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ECON 2005 Midterm II Study Guide

by: Shannon Cummins

ECON 2005 Midterm II Study Guide ECON 2005

Shannon Cummins
Virginia Tech
GPA 3.34

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About this Document

Everything you need to know for the second midterm exam. Covers chapters 6 through 9 and includes graphs, definitions, and more.
Principles of Economics
Steve Trost
Study Guide
exam, Econ, 2005, study, guide, review, notes, Chapter, 6, 7, 8, 9
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This 7 page Study Guide was uploaded by Shannon Cummins on Friday March 25, 2016. The Study Guide belongs to ECON 2005 at Virginia Polytechnic Institute and State University taught by Steve Trost in Spring 2016. Since its upload, it has received 95 views. For similar materials see Principles of Economics in Economcs at Virginia Polytechnic Institute and State University.


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Date Created: 03/25/16
ECON 2005 Exam II Review Chapter 6: Consumer Choice and Demand Utility – the level of satisfaction or happiness a consumer derives from the consumption of a good or serve; the basis of choice for economics. UTILS ARE NOT COMPARABLE ACROSS PEOPLE, ONLY ACROSS PRODUCTS FOR ONE PERSON AT A TIME. TU MU  Marginal utility – additional satisfaction gained by consumption of one Q additional product. TU  MU Total utility – the total amount of satisfaction obtained from consumption of  a good or service. Law of diminishing marginal utility - the more of any one good a person consumes per period, the less utility generated by consuming each marginal unit of the same good. Utility maximizing rule: 1. MU / P = MU / P for all pairs of goods x x y y If MU x Px> MU /yP ,yput more 2. All income must be spent money into good X! Budgets line graphs show all of the possible affordable combinations of products (normally just two items). The budget constraint is the line itself. The choice set includes all of the affordable product combinations (the area between the line and the axes).  As prices change, the line “rotates in (if the product becomes more expensive) or out (if the product becomes more affordable/cheaper).  As income rises, the budget line moves out. If income falls, the budget line moves in. Consumer surplus/producer surplus: supply demand Price* supply producer surplus consumer surplus Deadweight loss – net loss of producer and consumer surplus from underproduction or overproduction; results when quantity does not equal equilibrium quantity. Quantity deadweight loss due to overproduction Chapter 7: The Theory of the Firm Firms – economic units formed by PROFIT-SEEKING entrepreneurs who employ resources to produce goods and services for sale. π = TR – TC  Accountants consider only explicit costs, while  Economists consider both implicit (opportunity) and explicit costs. Every firm has to decide three things: 1. How much output to supply, 2. Which technology to use, 3. And how much of each input to demand, All which are based on three things: 1. The market price of output, 2. The techniques of production that are available, 3. And the prices of inputs.  Land – all natural resources  Labor – all human inputs  Capital – all physical equipment (building, machines, etc.)  Entrepreneurial skill - the ability to pull all other inputs together, pay them, and then make some money out of the deal. total product Q marginal productof labor  MP L  Marginal product – the total units of labor L additional output that can be produced by adding total product Q marginal productof capital  MP K  one more unit of a total units of capital K specific element. total product Q Average product – the average productof labor  AP L  total units of labor L average amount produced by each unit of total product Q a variable factor of average productof capital  AP K  total units of capitalK production (input). Law of diminishing marginal returns: when additional units of a variable input are added to fixed inputs, after a certain point the marginal product of the variable input declines; every term faces this in the short run. Short run – the period of time for which a firm is Long run – the period of time for which there are operating under a fixed scale of production and no fixed scales of production and firms can enter firms cannot leave or enter the industry. or exit the industry. Total fixed cost (TFC) – any cost that does not depenIN THE LONG RUN, ALL COSTS ARE on the firm’s level of output. VARIABLE AND THE FIRM CAN CHANGE Average fixed cost (AFC) – fixed cost per unit of ANYTHING IT WANTS. output. Long-run average cost curve (LRAC) – indicates the Total variable cost (TVC) – cost that varies with thelowest cost of production at each rate of output when the scale is allowed to vary. level of output. Average variable cost (AVC) – variable cost per unit Short run average cost curves form the LRAC. of output. Minimum efficient scale Total cost – total fixed cost + total variable cost. Average total cost (ATC) – total cost per unit of output. Cost per unit Marginal cost – the increase in total cost that results from producing one additional unit of output. Output per period Economies/diseconomies of scale – an increase in a firm’s scale of production leads to lower/higher costs per unit produced, respectfully. Constant returns to scale – an increase in a firm’s scale of production has no effect on costs per unit produced. When marginal benefit = marginal cost, the market is socially efficient. • If the marginal benefit > marginal cost, more shoes should be produced. • If the marginal benefit < marginal cost, fewer shoes should be produced. Chapter 8: Perfect Competition Five characteristics: 1. There are many small firms and many small consumers  Small firms are “price-takers.” They do not decide the price; rather, price equals market equilibrium price. They do decide the quantity to produce. firm’s marketThe firms sell a homogeneous product (commodities)  All products must be the same. For example, wheat, copper, stocks. Forethisperrasotls,elastic. 3. Everyone is fully informed  Buyers know what they’re buying and both buyers and sellers know the demand 4. There is unrestricted entry and exit to the market  May cost money to enter but there are no barriers 5. The government does not regulate prices  Price must be allowed to reach true equilibrium price; no price floors or ceilings Market Individual firm Marginal cost Demand = Price* Price* marginal revenue = average revenue Quantity* Quantity* To earn maximum profits, firms choose quantity where price is equal to marginal cost.


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