PRIN OF ECON (MICRO)
PRIN OF ECON (MICRO) ECON 201
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This 5 page Study Guide was uploaded by Arturo Runolfsson on Saturday September 26, 2015. The Study Guide belongs to ECON 201 at James Madison University taught by Bruce Brunton in Fall. Since its upload, it has received 19 views. For similar materials see /class/214164/econ-201-james-madison-university in Economcs at James Madison University.
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Date Created: 09/26/15
Study Guide for Final Exam Dr Brunton GECON 201 Final Study Guide Demand Shift Factors 1 Change in income Increase increase demand for normal goods Decrease increased demand for inferior goods 2 TastesPreferences of consumers 3 Price of other goods Substitute Goods Price of good increases then demand decreases Complementary Goods CDs and CD players Demand for one increases demand for another 4 Expectations of Future Prices Orange Crop gets destroyed people increase their current demand on the expectation that demand will increase which actually causes it to increase 5 Number of Buyers Supply Shift Factors 1 Prices of Inputs Increasing price of inputs means sellers will supply less 2 Technology 3 Expectations of Prices If the price of a good is expected to drop than suppliers will of oad their inventories and supply less 4 Taxes and subsidies Decrease in taxes increase in supply Increase in subsidies increase in supply 5 of Sellers Increased sellers increased supply Demand a schedule of quantities of a good that will be bought per unit of time at various prices other things constant Quantity Demanded specific amount that will be demanded per unit of time at a specific price other things constant Opp0rtunity Cost The benefit forgone by partaking in another activity Marginal Principle the satisfaction one gets from consuming one additional unit of product above and beyond what one has consumed up to that point P1inciple 0f Diminishing Returns as more and more of a variable input is added to an existing fixed input eventually the additional output one gets from that additional input is going to fall P1ice Elasticity of Demand How the quantity demanded responds to a change in price Elasticity gt Eltl Inelastic gt El 7 Unitary Elastic gt Egtl Elastic gt E0 Perfectly Inelastic gt E In nity Perfectly Inelastic Determinants 1 The more substitute goods the greater the elasticity 2 The more time people have to choose alternatives 3 The less a good is anecessity the greater its elasticity Luxuries have an elasticity gt1 Necessities have an elasticity lt1 The demand becomes more elastic as the de nition of the good becomes more speci c Bacardi gt Razz gt Limon of budget Products that make up are a smaller portion of your budget are more inelastic Role of Government Market failure Situation in which a market does not lead to a desired result 1 Extemalities a NegativePositive extemalities Effects of a decision not taken into account by the decision are detrimental Ex Steel i Marginal social costbene t 7marginal private cost cost of negative extemality Vertical difference between the private cost curve and social cost curve the extemality cost Shift in supply b Regulations Gov t Policy i Direct Regulation 7 amount of a good people are allowed to use is directly limited by the gov t Ex 2 drivers with different costs a Inefficient due to varying costs among individuals If you could concentrate the regulation on those that bear the smallest cost in reducing than the policy would be more efficient Not fair in real world ii Incentive Policies 7 allowing people to choose based on incentives how much to consume causes the people with the least cost make the most adjustment a Tax incentive 7 more efficient result because those who can reduce their consumption at a lower cost will and those who cannot will pay the tax Therefore people who can afford to reduce consumption pay less tax and reduce overall consumption Tax can also force firms to pay for the social cost oftheir services b Market Incentive Plan 7the gov t sets a maximum amount of consumption on an industry If a firm goes below that maximum they are awarded a certi cate which can be traded to other rms above the maximum Thus the amount of consumption balances out iii Voluntary Reductions a Freerider problem free riders deter people from voluntarily making socially bene cial decisions If no one else is going to do it why should I 4 V39 N Optimal Policy 7 when marginal cost of undertaking the policy equals the marginal bene t of the policy 3 Public Goods 7 a good in which no one is excluded and consumption by someone does not affect the consumption of another Ex Roads Education 4 Tax Shifting 7 the more inelastic your relative curve is the more burden you pay a Demand is inelastic consumer s pay a larger burden of a tax b Supply is inelastic producer s pay a larger burden of a tax 5 Imperfect Information a Asymmetric information 7 when one side of the market either buyer or seller has better information Adverse Selection problem 7 market failure that occurs when buyer and seller have varying degrees of information Ex Since buyers do not know whether they are getting a lemon or cherry they offer the average price between the two thus driving out all the cherries and causing the market to only offer lemons or lesser quality vehicles Medical insurers raise their rates because they see a higher demand among people with bad health Thus this drives out people with good health and they don t get covered Medical Licensure 7 Medical licenses ensure that consumers are getting at least a minimum level of quality treatment However if the gov t just simply supplied the information on which treatments are correct and which doctors are good than medicine wouldn t be as expensive Also people still only can be sure that the minimum was achieved which doesn t determine whether they are a good doctor or not 6 Government Failure 7 when gov t intervention actually makes the situation worse Labor Markets Incentive Effect how much a person will change his or her hours worked in response to a wage rate The higher the wage the more time dedicated to legal market activities and less time dedicated to nonmarket activities substitution effect to work more hours when your wage goes up You substitute work for leisure because the price of leisure has gone up income effect when you choose leisure over work when your pay goes up based on the fact that your richer and can live a better life Supply of Labor Firms like the labor supply curve to be elastic so they don t have to increase wages to much to get workers Workers like the opposite because inelastic supply means that the wage will have to be significantly increased in order to get more workers thus increasing income mmigration causes more elastic supply since legal and illegal immigrants want jobs and increase the work force the more consumers demand products the more factors of input or labor firms demand Monopsony Labor Decisions they limit the supply because when they hire a new worker at a higher wage they must also pay all their other workers that wage So they hire less workers and pay them a different wage Unions Work like a monopolist and try to reduce the supply curve they also try to get the wage to be higher than a monopolist would set Less workers employed but higher income Try to increase demand for AMERICAN products since labor demand is derived 6 0 3 1 tariff quota Limit substitution of machines for people in order to make labor demanded less elastic and more inelastic thus higher income Three Types of Direct DemandSide Discrimination l 2 Type 1 is discrimination based on relevant individual characteristics Age gender attitude Type 2 discrimination is based on group characteristics Younger people typically stay with a job for less time Can be properly or improperly attributed Type 3 discrimination is discrimination based on irrelevant individual characteristics that do not affect job performance or incorrectly perceived statistics of groups Not hiring old people simply because they are old Minimum Wage Results in less quantity of workers Firms don t always pay what the market dictates Economic Rent the difference between the current wage and the minimum amount a worker is willing to accept Reasons for income ineguality Elk59 0 Decreased wages of low and mid skill level jobs due to increased immigration which squeezes these wages Less progressive taX reform Less welfare or wealth redistribution policies Real wages have not kept up with price increases for the poor Baby boomer s retirement will cause a huge number of people to have lower income skewing the Lorenz curve Technology can force most performers out and make only a few performers incredibly wealthy thus increasing the income gap Study Guide for Test 2 Dr Brunton GECON 201 Microeconomics Study Guide 1 Chapters 68 E 5 change in QD change in P If price changes the quantity then the relationship is elastic if price does not change the quantity then it is inelastic Refers to graphs steepness If price elasticity is inelastic than a change in price will increase TR Vice versa 2 Chapters 910 Law of diminishing marginal productivity 7 when more and more of a variable input is added to an already existing fixed input eventually the additional output that one gets from the additional input is going to fall The relationship between marginal productive and marginal cost is that when productivity falls cost per unit increase as productivity increases costs per unit decrease Initially cost will fall as productivity rises however once productivity reaches the point where the law of diminishing returns begins to act on it productivity will fall and cost will rise Hence the Ushape curve The relationship between ATC and MC is as follows If MC gt ATC then ATC is rising MC gt AVC If MCATC then ATC is at its low point MC AVC If MC lt ATC then ATC is falling MC lt AVC Marginal cost works on the ATC like a low or high grade works on your GPA it moves it accordingly Marginal variables all work the same on average variables MC additional cost of producing one more unit of output TC FC vc ATC TCQ or AFC AVC AFC FCQ AVC VCQ In the longrun there is no such thing as a fixed cost Plant size form of technology types of equipment can all be decided and changed in the long run In the shortrun however the technology being used and the plant size cannot be changed in the shortrun time frame In the short fun some variables are fixed in the long run all variables can be augmented The law of diminishing returns only applies to the shortrun because some inputs are fixed in the shortrun It does not apply to the long run because all inputs are variable The economically efficient method is the lowest costing technically efficient method Economies and diseconomies of scale determine what is economically efficient in the longrun Economies of scale 7 are when longrun ATC decrease as output increases Economies of scale are important when considering some inputs that fall into the category of indivisible setup cost These inputs have a minimum level of output they can produce before they are economically feasible to build Economies of scale mean that the higher the output or productivity the lower the costs Companies determine whether or not there business falls into an Economies of scale in order to determine in the longrun if increases in production will actually ATC Production exhibits Diseconomies of Scale when long run ATC increase as output increases Reasons for diseconomies of scale have nothing to do with technical production relationships The social dimension of a
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