Final Exam Microeconomics
Final Exam Microeconomics
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ANTH 3853 001
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This 17 page Study Guide was uploaded by gbeatogonzalez1 Notetaker on Sunday January 17, 2016. The Study Guide belongs to at Georgia State University taught by Shelby Frost in Fall 2015. Since its upload, it has received 59 views. For similar materials see Microeconomics in Economcs at Georgia State University.
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Date Created: 01/17/16
Updated: 1:00p Tues, November 10, 2015 Required Material from the Mateer/Coppock textbook: Focus on the highlighted sections – skim the rest Unit 1 Exam Part 1: Introduction Chapter 1. The Five Foundations of Economics What is economics? – The Study of how people allocate their limited resources to satisfy their nearly unlimited wants Scarcity – term used to describe the limited nature of society’s resources Micro – individual units that make up the economy Macro – overall aspects and workings of an economy What are the five foundations of economics? Incentives – factors that motivate you to act or to exert effort. Positive and negative, direct and indirect. Tradeoffs – every decision incurs a c Opportunity costs – the highest valued alternative that must be sacrificed in order to get something else's. Marginal thinking – Economic thinking – purposeful evaluation of the available opportunities to make the best decision possible. Marginal analysis Trade Chapter 2. Model Building and Gains from Trade How do economists study the economy? The scientific method in economics Positive and normative analysis Economic models What are the benefits of specialization and trade? Gains from trade Comparative advantage Finding the right price to facilitate trade Appendix 2A: graphs in economics Part 2: The Role of Markets Chapter 3. The Market at Work: Supply and Demand What are the fundamentals of markets? Competitive markets Imperfect markets what determines demand? The demand curve Market demand Shifts in the demand curve What determines supply? The supply curve Market supply Shifts in the supply curve P – Prices of inputs E Expectations S – Subsidies and taxes T Technology The amount that people are willing to buy and sell are tied to a specific price. Surplus = sellers lower the price When you are not at equilibrium, there is a force in motion pushing you to equilibrium. As the price goes down, quantity demanded increases, quantity supplied is decreases. As the price goes up, How do supply and demand shifts affect a market? Supply, demand, and equilibrium Appendix 3A: changes in both demand and supply UNIT 2 EXAM: CH’S 4, 5, 6 – OCT. 9 12:15P Chapter 4. Elasticity Review from previous chapters Demand and Supply balance the desires of consumers and producers. Demand and supply steer the market price toward equilibrium. Elasticity helps us understand the sensitivity of consumers and producers to changes in price. Total Revenue=Price x Quantity Law of demand = lower prices, people will buy more o High price, buy less Elasticity measure of responses; responsiveness to a change in market conditions; responsiveness of buyers and sellers to changes in price or income; how consumers and producers change their behavior when prices or income changes Four Elasticities: o What is the price elasticity of demand, and what are its determinants? Price Elasticity= Demand is elastic if, the quantity demanded changes significantly as a result of the change of price. Elastic = “Sensitive” “responsive” Demand is Inelastic if, quantity demanded changes a small amount as the result of the price change. Inelastic – unresponsive Determinants of price elasticity of demand; Existence of substitutes o Goods with lots of substitutes Canned vegetables, breakfast cereals, many types of products with multiple brands More elastic o Goods with no good substitutes Broadway theater, rare coins, autographs, drinking water, electricity, super bowl Share of the budget spent on a good o Demand is more elastic for “big ticket items” like rent o Demand is more inelastic for inexpensive items. Which one would you react to more? 20% sale on a new vehicle you want < big reaction=elastic 20% sale on a candy bar < small reaction =inelastic Good is a necessity or luxury good Necessity = inelastic Luxury = elastic Time Inverse relationship between the price of a good and the quantity demanded; elasticity allows us to measure how much the quantity demanded changes in response to a change in price. IF the quantity demanded changes significantly as a result of a price change, the demand is elastic. If quantity demanded changes a small mount as a result of a price change, the demand is inelastic Elastic < 1 Inelastic > 1 Graphing the price elasticity of demand Price elasticity of demand and total revenue How do changes in income and the prices of other goods affect elasticity? Income elasticity Crossprice elasticity What is the price elasticity of supply? Determinants of the price elasticity of supply How do the price elasticity of demand and supply relate to each other? Perfectly Inelastic Slope = infinity Graph is vertical like an "I" Perfectly Elastic Slope = 0 Graph is horizontal "E" Chapter 5. Price Controls Price Ceiling > Max Price to Charge Price Floor > Min Price to Charge o Ex: Minimum wage Binding vs Nonbinding= If it is a price floor ABOVE equilibrium it is binding, if it is a price ceiling BELOW equilibrium it is binding. There are no problems in the market if a ceiling is above, and a floor is below... (Like a house?) Binding means the price control is bad for the economy, shortages/surpluses will happen. When do price ceilings matter? They are beneficial to consumers, but bad to producers. Understanding price ceilings The effect of price ceilings Price ceilings in the long run What effects do price ceilings have on economic activity? Rent control Price Ceiling on apartments or housing Goal: Help low income renters find affordable places to live Unintended consequences of rent control: Shortages Decreases in long term investment Reduction of quality of apartments Black markets with higher prices Landlords “nickel and diming” tenants with fees to increase revenues Price gouging Laws that place a temporary ceiling on prices Usually after a natural disaster or emergency Consequences: o Restricted prices can’t ration efficiently o Resources may not go where they are needed the most. o Goods that people need disappear due to severe shortages. o When do price floors matter? A minimum legal price Producers lobby for price floors Understanding price floors The effect of price floors Price floors in the long run What effects do price floors have on economic activity? The minimum wage The lowest hourly wage rate that firms may legally pay their workers; it functions as a price floor Rationale: to provide a “living wage”, help the working poor who are often unskilled The minimum wage is often nonbinding Labor Markets: Consumers (us) are the suppliers of labor Firms (employers) are the demanders of labor Demand curve is downward sloping, firms are willing to buy: o More labor at low wages o Less labor at high wages A simple supply curve for labor is upward sloping. Individuals are willing to supply: o More labor at higher wages o Less labor at lower wages Chapter 6. The Efficiency of Markets and the Costs of Taxation What are consumer surplus and producer surplus? How we measure the benefits of trade. Who benefits from trade, producers and consumers? Welfare economics – the study of how the allocation of resources affects economic wellbeing Consumer surplus – the net benefit of the consumers’ willingness to pay versus the market price Using demand curves to illustrate consumer surplus Producer surplus The net benefit versus the equilibrium price of what a producer is willing to sell a good, compared to the actual price. Using supply curves to illustrate producer surplus The height of the supply curve is the firm’s lowest price, it is the willing to accept to sell that unit of the good. Producer surplus is the area above the supply curve and below the price, for all units sold. When is a market efficient? The efficiencyequity debate Efficiency – are the gains from trade maximized? Is economic welfare maximized? Equity – are the benefits divided fairly? Why do taxes create deadweight loss? Types of taxes – income, payroll, corporate, sales, excise tax. Excise – tax on a specific good; alcohol, tobacco, gasoline We pay taxes for providing public goods, corrective taxes, externalities, roads. Tax incidence Deadweight loss UNIT 3 EXAM (Ch.’s 7, 16, and 8) – 10/28 @ 12:15P Chapter 7. Market Inefficiencies: Externalities and Public Goods Market Failures – 3 sources Externalities: Public Goods Market power What are externalities, and how do they affect markets? The thirdparty problem Externalities – the costs and benefits of a market activity that affect a third party, can often lead to undesirable consequences. For a market to work efficiently two things must happen: 1. Internal costs of participation – the costs that only the individual participant pays. 2. External costs – cost imposed on people who are not participants in the market. Social costs – combination of the internal and external costs of market activity. Third Party Problem – occurs when those not directly involved in a market activity experience negative and positive externalities What are private goods and public goods? Rivalry, if one person consumes it, then there is less for someone else to consume. Four Types of Goods: Private good, public good, common resource, club good. Private – Excludable, rival Common resource – non excludable, rival (the fish in the ocean) Club good – not rival, excludable (WiFi) public good – not excludable, not rival ( Private property Private and public goods What are the challenges of providing no excludable goods? Costbenefit analysis Common resources and the tragedy of the commons Solutions to the tragedy of the commons (From Part 5: special topics in microeconomics) Chapter 16. Consumer Choice How to economists model consumer satisfaction? Utility: the function that measures your satisfaction. (Utils) Measure of relative levels of satisfaction consumers enjoy form consumption of goods and services. DisAdvt: cannot be compared across individuals, not directly measureable or viewable Adv.: internally consistent, can maximize utility Total utility and marginal utility Marginal means Total means Diminishing marginal utility How do consumers optimize their purchasing decisions? Optimizing Consumption – Consumers have limited incomes Must make choices to be satisfied. Marginal Utility/Price vs Marginal Utility/Price of other good, which is larger Consumer purchasing decisions Marginal thinking with more than two goods Price changes and the consumer optimum What is the diamondwater paradox? Part 3: the theory of the firm Chapter 8. Business Costs and Production How are profits and losses calculated? The difference between expenses and revenues. Loss is whenever total revenue is less than total cost Total revenue – the amount the firm receives from the sale of the goods and services it produces Total cost – amount the firm spends in order to produce the goods and services it sells. Calculating profit and loss Total Revenue – Total Cost = Profit/Loss Explicit costs and implicit costs Explicit costs – tangible out of pocket expenses. –tangible expenses, wages, insurance, food ingredients. Implicit costs – opportunity costs of doing business, (includes opportunity cost of owner’s labor) Total costs = Explicit costs + implicit costs Accounting profit versus economic profit Accounting profit = Total Revenue – Explicit Costs Economic profit = Total Revenue – (explicit +implicit costs) Or Economic profit = accounting profit – implicit costs Factors of production: labor, land, and capital Production function – the relationship between the inputs a firm uses and the output it creates Marginal product change in output associated with one additional unit of an input Diminishing marginal product – the point at which successive increases in inputs are associated with a slower rise in output (only a short run phenomena). What costs do firms consider in the short run and the long run? Short run – costs are fixed Long run – everything is variable Costs in the short run variable costs – change with the rate of output fixed costs are unavoidable Average variable cost = Total Variable cCost / Output produced Costs in the long run Unit 4 Exam (CHs 9, 10, 12, 13) – 11/11 @ 12:15 p Comparison of Market Structures Monopoly: one firm, significant barriers to entry, marginal cost=marginal revenue, most output restriction, no competitors, possibly long run profit, P>MC Oligopoly: few firms, significant barriers to entry, strategic pricing, between monopoly and competition, output decisions somewhat restricted, interdependent decisions, possibly long run profit, P>MC Monopolistic competition: many firms, few barriers to entry, Perfect competition Chapter 9. Firms in a Competitive Market How do competitive markets work? How do firms maximize profits? The profitmaximizing rule Deciding how much to produce in a competitive market The firm in the short run The firm’s shortrun supply curve The firm’s longrun supply curve Sunk costs What does the supply curve look like in perfectly competitive markets? The shortrun market supply curve The longrun market supply curve How the market adjusts in the long run: an example Some elements of noncompetitive markets (parts of chapters 1013) Chapter 10. Understanding Monopoly How are monopolies created? Natural barriers Governmentcreated barriers How much do monopolies charge, and how much do they produce? The profitmaximizing rule for the monopolist What are the problems with, and solutions for, monopoly? The problems with monopoly Solutions to the problems of monopoly Chapter 11. Price Discrimination Chapter 12. Monopolistic Competition and Advertising what is monopolistic competition? Product differentiation What are the differences among monopolistic competition, competitive markets, and monopoly? Monopolistic competition in the short run and the long run Monopolistic competition and competitive markets Monopolistic competition, inefficiency, and social welfare Why is advertising prevalent in monopolistic competition? Why firms advertise Advertising in different markets The negative effects of advertising Chapter 13. Oligopoly and Strategic Behavior what is oligopoly? Measuring the concentration of industries Collusion and cartels in a simple duopoly example Oligopoly with more than two firms How does game theory explain strategic behavior? Strategic behavior and the dominant strategy Duopoly and the prisoner’s dilemma Advertising and game theory Escaping the prisoner’s dilemma in the long run a caution about game theory How do government policies affect oligopoly behavior? Antitrust policy Predatory pricing What are network externalities? Chapter 14. The Demand and Supply of Resources Chapter 15. Income, Inequality, and Poverty Chapter 17. Behavioral Economics and Risk Taking Chapter 18. Health Insurance and Health Care Course Learning Outcomes: The student should be able to: 1. Define the concept of Scarcity. 2. Define Opportunity Costs, demonstrate how they affect economic decisions, and identify these costs in a given economic decision. 3. Explain and apply the concepts of Marginal Benefits and Marginal Costs to determine optimal economic decisions for both consumers and firms. 4. Describe the BenefitCost Principle (e.g., take an action as long as the marginal benefits are greater than the marginal costs), and should be able to apply the principle in a given economic decision. 5. Accurately explain the way in which economists use the following adjectives and the relationships among them: marginal, average, total, fixed, variable, and sunk. The student should also be able to determine in a given economic decision which costs and benefits are relevant (e.g., marginal) and which are not (e.g., sunk). 6. Recognize and interpret a Demand Curve and a Supply Curve, and should be able to identify the underlying determinants of each. 7. Describe the concepts of Excess Demand, Excess Supply and Equilibrium Quantities and Prices, and should be able to predict changes in each as a result of changes in the underlying determinants of market demand and supply or government intervention. 8. Differentiate between a Change in Demand (Supply) and a Change in the Quantity Demanded (Supplied). 9. Define the general concept of Elasticity for different variables in the demand or supply function (e.g. own, cross, income, etc.), and should be able to describe the effect of a given elasticity on economic outcomes (e.g., revenues, tax burden, policy choices, etc.). 10.Identify the differences between a perfectly competitive market and an imperfectly competitive market and the implications of each for economic outcomes.
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