ECO 105 Goel Exam 2 Study Guide
ECO 105 Goel Exam 2 Study Guide ECO 105
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This 6 page Study Guide was uploaded by Daniel Hemenway on Thursday October 8, 2015. The Study Guide belongs to ECO 105 at Illinois State University taught by Rajeev Goel in Fall 2015. Since its upload, it has received 115 views. For similar materials see Principles Economics in Economcs at Illinois State University.
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Date Created: 10/08/15
ECO 105 Goel Exam 2 Study Guide Consumer Behavior Preferences Consumers likes and dislikes about goods and services independent of price and income considerations Utility The satisfaction a consumer gets from consuming goods and services Satisfaction can be negative Measure satisfaction in utils Marginal Utility MU Extra satisfaction from consuming one more unit of a good or service change in utility change in consumption Law of Diminishing Marginal Utility As you consume more of a good holding the consumption of everything else the same the additions to satisfaction ie MU Demand and Utility Focusses on the Households and Goods Market exchange Two questions of Demand and Utility Where does the Demand curve come from What constitutes a best buy Consumer Equilibrium n consumer equilibrium the consumer is consuming the set of goods and services that maximizes satisfaction Consumer s income and prices of the goods are assumed to be given Unless prices andor income change a consumer in equilibrium has no incentive to change the satisfaction maximizing bundle of goods and services Conditions for Consumer Equilibrium optimizing consumption rule All income is spent AND MUaPaMUbPb Points along the demand curve are consistent with consumer equilibrium The demand curve results from consumer s efforts to maximize satisfaction Example A consumer spends all his income of 1000 on two goods food and clothing The respective prices are Pf 10 and PC 20 The marginal utilities are MUf 50 and MUc200 Is the consumer maximizing satisfaction If not what should the consumer do to maximize satisfaction MUc Pc 20020 10 MUf Pf 5010 5 ECO 105 Goel Exam 2 Study Guide Satisfaction is not maximized to maximize it the consumer should increase Clothes and decrease Food Consumer Surplus Consumer surplus is a measure of consumer s well being Consumer surplus is the difference between a consumer s willingness to pay for a good and what the consumer actually pays Graphically it is the area of the triangle below the demand curve and above price Costs and Productivity Economic Costs vs Accounting Costs Explicit Costs Costs incurred when money changes hands Implicit Costs Money does not change hands but some alternative is sacrificed Economic Costs Explicit Implicit Accounting Costs Explicit Costs Profits Economics vs Accounting Economic Profits TR sales Explicit Implicit Accounting Profits TR Explicit Costs Normal Profits TR Explicit Implicit This is the Breakeven case of zero economic profit Productivity Marginal Physical Product Extra output from one more input Change in 0 Change in Input Law of Diminishing Returns As you increase one input in equal increments holding all other inputs the same its MPP will go down There is a negative relationship between MPP and MC Example Labor Ll Output Q A in QA in Input L 1 15 10110 MPPL 2 25 Leastcost Production MPPk Pk MPPL PL KLEM Capital Labor Energy Material For cost minimization Example The price of capital Pk is 100 per machine hour and its marginal product MMPk is 1000 units The price of labor ie PL or wage rate is 25 per hour and the marginal product of labor MMPL is 250 units Is the K Capital ECO 105 Goel Exam 2 Study Guide firm minimizing its production costs If not what should it do so that coasts are minimized MMPL PL 25025 10 MMPk Pk 1000100 10 Cost is minimized because lVlPPk Pk MPPL PL Profits cannot be maximized unless costs are minimized Costs Fixed Costs FC Implies ShortRun Variable Costs VC Change with production Total Costs TC FC VC Long Run All costs are variable Average Fixed Costs AFC FCQ Average Variable Costs AVC VCQ Average Total Costs ATC TC Q AFC AVC Marginal Costs MC Change in TC Change in Q Change in VC Change in Q Features of Long Run Costs Every long run is a sequence of short runs The firm has all the options in the long run that it did in the short run plus more The long run ATC will envelope touch from below the SRATCs Costs LRATC Economies Scale Constant Returns to Scale Diseconomies fS ale MES Quantity of output LRAC Economies of Scale ATC falls with output increase Diseconomies of Scale ATC rises with output increase Constant Return to Scale ATC stays constant with output change Minimum Output Scale MES Where LRATC is minimized a large MES acts as a built in Barrier to Entry of new firms ECO 105 Goel Exam 2 Study Guide Perfect Competition Characteristics 0 Large number of buyers and sellers 0 Perfect information about Price and Quantity 0 Homogeneous product 0 No barrier to entry and exit of firms 0 No buyer or seller is large enough to influence the price Price Takers and Price Searchers Perfectly competitive m are PRICE TAKERS Firms take price as given gt Horizontal demand curve gt P MR 0 All NonCompetitive Firms are PRICE SEARCHERS gt Negative Sloping Demand Curve gt P gt MR Price and Marginal Revenue MR 0 Total Revenue TR Sales P x Q o Marginal Revenue MR Extra revenue from selling one or more unit of a good or service Change in TR Change in Q Profit Maximization Profit Maximization Rule MC MR Applies to all firms Shut Down Rule P gt AVC or TR gt VC Do not shut down P lt AVC or TR lt VC Shut down 0 Applies in Short Run SR only SR and LR Profit max under PC In the Short Run a perfectly competitive firm might shut down make profits or make losses In the Long Run a perfectly competitive makes normal Profits ie Break Even Long Run Profit Maximization Equilibrium under Perfect Competition Long Run Perfect Competition Characteristics of Long Run Equilibrium Profit Maximization under Perfect Competition Firms make normal Profit Due to freedom of entry and exit of firms Firms produce at lowest points on ATC economic efficiency no wastage ECO 105 Goel Exam 2 Study Guide Producer Surplus Measure of seller s wellbeing Difference between what a seller receives for a good and the minimum the seller is willing to receive Graphically the area above the supply curve and below the price Together consumer surplus and producer surplus provide a measure of social welfare 0 Monopoly Monopoly Characteristics One seller many buyers No close substitutes for the product Price Searcher Maker P gt MR Barriers to entry of rivals For a monopoly the firm and industry are one and the same Barriers to Entry Economies of Scale Patents Exclusive Ownership of raw materials Public Franchises Licensing Facts About Monopoly Monopolist need not produce where ATC are minimized n Monopoly P gt MC Since P gt MR for Price Searchers and MC MR Monopolists produce where demand is elastic Monopolists DO NOT charge the highest possible price There is no supply curve of a monopolist Unlike a PC Firm a monopolist can continue to earn profits in the LR Due to Entry Barriers 0 Comparing PC and Monopoly The Efficiency of Competition Economic Efficiency When society s resources cannot be reallocated to make Everyone better off Equity Efficiency Tradeoff Economic Equity When resources are allocated according to a widely accepted fair criteria In general there is the classic tradeoff between Equity and Efficiency You have one or the other ECO 105 Goel Exam 2 Study Guide Pros and Cons of Monopoly Pros Might encourage technical change Cons Contrived Artificial Scarcity Monopolist deliberately reduces output to raise the price Pm gt Pc Qm lt Qc Monopoly leads to Deadweight Loss ie loss in consumer surplus and producer surplus it measures lost gains from trade Pros and Cons of Competition Pros Economic Efficiency Customer receives the lowest price Cons MIGHT lead to inequalities MIGHT NOT be efficient in the presence of externalities MIGHT NOT be Conducive Receptive to high rates of technical change
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