Microeconomics Final Exam Study Guide
Microeconomics Final Exam Study Guide ECON 2010
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This 8 page Study Guide was uploaded by Caylin Enoch on Wednesday April 27, 2016. The Study Guide belongs to ECON 2010 at University of Colorado at Boulder taught by Jeronimo Carballo in Winter 2016. Since its upload, it has received 46 views. For similar materials see Principles of Microeconomics in Economcs at University of Colorado at Boulder.
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Date Created: 04/27/16
Principles of Microeconomics Final Exam Review Chapter 11: Public Goods and Common Resources Key Terms- Excludability: the property of a good whereby a person can be prevented from using it. Rivalry in Consumption: the property of a good whereby one person’s use diminishes other people’s use. Private Goods: goods that are both excludable and rival in consumption. Public Goods: goods that are neither excludable nor rival in consumption. Common Resources: goods that are rival in consumption but not excludable. Club Goods: goods that are excludable but not rival in consumption. Free Rider: a person who receives the benefit of a good but avoids paying for it. Cost-Benefit Analysis: a study that compares the costs and benefits to society of providing a public good. Tragedy of the Commons: a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole. Concepts- Policy Options to Prevent Overconsumption: o Evaluate use of the resource o Impose a corrective tax to internalize the externality o Auction off permits allowing use of the resource o If the resource is land, convert to a private good by dividing and selling parcels to individuals Where do problems arise? o Public goods are under-provided o Common resources are over-consumed o When property rights are not established ______________________________________________________________________________ ___________________________ Chapter 13: The Costs of Production Key Terms- Total Revenue: the amount a firm receives for the sale of its output Total Cost: the market value of the inputs a firm uses in production Profit: total revenue minus total cost Explicit Costs: input costs that require an outlay of money by the firm Implicit Costs: input costs that do not require an outlay of money by the firm Economic Profit: total revenue minus total cost, including both explicit and implicit costs Accounting Profit: total revenue minus total explicit cost o Accounting profit ignores implicit costs, so it’s higher than economic profit Production Function: the relationship between quantity of inputs used to make a good and the quantity of output of that good. Accounting Profit: total revenue minus total explicit cost. Production Function: the relationship between quantity of inputs used to make a good and the quantity of output of that good. Marginal Product: the increase in output that arises from an additional unit of output. Diminishing Marginal Product: the property whereby the marginal product of an input declines as the quantity of the input increases. Fixed Costs: costs that do not vary with the quantity of the output produced. Variable Costs: costs that vary with the quantity of output produced. Average Total Cost: total cost divided by the quantity of output. Average Fixed Cost: fixed cost divided by the quantity of output. Average Variable Cost: variable cost divided by the quantity of output. Marginal Cost: the increase in total cost that arises from an extra unit of production. Efficient Scale: the quantity of output that minimizes average total cost. Economies of Scale: the property whereby long-run average total cost falls as the quantity of output increases. Diseconomies of Scale: the property whereby long-run average total cost rises as the quantity of output increases. Constant Returns to Scale: the property whereby long-run average total cost stays the same as the quantity of output changes. Concepts- Total Marginal Average Revenue TR= P x Q MR= Change in AR= TR/ Q=P TR/ Change in Quantity Cost TC= FC + VC MC= Change in AVC= VC/Q TC/ Change in AFC= FC/Q Quantity ATC= TC/Q= AVC+AFC Product MPL= Change in AMPL= Q/L quantity/ Change in L Profits Profits= TR-TC Profits= (P-ATC)x Q Q=0 TC=FC since VC=0 Q=1 ATC= TC, AVC=VC, AFC=FC MC= Change in VC/ Change in Q Since change in TC = VC (Q1)- VC (Q0)= Change in VC ______________________________________________________________________________ ___________________________ Chapter 14: Firms in Competitive Markets Key Terms- Competitive Market- a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. Average Revenue- total revenue divided by the quantity sold. Marginal Revenue- the change in total revenue from an additional unit sold. Sunk Cost- A cost that has already been committed and cannot be recovered. Concepts- Characteristics of a Competitive Market: o Many buyers and many sellers o The goods offered for sale are largely the same o Firms can freely enter or exit the market Marginal Revenue=Price for a Competitive firm Three General Rules for Profit Maximization: o If marginal revenue is greater than marginal cost, the firm should increase its output. o If marginal cost if greater than marginal revenue, the firm should decrease its output. o At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal. Firm Shutdown: A short-run decision not to produce anything because of market conditions. If shut down in SR, must still pay fixed costs. o Shut down if P < AVC Firm Exit: A long-run decision to leave the market. If exit in LR, don’t have to pay fixed costs. o Exit if P < ATC A new firm’s decision to enter the market: a new firm will enter the market in the long-run if it is profitable to do so o Enter if P > ATC Market Supply: Assumptions o All existing firms and potential entrants have identical costs o Each firms’ costs do not change as other firms enter or exit the market o The number of firms in the market is fixed in the short run but variable in the long run The Zero Profit Condition: o The Long Run Equilibrium: The process of entry or exit is complete- remaining firms earn zero economic profit 0 economic profit occurs when P= ATC Since firms produce where P=MR=MC, the zero profit condition is P=MC=ATC MC intersects ATC at minimum ATC Hence, in the long run P=Minimum ATC ______________________________________________________________________________ ___________________________ Chapter 15: Monopoly Key Terms- Monopoly- a firm that is the sole seller of a product without close substitutes Natural Monopoly- a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms Price Discrimination- the business practice of selling the same good at different prices to different customers Concepts- Why do monopolies arise? o Barriers to entry- 1. A single firm owns a key resource 2. The gov’t gives a single firm the exclusive right to produce the good Natural Monopoly Monopoly Profit-Maximization o Like a competitive firm, a monopolist profit by producing the quantity where MR=MC o Once the monopolist identifies the quantity, it sets the highest price consumers are willing to pay for that quantity o It find this price from the Demand curve A monopoly does not have an S curve o a monopoly firm is a “price-maker” , not a “price-taker” o Q does not depend on P, Q and P are jointly determined by MC, MR, and the Demand Curve Public Policy Towards Monopolies o Increasing competitions with antitrust policies o Regulation o Public ownership o Doing nothing ______________________________________________________________________________ ___________________________ Chapter 17: Oligopoly Key Terms- Oligopoly- A market structure in which only a few sellers offer similar or identical products Game theory- the study of how people behave in strategic situations Concentration Ratio- The percentage of the market’s total output supplied by its four largest firms Collusion- an agreement among firms in a market about quantities to produce or prices to charge Cartel- a group of firms acting in unison Nash Equilibrium- a situation in which economic actors interacting with one another each choose their best strategy given the strategies that al the other actors have chosen Prisoner’s Dilemma- a particular “game” between two captured prisoners illustrates why cooperation is difficult to maintain even when it is mutually beneficial Dominant Strategy- a strategy that is best for a player in a game regardless of the strategies chosen by the other players Concepts- Controversy over antitrust policy- o Resale price maintenance: manufacturer imposes lower limits on the prices retailers can charge, appears to reduce competition at the retail level, but any market power the manufacturer has is at the wholesale level not the resale level. o Predatory Pricing: occurs when a firm cuts prices to prevent entry or drive a competitor our of the market so that it can charge monopoly prices later, illegal under antitrust laws but hard for courts to determine. o Tying: occurs when a manufacturer bundles two products together and sells them for one price. Critics argue that tying gives firms market power by connecting weak products to strong products.
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