Midterm 2 Study Guide
Midterm 2 Study Guide Econ 1051
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This 8 page Study Guide was uploaded by Lauren Pike on Tuesday October 27, 2015. The Study Guide belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 173 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 10/27/15
Key Concepts for Exam 2 Chapter 7 Pure Competition Pure Competition Characteristics and Occurrence 0 key characteristics 0 very large of firms 0 standardized product I customers view products as subs 0 price takers firm cannot change market price but can only accept 9t as given and adjust to it I individual competitive producers at mercy of market 0 free entry and exit 0 this model is pretty rare in the real world 0 demand schedule 0 perfectly elastic demand 0 firms produce as muchlittle as they want market price Profit Maximization in the Short Run TRTC approach 0 3 questions 0 should the firm produce I as long as TRgtTVC OR I as long as Pgt min ATC I firm should shut down othenNise o if so what amount I PgtMC then produce more I PltMC then produce less I price maximization of output occurs at PMC 0 what economic profitloss will be realized I profitable if TRgtTC OR I Pgtmin ATC I breakeven at P min ATC I firm loses othenNise MRMC Rule 0 features of rule 0 only applies if producing is preferable to shutting down 0 can restate rule as PMC when applied to PC firm 0 profit maximization o at MCMR firm realizes econ profit as long as MR or price is gt MC increase production as long as MCgtMR decrease production MCMR is optimal qty if market price P is too low sellers pick loss minimizing cost bc sometimes more profitable than shutting down 0000 o breakeven point where zero profit occurs when P min ATC I anything higher is pos profit I anything less is neg profit loss LongRun Equil 0 shift in demand will change original industry equil and produce econ profitloss 0 entry eliminates econ profits 0 as demand for product increases price will increase creating econ profit 0 profit lures in new firms 0 as more firms enter supply increases and product price decreases econ profits eliminated and firms that remain only earn normal profit zero econ profit 0 exit eliminates loss 0 as demand decreases price decreases making production unprofitable min ATC 0 resulting econ loss will cause firms to leave industry to make normal profit elsewhere 0 eventually as more firms leave supply decreases and prices increase to normal and all that remains are firms earning normal profit 0 longrun equil restored Chapter 8 Pure Monopoly Introduction 0 single seller sole producer 0 no close subs unique product 0 price maker control over price 0 blocked entry strong barriers to entry block potential competition 0 difficult to maintain o monopolistis will engage in price discrimination Barriers to entry 0 economies of scale natural monopolies legal barriers patents and licenses ownership of essential resources pricing network effects customers derive greater benefit from joining a network that many other consumers usebelong to Output and Price Determination o monopolies have same cost structure as PC firm but losses are still possible 0 MRMC rule still applies Price Discrimination 0 definition charging dif prices or the same product to dif buyersbased on volumes 0 conditions 0 monopoly power firm must be monopolistic or at least possess some monopoly power ability to control output price 0 market segregation must be able to segregate buyers into distinct classes each w dif willingness to pay usually based off dif elasticities of demand 0 no resale original purchaser can t resell productservice if they can resell causes competition at high price segment of market Monopoly and Antitrust policy 0 monopolies not widespread 0 research and tech advances may undermine monopoly power 0 patents eventually expire o antitrust policy 0 if monopoly appears to be unsustainable over long period of time society might ignore it o gov may file charges if monopoly was achieved through anticompetitive actions creates substantial econ inefficiency and appears to be longlasting 0 rule of reason court ruling that only monopolies unreasonably attainedmaintained are illegal I court can issue injunctions to prohibits anticompetitive behaviors I break up monopolies into competing firms Chapter 9 Oligopoly Monopolistic competition 0 characteristics 0 relatively large of sellers more PC 0 differentiated products more monopolistic 0 easy entry and exit from industry more PC 0 advertising Price and Output in Monopolistic Competition 0 firm s demand curve 0 curve highly but not perfectly elastic 0 price elasticity of demand depends on of rivals and degree of product differences Oligopoly 0 characteristics 0 few large producers 0 control over price but mutual interdependence 0 either homogenous or differentiated products 0 entry barriers I econs of scale I ownership and control of raw materials 0 mergers Oligopoly Behaviors 0 game theory study of how pplfirms behave in strategic situations 0 mutual interdependence o collusion cooperation w rivals firms reach agreement to fix prices divide markets or otherwise restrict competition between the two 0 incentive to cheat firms may feel pressure to secretly violate terms of collusion agreement to gain profits Advertising and Oligopolies c an oligopolist s market share is determined through product advertising bc 0 product development and advertising are less easily duplicated than price cuts 0 oligopolists have enough financial resources to engage in product development and advertising 0 positive effects of advertising 0 provides info to consumers minimizes search time diminishes monopoly power enhances competition and leads to efficiency speeds up tech progress can increase sales and output leading to econs of scale 0 potential negative effects of advertising much designed to manipulatepersuade customers sometimes based on misleading claims can achieve substantial brand loyalty which can lead to monopoly power can be selfcancelling when other firms run similar ads selfcancellingincrease monopoly power leads to inefficiency Ch 10 GDP and Economic Growth 00000 00000 GDP 0 GDP total market value of goodsservices produced within the borders of a country during a specific period of time total spending and total income of econ o a monetary measure 0 avoiding multiple counting o excluding second hand sales and financial transactions Measuring GDP 0 personal consumption expenditures C 0 gross private domestic investment lg o newly produced capital goods and additions to inventories o gov purchases G gov expenditures on final goodsservices and publicly owned capital 0 net exports Xn I only items madeproduced in US I spending toward imports o substracted from total exports o GDPClgGXn Nominal GDP vs Real GDP o nominal GDP measured in terms of price level time of measurement GDP unadjusted for inflation 0 real GDP measured in terms of price level base period GDP that s adjusted for inflation Economic Growth 0 arithmetic of growth 0 rule of 70 tells time it would take for some measure to double I Ofyrs t0 dOuble GDP 70 annual rate of growth Determinants of Growth 0 six factors grouped as supply demand and efficiency factors 0 supply factors physical ability of econ to expand I increase in qty and quality of natural resources I increase in qty and quality of human resources I increase in supplystock of capital goods I improvements in tech 0 demand factor I to achieve increased prod potential created by supply factors households businesses and gov must purchase econ s expanding output goals 0 efficiency factor I to reach full prod potential econ must achieve efficiency and full employment 0 productive and allocative efficiency Accounting for Growth 0 5 factors that explain changes in productivity growth rates I tech advance I amount of capital each worker has to work with I edu and training ls Growth Desirable and Sustainable o antigrowth view 0 growth and industrialization pollution o hasn t solved socioeconomic problems 0 may promote better living but not good life 0 doubt sustainability o in defense of growth 0 path to increased material abundance 0 improved infrastructure 0 may be only realistic way to reduce poverty 0 sustainable bc most natural resource prices have dropped Ch 11 Business Cycles Unemployment and Inflation Business cycles 0 definition increasedecrease in level of econ activity over periods of time o 2 primary phases growth and recession 0 causes of the business cycle 0 theories founded on idea that fluctuations are driven by shocks I shocks situations in which event don t meet expectations I sticky prices prices of goods and services slow to respond to changes in supply and demand as response firms increase and decrease output and employment 0 possible theories for shocks I irregular innovation I productivity changes I monetary factors I political events I financial instability o cyclical impact durables and nondurables 0 firms producing capital and durable goods most impacted by business cycles bc businessesconsumers will cut spending 0 nondurables ex food and clothing and services are better protected Unemployment 0 measurement of unemployment o divides population into 3 groups I under16institutionalized I not in labor force I labor force people able and willing to work 0 unemployed but seeking job included unemployed labor force X I unemployment rate 0 types of unemployment o frictional ppl searching forjobswaiting to take jobs in near future I most workers not in unemployment pool for too long 0 structural mismatch between available jobs and skillslocation of those unemployed I when workers find their skills obsolete o cyclical associated with recessionary phase of business cycle 0 definition of full employment 0 bc structuralfrictional unemployment unavoidable full employment is lt 100 o no cyclical unemployment 0 occurs when unemployment rate lt 5 natural rate 0 potential output level of real GDP that would occur if there was full employment 0 econ cost of unemployment 0 GDP gap difference between actual and potential GDP 0 increase in unemployment increase in GDP gap 0 can be or o means below natural rate means above natural rate actual GDPlt potential GDP 0 natural rate of unemployment frictional structural Inflation 0 meaning of inflation 0 def rise in general level of prices in an econ 0 measurement of inflation 0 consumer price index CPI compares price of a market basket of consumer goods and services in one period w price of samesimilar market basket in base period calculated by BLS CP I 2 price of most recent market basket in particular year 0 price of same market basket in 1982 84 0 types of inflation o demandpull inflation increase in price level caused by excessive spending excess of total spending gt econ s capacity to produce I causes overissuance of by Fed Reserve I bids of price of limited output 0 costpush inflation increase in price level caused by sharp rises in cost of key resources I squeezes profits and reduces supply of goods and services I supply shocks are major source Redistribution Effects of Inflation o nominal income of dollars received as wages rent interest and profit 0 real income measure of amounts of goods and services nominal income can buy purchasing power of nominal income nominal income real price index in hundredtlis O A real income A nominal income A price level 0 who is hurt by inflation o fixedincome receivers o creditors 0 who is unaffectedhelped o flexible income receivers o debtors o anticipated inflation 0 real interest rate increase in purchasing power that borrower pays to lender o nominal interest rate increase in money that borrowers pays to lender I nominal interest rate real interest rate inflation premium Does Inflation Affect Output 0 costpush inflation and real output 0 as prices levels increase qty of goods and services demanded decreases 0 firms respond by producing less and unemployment increases 0 reduces real output and redistributed decreased level of real income 0 demandpull inflation and real output 0 economists don t fully agree perspectives even low levels of inflation reduce real output bc inflation diverts time and effort toward activities designed to limit inflation OR full employment and economic growth depends on strong levels of spending and is a small price to pay for fullemployment and econ growth
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