit by some firms in long-run > shifts demand curve of each remaining firm to right. *Long-run : monopolistically competitive industry is ZERO-PROFIT EQUILIBRIUM --- at its profit-maximizing quantity, the demand curve for each existing firm is tangent to its average total cost curve. Zero profits in industry and no entry/exit at profit maximizing quantity -long-run equilibrium : monopolistically competitive industry sells at price > marginal cost. with EXCESS CAPACITY because they produce less than the minimum-cost output. --- Higher costs than firms in perfectly competitive ind. Chapter 16 - EXTERNALITIES : -Without government intervention, a market produces too much pollution because polluters take only their benefit from polluting into account, not the costs imposed on others. *Coase Theorem = individuals can find a way to internalize the externality, making government intervention unnecessary as long as transaction costs are low. *Pigouvian tax = cost-minimizing method for reducing pollution such as emissions taxes. Optimally, tax is = to its marginal social cost at the socially optimal quantity of pollution. -Pigouvian subsidy= moves the market to socially optimal Q of production when a good/activity yields external benefits. *Network externalities = arise when the value of a good to an individual is > when a larger # of people use the good. (communications, transportation, technology) -markets with network externalities tend to be monopolies. Chapter 17 - PUBLIC GOODS AND COMMON RESOURCES : *excludable= suppliers of the good can prevent people who don’t pay from consuming it *rival in consumption= same unit of the good cannot be consumed by more than one person at the same time. *common resources= nonexcludable but rival in consumption (clean water in river) *artificially scarce goods= excludable but nonrival in consumption (on- demand movies Netflix) *public goods= nonexcludable and nonrival in consumption (public sewer system) *private good= both excludable and rival in consumption. Wheat is an example of a private good. It is excludable: the farmer can sell a bushel to one consumer without having to provide wheat to everyone in the county. And it is  rival in consumption: if I eat bread baked with a farmer’s wheat, that wheat cannot be  consumed by someone else *nonexcludable= supplier cannot prevent consumption of the good by people who do not pay for it. (fire protection) *nonrival in consumption= more than one person can consume the same unit of the good at the same time. (TV shows) *COST- BENEFIT ANALYSIS= governments try to estimate/compare both social benefits and social costs of providing a public good. Chapter 18 - THE ECONOMICS OF THE WELFARE STATE : *Government transfers = payments made by the government to individuals/families. *Social Insurance Programs= programs designed to provide protection against unpredictable financial distress *Poverty threshold= minimum annual income that is considered adequate to purchase necessities of life. (U.S. govt. has maintained this since 1965). *means-tested programs= benefits are only available to families/people whose income and/or wealth falls below some minimum. -negative income tax= program that supplements the earnings of low- income working families *In-kind benefits= given in form of goods or services rather than money *Private health insurance= each member of a large pool of people agree to pay a fixed amount annually into a common fund that is managed by a private company, which then pays most of the medical expenses of the pool’s members. *Single-payer system= health care system in which the govt. acts as the principal payer of medical bills funded thru taxes. *What’s the rationale for the welfare state?? -Alleviating income inequality -alleviating economic insecurity -reducing poverty and providing access to health care. *Gini Coefficient= a number that summarizes a countrys level of income inequality based on how unequally income is distributed across quintiles (higher=less equal). Notes: *long run vs short run : -short run : at least 1 input is fixed -long run : all inputs variable ● network good = value increases as more people usee it History: when was economics “born?” Who is the father of economics? What is Laissez-Faire capitalism all about (what does it assert and what does it assume?) What is the 2 parts of the “Invisible Hand?” perfect competition, monopoly, oligopoly, and monopolistic competition. = 4 types of  market structures. What are some solutions to pollution? Explain Pigouvian taxes and subsidies. Terms: Coase Theorem, tradable  pollution permits (cap­and­trade)  : environmental standards such as emissions taxes or tradable emissions permits.  the government sets a cap (a maximum amount of pollutant that can be  emitted), issues tradable emissions permits, and enforces a yearly rule that a polluter  must hold a number of permits equal to the amount of pollutant emitted. The goal is to set the cap low enough to generate environmental benefits, while giving polluters  flexibility in meeting environmental standards and motivating them to adopt new  technologies that will lower the cost of reducing pollution. nonexcludable goods suffer from inefficiently low production in a market economy. In fact, in the face of the free­rider problem, self­interest may not ensure that any amount of the good—let alone the efficient quantity—is produced. Goods that are excludable and nonrival in consumption, like on­demand movies,  suffer from a different kind of inefficiency. As long as a good is excludable, it is  possible to earn a profit by making it available only to those who pay. Therefore,  producers are willing to supply an excludable good. But the marginal cost of letting an additional viewer watch an on­demand movie is zero because it is nonrival in  consumption. So the efficient price to the consumer is also zero—or, to put it another  way, individuals should watch movies up to the point where their marginal benefit is  zero. How do we measure poverty and inequality? What did Krugman argue are the causes of rising inequality? What are  the arguments for and against redistribution? What caused the cost problem with US health care prior to the  Affordable Care Act and how does the ACA/Obamacare attempt to rein in these costs? What is the difference  between employer­ based health care and a single­payer system? Which does the US have?  ­ poverty threshold depends on the size and composition of a  family.  ­inequality is measured by median income and the GINI COEFFICIENT(based  on how disparately income is distributed across the quintiles). ­until implementation of the Affordable Care Act in 2014, medical problems requiring expensive treatment caused surges in expenses. Attempts to correct the skewed  incentives (doctors dont worry about costs and want to provide additional care since  health care providers are generally paying) by having stricter overseeing of  reimbursements, linking payments to a procedures medical value, paying health care  providers for improved health outcomes rather than procedures, and limiting the tax  deductibility of emplyoment­based plans.  employment­based health insurance (usa)= selling insurance indirectly to people’s  employers(the company provides it to its employees) employees are likely to contain a representative mix of healthy and less healthy people. Employers require their  employees to participate. single­payer system= government acts as the principal payer of medical bills funded  thru taxes.  In this case, the consumers do not get any consumer surplus! The entire surplus is  captured by the monopolist in the form of profit. When a monopolist is able to capture the entire surplus in this way, we say that it achieves perfect price discrimination. *price discrimination has a horizontal line for marginal cost That’s because of the price effect: a monopolist’s marginal revenue from selling an  additional unit is always less than the price the monopolist receives for the previous  unit. It is the price effect that creates the wedge between the monopolist’s marginal  revenue curve and the demand curve: in order to sell an additional diamond, De Beers  must cut the market price on all units sold. ­marginal revenue always lies below demand curve. *Income vs Substitution Effect: ­income: as price goes down, my budget can go farther & I can buy more(Qd ^) *inferior good­ income and subst. effect goes opposite direction  *normal good­ income and subst. effect go same direction  ­substitution: as price curry drops relative to burritos, I buy more curry because I buy  less burritos. The U.S. Department of Justice considers a market with a result of less than 1,000 to be a  competitive marketplace; a result of 1,000­1,800 to be a moderately concentrated  marketplace; and a result of 1,800 or greater to be a highly concentrated marketplace. As a  general rule, mergers that increase the HHI by more than 100 points in concentrated  markets raise antitrust concerns. Read more: Herfindahl­Hirschman Index (HHI) Definition | Investopedia  Follow us: Investopedia on FacebookThe U.S. Department of Justice considers a market  with a result of less than 1,000 to be a competitive marketplace; a result of 1,000­1,800 to  be a moderately concentrated marketplace; and a result of 1,800 or greater to be a highly  concentrated marketplace. As a general rule, mergers that increase the HHI by more than  100 points in concentrated markets raise antitrust concerns. Read more: Herfindahl­Hirschman Index (HHI) Definition | Investopedia  Follow us: Investopedia on Facebook Questions / In Class Review : 1. Why is the ATC u­shaped? 2. What does the long­run average cost curve look like and what are economies (and  diseconomies) of scale and constant returns to scale?  ­economies of scale = as a firm increases in size quality doesnt change and average  cost drops in long run ­diseconomies of scale= as a firm increases in size, average cost goes up in long run  ­constant returns to scale= as firm increases in size, average cost does not change  3. Be able to graph a market with an external cost like pollution­ and show that the market  equilibrium is inefficient. (16­2)  4. What did Krugman argue are the causes of rising inequality?  ­POLICY. 5.       6. 7. 8. 9. Explain why firms in Monopolistic Competition won’t be able to enjoy long run profit.  Show long­run equilibrium for firms in this type of industry.  10. Why does a monopolist need to cut the price to sell the last unit?(price vs  quantity effect)   Profit = ( P­ATC ) x Quantity


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