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Econ 221 Final Study Guide

by: Megan Wenzel

Econ 221 Final Study Guide ECON 221 001

Megan Wenzel
Cal Poly

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About this Document

These are the main points (did not include general stuff) that will help on the final. Includes main points from first midterm and from lecture notes which are what the test usually consists of.
Principles of Microeconomics
Solina Lindahl
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This 2 page Study Guide was uploaded by Megan Wenzel on Saturday March 5, 2016. The Study Guide belongs to ECON 221 001 at California Polytechnic State University San Luis Obispo taught by Solina Lindahl in Winter 2016. Since its upload, it has received 234 views. For similar materials see Principles of Microeconomics in Economcs at California Polytechnic State University San Luis Obispo.


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Date Created: 03/05/16
Econ Study Guide Final • Supply curve shifts right­ the price in the market will the decline the most if demand is more:  price inelastic and supply is more price­inelastic (price elasticity of demand < 1 and demand is  inelastic at low prices)  • A Giffen good is one in which the demand curve is positively sloped (income effect and  substitution effect move in opposite directions and income effect outweighs substitution, must  be an inferior good) • Comparative advantage is when one firm has less opportunity cost than another • Accounting profit is [implicit costs + economic profit] • If price elasticity of demand is 0.5 for product A and income elasticity of demand is 0.4 then: a 50% increase in income will increase the QD of product A by 20% • Elasticity of demand for B is 0.1. To increase sales by 5% they have to lower price by 50% [50 x 0.1 = 5%] • Three Economic Questions: What? How? For Whom? [Should production of goods occur] • Price increase for corn tortilla chips­fungus killing corn crop  • For a normal demand curve, price elasticity of demand will always be negative  • If a country is producing ON the PPF and decides to increase production of A and decrease the production of B— the bowed out PPF would suggest there will be increasing opportunity cost  of producing more A • When price of an inferior good falls, substitution effect contributes to an increase in QD and  income effect opposes the substitution effect  • Proft = [Total revenue ­ Explicit costs ­ implicit costs] — Profit is maximized where a firm  produces @ the quantity where MR = MC  • In the short run, some inputs are fixed but in the long run you can adjust the inputs as needed  • MP = Change in Total product / Change in # input • TC = VC + fixed cost, AFC = fixed cost / Q, AVC = VC / Q • Economies os scale ­ as quantity of input increase, the average total cost drops  • Key characteristics in perfect competition: Many buyers and sellers w/ small market share,  product is standardized across sellers, free entry and exit • If TR > TC ­ profitable, TR = TC ­ break even, TR < TC ­ loss incurred  • A firm should stay open in the short run if it can cover its VC, if not then it should shut down  • Short run individual supply curve is the MC curve about the AVC curve (firms supply curve  above shut down price) • Monopolies ­ firm that is the only producer of a good with no close substitutes and they rescue  the QS to Qm and move up demand curve raising price to Pm = charge more but make less  • They exist due to barriers to entry which generates profit in SR and LR, inc returns to scale,  superior in technology and they can choose their price (how they maximize profit) • One is more elastic if they are more sensitive to price and there isn’t price discrimination in  things that can’t be resold  • When perfect price discrimination can be employed, a firm will charge each customer a  different price, the maximum each is willing to pay and under this, the firm captures all  consumer surplus as profit (there is NO deadweight loss)  • Oligopolies are measured using the Herfindahl­Hirschman Index —the sum of squares of each  firm’s share of market sales  (2 firms— 60%, 20% so.. (60 x 60) + (20 x 20) = HHI • If HHI < 1000 = strongly competitive, if HHI > 1800 = oligopoly and if in between then it is  somewhat competitive  • Collusion: firms cooperating to raise each other’s profits by several producers to restrict output • Game Theory (Von Neumann) ­ it’s one upping the next guy because it’s safer  • The prisoners dilemma: each firm has incentive to cheat but both are worse off if they both  cheat, so the best strategy (Game Theory) is to pick the best option for you AND everyone else • Dominant strategy: don’t know what other person is doing but it is your best move regardless • Nash equilibrium ­ when you know what the other person is doing, and it is your best move • Tacit collusion (without explicitly saying so, firms agree on a strategy)  • Monopolistic competition is like a monopoly AND perfect competition because it has many  competitors and similar but not identical products and free entry and exit from the industry in  the long run  Rival In Consumption  Non Rival in Consumption              Private Goods           Artificially scarce goods Wheat on demand movies Excl Bathroom fixtures computer software u           Common Resources            Public Goods Clean Water Public Sanitation  Biodiversity  National Defense  Non ­ Excl • Non excludable goods sugar from inefficiently low production and non rival in consumption  goods suffer from inefficiently low consumer (efficient price = 0)  • Marginal Revenue curve is 2x steep as demand curve (based on demand curve) = change in  total revenue / change in quantity  • Social cost curve = S (private costs + external costs)  • Policies for pollution include: Environmental standards, emission tax (Pigouvian tax) and  tradable emissions permits  • Coase Theorem: even in the presence of externalities an economy can always reach an efficient solution provided that the transaction costs are sufficiently low  • Positive externalities:  the marginal social benefit of a good or activity is equal to the marginal  benefit that accrues to consumers plus its marginal external benefit  • Market failures occur when there is too much non­excludability 


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