Final Exam Study Guide
Final Exam Study Guide Econ 2106
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This 11 page Study Guide was uploaded by Catherine Notetaker on Saturday February 13, 2016. The Study Guide belongs to Econ 2106 at Georgia State University taught by Professor Chijioke Nwosu in Spring 2016. Since its upload, it has received 154 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Georgia State University.
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Date Created: 02/13/16
Chapter 10 Monopoly Monopoly there is only one seller Notes When a monopoly exists there isn’t a good that can substitute A monopoly is not efficient (for society) Demand curve downwardsloping demand curve(relatively inelastic) *it is possible for a monopoly to make a loss A monopoly charges high prices but has inefficient output Remember this: Monopolies choose their profit maximizing output level and price. Monopolies control the entire market. Characteristics of Monopoly entry barriers:you can not enter the market easily economic profits: in the longrun profits are possible a monopolist is the pricemaker P>MR=MC price is greater than marginal revenue when a monopoly exists it can markup prices Natural Barriers a monopoly controls all the resources there is no competition (competitors can not raise capital) the average cost goes down as profit increases (called Economics of scales) Government barriers(the government can create barriers unintentionally or intentionally) Licenses one firm has an exclusive right to sell a good or service Government wants to minimize negative externalities Patents and Copyrights Laws Keeps competitors from copying inventions without permission These laws create innovation and an incentive to develop new technologies/inventions Problems with a Monopoly Can make society worse off (socially inefficient) Rent seeking(lobbying): leads to corruption (political corruption) Restrictions on output because MB>MC Marginal Benefit is greater than Marginal cost Consumers have few choices: there will be a deadweight loss due to underproduction Remember this: In order for a monopoly to increase profit, it must decrease prices which will be a loss for a monopoly[price effect]. In order to sell more output it must decrease prices which will be a gain for a monopoly firm[output effect] Chapter 12 Monopolistic Competition Monopolistic Competition a combination of a perfect competition and a monopoly; a combination of a firm having market power and competition among other firms Notes Real world companies such as fast food companies Monopolistic competition is inefficient (for society) P>MR=MC price is greater than marginal revenue In the longrun a monopolistic competitive firm will break even(or zero) because of free entry of other competing firms Remember this:Free exit and entry does not exist in the shortrun Monopolistic competitor charges lower prices but has efficient output (compared to a monopoly) Demand curve: downwardsloping Characteristics of Monopolistic Competition Free entry and exitthere are lower barriers Many sellers (not as many sellers as Perfect competition) Product differentiation Remember this: In perfect competition products are identical There is a markup P=ATC price is equal to average total cost Chapter 13 Oligopoly and Strategic Behavior Characteristics of an Oligopoly Few sellers Different Products Entry barriers Firms interact strategically Game Theorya branch of mathematics that is used to analyze strategic behavior Components (Basic) of a Game Theory Playersthe firm (agents) that is involved Strategythe decision rule on how a player will act Payoffsrewards Josh Nash created Nash equilibrium Nash Equilibrium an economic decision maker has nothing to gain from changing its strategy, unless the decision maker colludes *Colludes do not work * Duopoly is more efficient than a monopolistic competition, but less efficient than a competitive market Chapter 5 Price Controls Price controls are an attempt to set prices through government intervention in the market they are meant to ease perceived burdens in society Price ceiling legally establishes a maximum price for a good or service Notes(things to remember) The supply and demand law states that if prices drop the quantity demanded will increase. In addition, the quantity supplied will decrease because producers will receive lower profits for effort.These things create a SHORTAGE! many people will want more of the good producers will decrease the size of unit and the quality will decrease there is not enough to go around so consumers will buy goods on the black market at a higher price Black market illegal markets that pop up when price controls are present Types of Price Ceilings Binding Nonbinding Nonbinding: when a price ceiling is above equilibrium price it is nonbinding (surplus) Notes Any price above the price ceiling is illegal Any price below the price ceiling is legal Binding: when a price ceiling is below equilibrium price it is binding Notes A shortage will occur if the price ceiling is below equilibrium price Q (d >Q (s) black markets will eliminate shortages caused by price ceilings(binding) *in the longrun supply and demand become more elastic(flatter curve) Price floors are legal minimum prices for a good or service Types of Price Floors Binding Nonbinding Nonbinding: when the price floor is below equilibrium price it is nonbinding Binding:(surplus) when the price floor is above the equilibrium price it is binding Notes if prices are binding, it will affect the market Q (s<Q (d) Chapter 6 Efficiency of Markets and the Cost of Taxation Welfare economics the study of how the distribution of resources affect economic well being Notes the balance between supply and demand improves welfare Measures of Market Value Consumer surplus Producer surplus Willingness to Pay(WTP) is the maximum amount consumer will pay for a good or service Consumer surplus the difference between WTP and the purchase price Willingness to Sell (WTS) the minimum amount a producer will sell for a good or service Producer surplus the difference between WTS and the selling price Notes total surplus is adding consumer surplus and producer surplus, this also known as social welfare when the distribution of resources maximize total surplus, it means the market is efficient efficiency is at equilibrium point consumer surplus can not be negative Deadweight Loss the decrease in economic activity from market disruptions (e.g. taxes) –Taxes (lead to deadweight loss due to underproduction) –Subsidies (lead to deadweight loss due to overproduction) Chapter 7 Externalities and Public Goods (Market inefficiency) Externalities are cost or benefits that affect thirdparties due to economic activity Types of Externalities Internal cost External cost Negative Positive Internal costthe activity is directly paid by the individual External costthe cost of the activity is paid by someone else Social costs are the sum of internal and external cost Negative overproduced ex:pollution Positiveunderproduction ex:education Notes Public goods are nonexcludable and nonrival public goods encourages the freeloader issue a freeloader is someone who can benefit without paying for it they are underproduced Private goods are excludable and rival ex:property Club goods are nonrival and excludable ex: Sam’s, country club Common resource goods are rival and nonexcludable ex:fishing In negative externalities, social costs are greater than internal cost Society will benefit if all external and internal costs are taken into consideration in order to correct an negative externality(negative external cost) is to internalize it in order to correct a positive externality( positive internal cost) is to externalize it Chapter 16 Consumer Choice Utility the satisfaction that consumers enjoy from goods and services Notes utility is subjective, it varies from person to person the unit util is the way economist measure satisfaction utility helps economist understand why consumers make decisions Marginal utility it is the extra satisfaction someone receives from one more unit Formula: Marginal utility / price Diminishing Marginal utility marginal utility decreases as consumption increases Notes marginal utility can be negative when total utility is maximized, marginal utility will be zero a consumer who gets the biggest bank fro their buck has reached a consumer optimum Types of Utility Ordinal utility Cardinal utility Ordinal utilitypreference over another good (no value attached) Cardinal utility has value (needs a unit of measurement) ex: util M= change of Total Utility / change in quantity Chapter 3 Market at Work:Supply and Demand Markets and the Nature of Competition •Firms –Supply goods and services •Consumers –purchase goods & services supplied by firms •Exchange happens –Supply and/or demand factors can change the market price. Markets •Sellers and buyers come together to form a market. –A market is any mechanism that brings buyers and sellers together to voluntarily exchange goods and services. –Markets exist whenever goods and services are exchanged. Markets and the Nature of Competition Doesn’t have to be a physical place Types of Markets •Market economy –Resources are allocated among households and firms with little or no government interference. –The main economic structure of the United States –Prices are determined by the forces of supply and demand. •Competitive market –Many buyers and sellers –No one individual has any influence over the price. –The price is determined by the entire market (i.e. the interaction of demand & supply). Freedom of entry •Imperfect market –Seller has an influence on the price Demand •Quantity demanded –The amount of a good purchased at a given price •Law of demand –Ceteris paribus, there is an inverse relationship between price and quantity demanded –Inverse: Two variables move in opposite directions •Demand schedule –Table showing the relationship between price and quantity demanded •Demand curve –Graph of the relationship between price and quantity demanded •Market demand –Horizontal sum of all individual quantities demanded by all buyers in the market at each price Movement along a demand curve –Caused by a change in the price of the good –Inverse relationship between price and quantity demanded Shift in demand –Caused by changes in nonprice factors Demand shifters Changes in income •Normal good –Good for which we buy more of when we get more income –Direct relationship between income and demand •Inferior good –Good for which we buy less of when we get more income –Inverse relationship between income and demand Prices of related goods •Complements –Two goods used together –Inverse (i.e. negative) relationship between the price of good X and demand for good Y •Substitutes –Goods that can be used in place of each other –Direct (i.e. positive) relationship between the price of good X and demand for good Y Changes in Tastes and Preferences •A good may become more fashionable or may come into season. –Demand increases (shifts right) as a result •A good may go out of style or out of season. –Demand decreases (shifts left) •New information about a good Future expectations –Our consumption today may depend on what we think the price may be tomorrow. Number of buyers Supply •Quantity supplied –The amount of the good or service that producers are willing and able to sell at the current price •Law of supply –All other things equal, there is a direct relationship between price and quantity supplied. –Direct: two variables move in the same direction •Supply schedule –Table showing the relationship between price and quantity supplied •Supply curve –Graph of the relationship between price and quantity supplied •Market supply –Horizontal sum of all individual quantities supplied by each seller in the market at each price Movement along a supply curve –Caused by a change in the price of the good –Direct relationship between price and quantity supplied Shift in supply –Caused by nonprice factors Supply Shifters The cost of inputs •Inputs –Resources used in the production process –Inverse relationship between input costs and supply Changes in technology •Technology –Knowledge that producers have about how to produce a product –Direct relationship between level of technology and supply Taxes and subsidies •Tax– paid by producer which adds to the cost of production –Inverse relationship between taxes and supply •Subsidy–Opposite of a tax; government pays sellers to produce goods. –Direct relationship between subsidies and supply Number of sellers –More individual sellers means more market supply. Price expectations –Higher price expected tomorrow? If so, delay sales/supply until future, if possible. –Inverse relationship between tomorrow’s expected price and today’s supply The Law of supply and demand –The price of any good will adjust to bring the quantity supplied and quantity demanded into balance(equilibrium). The supply and demand graph •Equilibrium (point) –Graphically, the point at which supply and demand intersect –Equation: Set demand & supply equations equal to each other and solve for equilibrium price & qty •Equilibrium price – causes quantity supplied to equal quantity demanded. –The price that “clears the market” •Equilibrium quantity –The numerical quantity (supplied and demanded) at the equilibrium price •Shortage –Q D> Q S –Occurs at any price below equilibrium –Price will rise over time toward equilibrium •Surplus –Q S Q D –Occurs at any price above equilibrium –Price will fall over time toward equilibrium.
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