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ECON 2100 Exam 1 Study Guide

by: Meh-Ki White

ECON 2100 Exam 1 Study Guide ECON 2100

Meh-Ki White


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About this Document

This study guide covers concepts found in chapters 1-3, 5, and 6 of the Krugman, Wells, and Graddy textbook.
Economics and Policy
Richard Fritz
Study Guide
Economics, Microeconomics, Macroeconomics
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This 7 page Study Guide was uploaded by Meh-Ki White on Sunday September 18, 2016. The Study Guide belongs to ECON 2100 at Georgia Institute of Technology - Main Campus taught by Richard Fritz in Fall 2016. Since its upload, it has received 17 views. For similar materials see Economics and Policy in Economics at Georgia Institute of Technology - Main Campus.


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Date Created: 09/18/16
Sunday, September 18, 2016 Exam 1 Study Guide: Chapters, 1-3, 5, 6 Chapter 1: First Principles - Markets usually lead to efficiency. - Government intervention can improve society's welfare when markets fail and do not achieve efficiency. - One person's spending is another person's income. - Overall spending in the economy can get out of line with the economy's productive capacity, leading to recession or inflation. Chapter 2: Economic Models: Trade-offs and Trade - Other things equal assumption: allows analysis of effect of a change in one factor by holding all other relevant factors unchanged. - Production possibility frontier: illustrates opportunity cost, efficiency, and economic growth. • feasible if production point is inside or on the PPF - efficient if point is on PPF - inefficient if point is inside PPF • not feasible if production point is outside PPF - Sources of growth: increase in factors of production (land, labor, capital), inputs that are not used up in production, and improved technology. • Shifts PPF - comparative advantage: opportunity cost of production is lower - absolute advantage: more output per worker 1 Sunday, September 18, 2016 Chapter 3: Supply and Demand - In a competitive market: • many buyers/sellers • all sellers offer the same good/service • no one party can influence price. • market itself determines equilibrium. - Demand curve: downward sloping • higher price, lowerquantitydemanded • shifted by: - change in price of related good (substitute or complement) - changes in income • normal good: rise in income increases demand • inferior good: riin income decreases demand - changes in tastes/expectations - change in number of consumers • Market demand: horizontal sum of individual demand curves - Supply curve: upward sloping • higher price, higher quantity supplied • shifted by: - changes in input prives - changes in prices of related goods/services - changes in technology - changes in expectations - changes in number of producers - equilibrium: quantity demanded= quantity supplied 2 Sunday, September 18, 2016 - quantity shifts in same direction as price: demand shift - quantity shifts in opposite direction of price: supply shift Simultaneous Shifts ISupply increases ISupply decreases Demand increases P: ambiguous lP: up 0 : up iQ: ambiguous • • • • •• • o • • • • • • • • •• • o • • • • • • • • • • • • • • • • • • • • • • • • • • • o • • • • • • • • • • •• • • • • • • • • ... •n • • • • • • • h H o • • • o • • • • • • • • • • • - • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Demand decreases P:down lP: ambiguous Q: ambiguous j0 : down Chapter 5: Elasticity and Taxation - Price elasticity of demand= I~ Q. h ~ ~ a- .,00 ) ~i)'P' - Midpoint method: • Calculate percent change using averages Q 'l.Q,- cl,-~ v -Q ~ IOQ Q I kCb . O·"J.'\. ~ tU-~ u.? y"~\ -*\?'l. ()1.v-e~pi,..1.:.0 Extreme cases: ·1.-- • demand is perfectly inelastic when Q demanded does not respond at all to changes in price (vertical demand curve) • demand is perfectly elastic when average price increase will cause Q demanded to drop to zero (horizontal demand curve) - interpreting price elasticity • elastic: PE> 1 • inelastic: PE< 1 • unit-elastic: PE= 1 - when a seller raises the price of a good there are two effects in motion • price effect: after price increase, each unit sold sells @ higher price and increases revenue • quantity effect: after price increase, fewer units are sold, which tends to lower revenue 3 Sunday, September 18, 2016 - Elasticity and total revenue: • if demand is elastic: - increase in price reduces total revenue - quantity effect stronger than price effect • if demand is inelastic: - higher price increases total revenue - price effect stronger than quantity effect • if demand is unit elastic - higher price doesn't effect total revenue - Price elasticity along the demand curve: • @ low prices, generally inelastic • @ high prices, generally elastic 1. c Q - Cross price elasticity:·1. P ~ ,d "' • measures effect of change in one goad's price on quantity demanded of another good • substitutes if positive, complements if negative - Income elasticity of demand: • normal good if positive • inferior good if negative l D-Q - Price elasticity of supply: 1.6 v • measure responsiveness of quantity of a good supplied to the price of that good • perfectly inelastic:vertical supply curve. price elasticity is zero • perfectly elastic: horizontal supply curve, price elasticity is infinite - cost of taxation: • decrease in the price of a good generates a gain in consumer surplus • increase in price generates a loss in consumer surplus 4 Sunday, September 18, 2016 • a tax reduces both consumer and producer surplus - to minimize the efficiency costs, government should choose to tax only goods for which supply or demand, or both, is relatively inelastic so that the tax has little effect on behavior. - Elasticities and deadweight loss: • deadweight loss: amount of surplus that would've been generated by transactions that now don't take place because of the tax - demand perfectly inelastic: no deadweight loss - supply perfectly inelastic: no deadweight loss Chapter 6: Behind the Supply Curve: Inputs and Costs - The production function • relationship between the quantity of inputs a firm uses and the quantity of outputs it produces - fixed input: cannot be varied, quantity fixed for a period of time - variable input: quantity can be varied at any time ~ - l.!,~ '4fif'-Q C,..,t'f'''~ ~ \ n e, Q" " ? '-'Y ~ - Marginal product of labor (MPL) = D '- - (. ~ l.,._\c;..\,o.~ '!c.~ r:u:l.d.,-nc ...."" 1,.,n.\l-cl-t,g-r - Diminishing returns to an input • when an increase in the quantity of that input leads to a decline int he marginal product of that input. - as we add more workers, eventually we will get less and less output - Whats behind the supply curve: • fixed cost: doesn't dependonquantityof output produced • variable cost: depends on quantity produced, can be zero of no output • total cost: sum of fixed and variable cost producing that quantity of output • due to diminishing returns, the total cost curve becomes steeper as more output is produced. 5 Sunday, September 18, 2016 .OT C.. e,~ , "\-cTt-\LQS\- - Marginal cost (MC) = ~ -:.L "'-~ t,.a......Ay--t- • total cost incurred by producing one more unit • upward sloping due to diminishing returns • intersects average total cost curve from below, crossing at its lowest point \ (....T ~ \(.O ~ - average total cost (ATC) = Q ~~ ..,...,~ v+ • u-shaped curve: - spreading effect: larger output, greater quantity of output over which fixed cost is spread, leading to lower average fixed cost - diminishing returns effect: larger output, greater amount of variable input required to produce additional units, leading to higher average variable cost - average fixed cost (AFC)= £......D_b _.,~u ,,+ • fixed cost per unit of output • downward sloping due to spreading effect \J' v "-/'\!AlL'5+- - average variable cost (AVG) = ~ = Q. 04 .....~ • variable cost per unit of output • downward sloping but flatter than marginal cost - general principles of MC and ATC curves • minimum cost output is the quantity of output at which average total cost is lowest - @ minimum cost output, ATC is equal to MC - @ output less than minimum cost output, MC< ATC, and ATC is falling - @ output greater than minimum cost output, MC > ATC, and ATC is rising - Short run vs long run costs • short run: - fixed cost completely outside control of the firm • long run: - all inputs are variable, including fixed cost. the firm will choose fixed cost based on the level of output it expects to produce. 6 Sunday, September 18, 2016 - Long run average total cost curve (LRATC) • shows relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output - draw a line that connects to minimum tangence's of the short run ATC curve - Returns to scale • increasing when LRATC declines as output increases (economies of scale) • decreasing when LRATC increases as output increases (diseconomies of scale) • constant when LRATC is constant as output increases • network externalities occur when the value of a good to an individual is greater when a large number of other people also use that good. 7


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