Final exam reveiw
Final exam reveiw Econ 10223
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This 7 page Study Guide was uploaded by Jade Frederickson on Saturday April 30, 2016. The Study Guide belongs to Econ 10223 at Texas Christian University taught by Dr. Watson in Spring 2016. Since its upload, it has received 79 views. For similar materials see Microeconomics in Economcs at Texas Christian University.
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Date Created: 04/30/16
Final Exam Review – Spring 2016 Chapter 16 1. In MONOPOLISTIC COMPETITION, there are many sellers selling differentiated products, and there is free entry and exit in the long run. 2. In order to PROFIT MAXIMIZE, in the short run, this market must produce the quantity where MR=MC, and the price is on the demand curve. If P>ATC, profit and if P<ATC, loss In the long run, the quantity produced is not at the minimum ATC. P>MC due to a markup in over the marginal cost, BUT there is not profit in the long run. Chapter 17 3. An OLIGOPOLY is a market in which there are only a few sellers that are interdependent. They sell goods that can be either similar or identical. 4. In an oligopoly, firms can either collude or choose their best strategy. When they choose their best strategy based on the strategies that the other firms have chosen, the outcome is known as the NASH EQUILIBRIUM. 5. The Nash equilibrium is not their best option though. It is created due to something called the PRISONERS’ DILEMMA, a game in which each “prisoner” pursues his or her own best interests, reaching an outcome that is worse for both of them. This is because cooperation is difficult to maintain and is individually irrational. 6. In order to MAXIMIZE PROFIT, an oligopoly must individually choose production. The quantity produced must be more than a monopoly, less than perfect competition. The price must be less than a monopoly and more than perfect completion. 7. ANTITRUST LAWS AND LEGISLATION was created to prevent oligopolies from colluding. The Sherman Antitrust Act was an agreement among oligopolists to enforce contracts against criminal conspiracy. The Clayton Act further strengthened the antitrust laws. Chapter 18 8. FACTORS OF PRODUCTION are the inputs used to produce goods and services (land, labor and capital). The demand for a factor of production is the derived demand of labor for a market. 9. The MARGINAL PRODUCT OF LABOR is the increase in the amount of output gained form an additional unit of labor. As more people are hired, the marginal productivity decreasesknown as the DIMINSHING MARGINAL PRODUCTIVITY. The VALUE OF THE MARGINAL PRODUCT OF LABOR (VMPL) is equal to marginal product of labor (MPL) x Price VMPL=MPLxP. Thus, the MARGINAL PROFIT (change in profit for each additional worker) is the VMPLW. A competitive, profit maximizing form will hire workers up to the point where VMPL=Wage. At this EQUILIBRIUM WAGE, the demand for workers exactly equals the supply of labor (workers). Chapters 15 10. A NORMATIVE STATEMENT attempts to prescribe how the world should be while a POSITIVE STATEMENT attempts to describe the world as it is. 11. An ABSOLUTE ADVANTAGE occurs when a firm has the ability to produce a good using fewer inputs than another producer while a COMPARITIVE ADVANTAGE is the ability to produce a good at a lower opportunity cost than another producer (if your opportunity cost is less, you should produce the good). 12. The LAW OF DEMAND states that other things being equal, when the price of a good rises, the quantity demanded falls, and when the price a good falls, the quantity demanded increases. An increase in quantity demanded (or a change in the price of a good) will lead to MOVEMENT ALONG THE CURVE. An actual increase in demand (due to income, prices of related goods, tastes, expectations and number of buyers) SHIFTS THE WHOLE DEMAND CURVE LEFT OR RIGHT. A NORMAL GOOD is one that a consumer will buy when there is an increase in income (increase income=increase demand). An INFERIOR GOOD is one that when a consumer experiences an increase in income, they will not buy (it is an inferior product). A SUBSTITUTE GOOD is a good that an increase in the price of one (such as chicken) leads to an increase in demand for the other (such as beefbuy more beef because chicken is more expensive). A COMPLEMENT GOOD is a good that an increase in price of one (such as jelly) leads to a decrease in demand for the other (such as peanut butter). 13. The MARKET DEMAND CURVE is the sum of all the individual demand curves. 14. The LAW OF SUPPLY states that other things being equal, when the price of a good increases, the quantity supplied of that good also increases, and when the price of a good decreases, the quantity of a good supplied also decreases. An increase in quantity supplied (or a change in price) leads to MOVEMENT ALONG THE SUPPLY CURVE while and increase or decrease in supply (due to technology, number of suppliers, expectations about the future and input prices) causes a physical MOVE OF THE SUPPLY CURVE LEFT OR RIGHT. 15. Equilibrium is when supply and demand are exactly equal, but a change in either will cause a shift along the curves, or a shift of the curves, causing the equilibrium price and quantity to be changed. A SURPLUS will occur when the quantity supplied is greater than the quantity demanded. Thus, there is a downward pressure on price towards equilibrium. A SHORTAGE will occur when the quantity demanded is greater than the quantity supplied. Thus, there is an upward pressure on price towards equilibrium. 16. ELASTICITY is the measure of responsiveness of quantity demanded or quantity supplied. A good is inelastic when it is a necessity and there are no close substitutes, but elastic when the good is more of a luxury item and your need of it varies over time. Q2+Q1 (Q2−Q1)/( ) The ELASTICITY OF DEMAND can be figured by: 2 P 2+P1 (P2−P1)/( 2 ) When the price elasticity of demand >1, the good is ELASTIC. When the price elasticity of demand<1, the good is INELASTIC. The flatter the demand curve, the more elastic the good is. TOTAL REVENUE is price x quantity. If a good is INELASTIC, TR increases, and if a good is ELASTIC, TR decreases. 17. CROSSPRICE ELASTICITY OF DEMAND is how much the quantity demanded of one good ∆quantitydemanded of good A responds to a change in the price of another good. It is equal t∆ priceof good B Goods are substitutes this number is positive. Goods are complements when this number is negative. Chapters 610 18. A PRICE CEILING is a legal maximum on the price at which a good can be sold while a PRICE FLOOR is a legal minimum on the price at which a good can be sold. A price ceiling is binding only when it is set below the equilibrium price and a price floor is binding only when it is set above the equilibrium price. 19. A TAX ON SELLERS shifts the supply curve to the left, causing the equilibrium price to increase, the equilibrium quantity to decrease, and causing the overall size of the market to decrease. 20. A TAX ON BUYERS shifts the demand curve to the left, lowers the equilibrium price and quantity and causes the size of the market to decrease. 21. The TAX BURDEN is determined by elasticities. When the supply curve is more inelastic and the demand is elastic, the incidence of the tax falls more heavily on the producers. When the demand curve is more inelastic and the supply curve is elastic, the burden falls more heavily on the consumers. 22. On a graph, CONSUMER SURPLUS (amount consumer is willing to pay for a good minus the amount the buyer actually pays) is found underneath the demand curve and above the price, and PRODUCER SURPLUS (amount a seller is paid for a good minus the seller’s cost of providing it) is found above the supply curve and below price. 23. All taxes create a DEADWEIGHT LOSS, a fall in total surplus. It is equal to size of the price wedge times the reduction in quantity times 0.5. The greater the elasticities of the goods, the more that is lost. 24. Trade makes everyone better off, but you must first determine whether or not a country should import or export a good. A country should IMPORT the good if the domestic price > world price (because the world has the comparative advantage). Importing is better for the consumers because they can buy goods at lower prices and have a greater surplus. A country should EXPORT the good if the domestic price < world price (because the country has the comparative advantage). Exporting is more beneficial for the producers because they get more surplus. 25. A TARIFF is a tax on goods produced abroad and sold domestically. A tariff is placed on imports, and raises the domestic price above the world price, creating a tax and deadweight loss. The government is the only real entity that befits from increased revenue; both domestic buyers and sellers are worse off. Chapters 1115 26. A PUBLIC GOOD is one that is not excludable (you cannot be prevented from using it) and it is not a rival in consumption. A COMMON GOOD is one that is a rival in consumption (one person’s use of it detracts from another person’s use of it) but it is not excludable. Public goods often experience the free rider problem because people get benefit from them without paying while common resources are often at the mercy of the tragedy of the commons, where too many people use it and it disappears. 27. ECONOMIC PROFIT is the total revenue minus total cost, including implicit and explicit costs where implicit costs are those that do not require and outlay of money and explicit costs do require an outlay of money. If this number is positive, you should stay in business, but if it is negative you didn’t cover your opportunity costs and you are better off doing what you were doing before. 28. ACCOUNTING PROFIT is the total revenue minus just explicit cost. Usually larger than economic profit. 29. FIXED COSTS are costs that do not vary with the quantity of output produced. A VARIABLE COST on the other hand, changes depending on the amount of product produced. TOTAL COST then is fixed cost plus variable cost. 30. AVERAGE FIXED COST (AFC) is the fixed cost divided by the quantity of output, AVERAGE VARIABLE COST(AVC) is the variable cost divided by the quantity of output, and the AVERAGE TOTAL COST (ATC) is the total cost divided by the quantity, (ATC=AFC+AVC). 31. MARGINAL COST is the increase in total cost arising from an extra unit of production (MC=ΔTC/ΔQ). 32. THE EFFICIENT SCALE is the quantity of output that minimizes ATC. There is said to be an ECONOMIES OF SCALE when longrun average total costs fall as the quantity of output increases. This is due to increasing specialization among workers. 33. When MC<ATC, the average total cost falls and when MC>ATC, the average total cost rises. The marginal cost curve crosses the average total cost curve at its minimum. 34. In a COMPETITVE MARKET, PROFIT IS MAXIMAIZED when MR=MC. Many buyers and sellers Identical products Price takers Free entry and exit If MR>MC, increase production and if MR<MC, decrease production. MR=P=AR 35. In a MONOPOLY, PROFIT IS MAXIMIZED when MR=MC, but then, using the demand curve, the price is set higher than that of MR. Price maker Firm is the sole seller of a product, and there are no close substitutes Created by barriers to entry (monopoly resources, government regulation and the production process) Downward sloping demand curve
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