Final Study Guide
Popular in Microeconomics
Popular in Economcs
This 28 page Study Guide was uploaded by Nicole Goodfliesh on Friday October 16, 2015. The Study Guide belongs to ECON at University of Washington taught by in Fall 2015. Since its upload, it has received 28 views. For similar materials see Microeconomics in Economcs at University of Washington.
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Date Created: 10/16/15
Demand Important Terms Price Law Of Demand As the price of a good or service increases the quantity demanded decreases ceteris paribus o Ceteris Paribus All else equal Market Any mechanism that brings together buyers sellers of a good service Demand The entire list of possible prices and the quantities that would be demanded at each possible price the entire curve not just one point Quantity Demanded The speci c amount of a good or a service demanded at a particular price one point on the curve 0 EX The quantity demanded of donuts is 10 when the price is 4 0 When price decreases there is an increase in the quantity demanded NOT and increase in demand Demand Schedule demand info on a table Price Per Quantity Donut Demanded 5 0 4 10 3 20 2 30 1 40 0 50 Demand Curve demand info on a graph 0 Downward sloping because as people consume more of a product MU declines As price decreases more donuts are demanded lnverse downward sloping Speci ed period of time D Willing and able Quantity Supply Important Terms Price Law Of Supply As the price per unit of a product increases quantity supplied increases ceteris paribus Supply The entire list of possible prices and the quantities that would be supplied at each possible price the entire curve not just one point Quantity Supplied A speci c amount of a good or service supplied at a particular price 0 EX The quantity supplied is 40 When the price is 4 0 When the price of donuts increases the quantity of donuts supplied increases Supply Schedule supply info on a table Price Per Quantity Supplied Donut 5 50 4 40 3 30 2 20 1 10 0 0 Supply Curve supply info on a graph Quantity gt Shows the total quantities that would be supplied in the market at each possible price gt Direct relationship Price Equilibrium Price and Quantity Market Price Q e Quantity At Equilibrium quantity supplied quantity demanded therefore no shortage no surplus Surplus Q demanded Q 6 Quantity Q supplied P high At a price above P e the quantity demanded is less than the quantity supplied therefore surplus Shop keepers will decrease prices to get rid of surplus Shortage Price F P e Plow I D I I Shorjltage I Q supplied Q C Q demanded Quantity P low At a price below P e the quantity supplied is less than the quantity demanded therefore shortage Government set prices and quantities Price Ceilings Price 39r I PRICE CEILING I I l D I Shortage I I I Q s Q d Quantity Placed below equilibrium to keep prices from getting to high when equilibrium price is considered too high EX Rent control Price Floors Surplus P oor PRICE Floor Price Per P e Donut Quantity Placed above equilibrium to set a limit on how far prices can fall when equilibrium price is considered too low Protects workers by establishing minimum wage Supports farmers when a price oor is put on agriculture Determinants of Demand 1 Income of buyers Normal goods goods whose consumption increases as income increases Inferior goods goods whose consumption decreases as income increases S Substitute good prices Substitute goods use one OR the other EX Mac or PC Complementary good prices Complementary goods things that go together eX Tennis racquet and ball Expectations about future priceavailability Expect prices availability to change 2 P1 0 Number of buyers More buyers greater demand Tastes and Preferences Fads and trends H Determinants of Supply S Subsidies 0 Make more R Resource Prices Resource prices 1 either supply l or prices O Other product prices Cannot be too high or people wont demand yours Taxes T Taxes on the business either supply l or prices T Technology E Expectations about future N Number of suppliers Effects on Price and Quantities Change in Demand Change in supply Effect on E Price Effect on E Quantity Increase39f Increase39f Not Determinable Increase39f Decrease l Decrease l Not Determinable Decrease l Increase39f Decrease l Increase39f Not Determinable Decrease l Increase39f Decrease l Not Determinable Price Elasticity of Demand Shapes of Curves S S P P P P S S Q Q Q Q Perfectly Elastic Relatively Elastic Perfectly Inelastic Relatively Inelastic Determining Elasticity Beauty Product lt gt Relatively Relatlvely Inelastic Elastic Of Substitutes None I I Many Oil Company Fast foods L Level Of luxury I lTotal luxury Necessrtyl Insulin Fur coat Medicine Yachts Of income Low I I I Big Pencil Fridge Car T Time to Find Substitutes I Little I I Lots Price Elasticity of Demand A Quantity Demanded A Price In Other Woldsz To Find Midpoint E d Original 8 x A Ori inal Aim 3 Sum A g Sum Original Elasticity of Demand Coef cient E d 0 If E d gt1 elastic 0 If E d lt1 inelastic 0 If E d 1 Unit Elastic P X Q TR Price 18 Quantity Total Revenue Demanded 8 l 8 7 2 14 I I P decreases While TR increases so demand in this range is elastic 6 3 l 8 5 4 20 I Stays the P decreases While TR stays the same same so demand in this range is unit elastic 4 5 20 ee Example 3 6 1 8 Above 2 7 l4 1 8 8 Total Revenue Test To find elasticity If P and TR move in opposite directions demand in that range is elastic If P and TR move in the same directions demand in that range is inelastic If P changes and TR stays the same unit elastic Price Elasticity of Supply Time is the only factor in determining the elasticity of supply S P Market Period Time period Where you cannot adjust your supply Q S gt ShortRun When the company has time to adjust their variable inputs P Variable inputs things that can be changed easily 0 Want more workers Hire them 0 Want to increase production of desks Get more lumber Q P LongRun When the company has time to adjust their variable inputs S and their fixed plant Fixed Plant Factory size 0 Want more business Find a bigger space for your restaurant Q Perfectly Inelastic Relatively Inelastic Relatively Elastic Perfectly Elastic Quantity Supplied E P A Price S S g 0 IfE d gt1 elastic 0 If E d lt1 inelastic 0 If E d 1 Unit Elastic 7 quot MEMORY DEVICE When stretched horizontally the rubber band is perfectly elastic re Cross Elasticity of Demand Good X Good Y Demanded Price 101 A demanded 0f GOOd X Cross Elasticity Coef cient E C A of Good Y 0 If Complementary goods 0 Goods that go together EX Tennis ball and Tennis Racquet 0 If 2 Substitute goods 0 Buy one OR the other EX Mac or PC If 0 Goods are unrelated EX Tennis ball and Mac Income Elasticity of Demand A demanded 0f GOOd X Income Elasticity Coefficient E i A Income 0 If 2 Normal Goods 0 As you get richer you buy more fancy things 0 If inferior goods 0 As you get richer you buy less ramen fast food 0 If 0 Necessity 0 They need it no matter their income Insulin medicine Taxes and Efficiency Loss 0 Incidence of tax 0 The incidence of a taX imposed on suppliers will have an impact on consumers in the form of price increases depending on the price elasticity of demand ie the greater the elasticity the smaller the impact on Prices After tax Price for Producer Burden of tax 0 When the government imposes a taX on a business part of it can be paid for by increasing the price of their product Consumer Behavior and Choice Total and Marginal Utility Important Terms Total utility Total amount of satisfaction or pleasure a person derives from consuming some speci c quantity 0 Increases when MU is positive 0 Decreases when MU is negative 0 Marginal utility Extra satisfaction a consumer realizes from an additional unit of that product 0 Declines as more and more of the product is consumed 0 As MU declines price must decline because as people buy more of a product their MU declines and if people want to maintain an acceptable MU ratio then the price must decline also 0 Law of diminishing marginal utility As more and more of a product is consumedpurchased each successive unit yields less and less marginal utility The rst is always the best 0 Example Of 2 Donuts Consumed Utils received 1 8 2 3 3 2 0 Utility Maximizing Rule with budget MUA MUB o If MUA lt MUB then buy more B 0 Budget Line All the combinations of any 2 products that can be purchased given the prices of products and consumers income gt Increase in income shifts budget line to right gt Decrease in income shifts budget line to left gt Decline in price of BOTH shifts curve right gt Increase in price of BOTH shifts curve left 0 10 0 069 PA 150 PB 100 12B Indifference Curve Combination of products A and B that yield the same total utility Downward sloping ConveX gtquotEach point measures the Marginal Rate of Substitution MRS 9The combo which one can substitute one good for the other and remain equally satis ed MRS declines as you move B southeast Indifference Map Set of indifference curves 0 Curves farther from origin have higher levels of total utility Equilibrium at Tangency A 12 Consumer s equilibrium position 9 Highest total utility possible 13 Production and Costs Important Terms 0 Law of Diminishing Marginal Returns As you put in more and more input eventually marginal output will decline 0 Once you have enough people working specialized jobs another person will yield no additional marginal product and the output will begin to decrease Fixed Costs Costs even if your business is producing 0 product 0 Price is same w 0 product or lots of product Variable Costs Vary with output 0 The more the output the more the costs Total Costs Variable costs Fixed costs 0 Vertical sum of AVC and AFC curves 0 Average Fixed Costs AFC Total xed costtotal product Average Variable Costs AVC total variable cost total product Average Total Cost ATC Total xed total variable total product Business Costs Short Run Cost Curves P C ATC AVC AFC Q 0 AFC o It will NEVER cross the X axis 0 AVC 0 At rst each worker is adding to the output so will decrease but as each unneeded worker is added it will start to increase because they become less ef cient o ATC 0 Never Crosses the AVC but gets very close 0 The distance between the AVC and the ATC is equal to the distance between the X axis and the AFC o Hooks through the lowest point of the ATC and AVC 0 Interaction with AFC does not matter Graph Practice Total Product Units of Production Units of Labor Marginal Product Average Product Units of Production AP Units of Labor MP gtquotAverage product On average how much product each worker is making TPlabor gt Slope tells us the rate of gain Steep beginning Flattish near the top gt No negatives gt Shaped like this due to the law of diminishing marginal returns Hire TP MP Person 20 20 A Person 100 80 B Person 180 80 C Person 190 10 D Person 170 20 E Total Cost Total Fixed Cost Total Variable Cost TC TVC Output TFC Cost gt TFC no matter the output cost is the same gt TVC The additional workers still have to be paid but don t contribute output gt TC Parallel to the TVC because you add the same amount Long Run Cost Curves Short Run W small space Short Run W bigger space P P MC MC ATCAVC ATCAVC Q Q Short Run W even bigger space P MC ATCAVC k AFC Q All ATC s on One Graph ATCs for various sized restaurants P MES Minimum I I efficient scale 9 Where I I companies want to MES operate Q V Long run cost Curve gt Goes through lowest points of all the ATCs Economies of Scale 0 Economy of scale Area of the long run cost curve that is decreasing o Diseconomy of scale Area of the long run cost curve that is increasing 0 MES Area in the middle of the long run cost curve that is basically at 0 Monopolies and Oligopolies have huge MES O X inef ciency o X inef ciency Wasting resources Intro to Market Models Buyers and Entry into Price Control Non price Example sellers the competition market Many many Very easy No control over None Agriculture 39ure sellers selling price 9 Standardized Iompetition lots of products Doesn t identical Xist products to many buyers Many Fairly easy Small control LOTS of ads 9 Clothing Brand Ionopolistic differentiation Fast Food Iompetition Restaurants Few Dif cult W collusion Yes lots Oil ligopoly control 9 Standardized or Steel Wo collusion differentiated Appliances very little products Phone Companies One seller Completely Unnecessary Utilities 39ure sells a product blocked Some PR Ionopoly with no close Doesn t substitution Xist Pure Competition 0 Many buyers Many sellers Free entry and eXit into the market Homogeneous product 0 Firms are price takers High levels of ef ciency 0 Allocative PMC o Productive equilibrium output is supplied at minimum average cost 0 These occur due to prices being driven down by competition Firms must sell at the market price 0 If they increase price customers will buy the identical product from a cheaper rm If they lower price it will incur loss and not sell too much more Short Run Profits MR gtMC produce it MR lt MC don t produce it When MR MC you are earning maximum pro ts Individual firm Demand Price Quantity TR MR 2 1 2 2 2 2 4 2 2 3 6 2 2 4 8 2 2 5 10 2 2 6 l2 2 2 US Corn Market D Individual Corn Firm S 2 Perfectly Elastic DZPC Economic Pro t Decision to Shut Down Shut down in the short run 1 Draw line down to XaXis and 0 If TR 2 TVC rms produce at MCMR 0 If TRlt TVC the rm shuts down and QO Shut down point TRTVCQ tells us that we should shut down if PltAVC 0 If PZAVC rm produces at MCMR 0 If PltAVC the rm shuts down and QO up to demand curve Where MCMR Where this guideline intersects ATC is cost so above area is pro t ShortRun Scenarios Resulting In LongRun Adiustments When the The Firm Shotrun In the The Longrun Short Run Produces Economic Long Outcome is Where Pro ts Run are PgtATC MRMC Positive Firms PLRMRMCATC enter and pro t0 PATC MRMC Zero No entry PLRMRMCATC break even or eXit and pro t0 AVCltPltATC MRMC Negative Firms PLRMRMCATC exit and pro t0 PltAVC Zero shut Negative Firms PLRMRMCATC down TFC eXit and pro t0 Taken from 5 Steps to a 5 pg 131 Shut Down Case P MC AT CAVC 500 DMR PltAVC2 shut down Pro t Maximizing Case MC 900 DMR 775 AVC I I I Q 0 PgtAVC2 keep producing Loss Minimization Case P Q 0 PgtAVC2 keep producing Total pro t QPATC 79775875 Total losses QATCP 57606 800 Monopolistic Competition Lots of Sellers Lots of Buyers Lots of differentiation Easy entrance and eXit Lots of advertising 0 Demand Relatively elastic 0 Small price increase lose lots of customers Shortrun Pro t MC ATC gt quot Pro ts attract others to enter the industry the demand curve for each individual rm will shift to the left Short Run Loss Q When they have a shortrun loss some rms eXit in the long run remaining industry D curves will shift to the right Long run Equilibrium ATC is has point of tangeney with D curve Only a Normal pro t 0 Will only break even Ef ciency No productive or allocative ef ciency 0 No Productive because Pgt minimum ATC o No allocative because PgtMC Both a result of underallocated resources and excess production capacity 0 Excess production capacity the gap between the min ATC and profit maximizing output Oligopoly 0 Few large producers 0 Either homogenous OR differentiated products Control over price but mutual interdependence 0 Entry barriers Her ndahl Index the large the number the more market power within an industry 0 Sl2 SZ2 S32 MC ATCAVC gt MC often cuts through the vertical section of the MR R Q Kinked Demand Curve because companies will match a price drop but are not likely to match a price raise and assuming 0 No collusive activity 0 No price leader 0 Relatively equal market share between rms Mutual Interdependence Think about what other businesses will do with their prices Price following when small rms raise their prices because they saw the leading company do it Price discrimination get rid of the area of lucky customer by creating different prices for different people Game theory models the strategic interactions of rms Monopoly Reasons for 0 Economies of Scale 0 Patents 0 Licenses 0 Ownership control of resources Pricing strategies 9 because you are big and make lots of revenue make your product cheap so other rms will fail wait them out Characteristics One seller 0 No close substitutes Generally inelastic but elastic at higher prices 0 Price makers Complete barriers to entry 0 PgtMC PgtMR Types of Monopolies Natural Unregulated 0 Price highest output lowest economic pro ts Regulated 0 Fair rates of return I Allows the monopolist to only charge where PATC 0 Optimal pricing 0 Subsidized I Lowest price highest output Factor Markets Resource Demand Product Market Households demanders Business Suppliers Resource Market Households suppliers Business demanders Demand for a Resource Based on two things 1 How well can the resource market make the product Marginal Resource Productivity MRP 2 How much can you sell the product for Marginal revenue product MRP Derived demand you want a worker if the thing they make is sellable 0 Resources that make a valued thing and make it well will have high demand 0 Resources that make crap crapily will not Marginal Revenue Product MRP Change in total revenue Usually is 1 Unit Change in resource quantity Units of Total Marginal Product Total Marginal resource Product Product Price Revenue Product Output Revenue 0 0 0 5 0 0 1 10 10 5 5 0 50 2 19 9 5 95 45 3 27 8 5 135 40 4 34 7 5 170 35 5 40 6 5 200 30 Marginal Resource Cost MRC Change in total resource cost Unit Change in resource quantity GOLDEN RULE MCMB 71 R MRP MRC Demand for Labor Table If Wage Then hire Because Rate is Workers 50 1 Hiring the 2nd worker will cost you 80 but that 2nd worker only gives you 45 additional revenue 45 2 3rd worker costs 45 but only gives 40 additional revenue 40 3 4th worker costs 40 but only gives 35 additional revenue 35 4 5th worker costs 3 5 but only gives 30 additional revenue P 3 SAME 52 G gt 00 CG 3 Q Quantity of Resource Demanded gt quot Demand for Resource how much revenue they will bring in Resource Demand D Perfect Competition D Imperfect Competition Q Wage Rate Units of Total Marginal Product Total Marginal resource Product Product Price Revenue Product Output Revenue 0 0 0 0 0 1 10 10 5 50 50 2 19 9 4 76 26 3 27 8 3 81 5 4 34 7 2 68 13 5 40 6 1 40 28 69 U 0 Resource Demand Imperfect Competition 4 Quantity of Resource Demand What Shifts Resource Demand Event Demand Will Demand for Good A increases Increase Productivity of resources that make Good Increase A increase Price of substitute good increases Increase Price of Complementary resource that Decrease make Good A increases Elasticity of Resource Demand EOD Coef cient Em A resource quantity demanded A resource price If gt1 demand is elastic If lt1 demand is inelastic If 1 demand is unit elastic When price of resource changes if quantity demanded of the resource changes a lot then demand is more elastic
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