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This 3 page Study Guide was uploaded by Tyler Greene on Saturday December 5, 2015. The Study Guide belongs to Econ 260 at Northern Illinois University taught by Manjuri Talukar in Summer 2015. Since its upload, it has received 149 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Northern Illinois University.
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Date Created: 12/05/15
Opportunity cost-the highest-valued alternative of what you must give up in order to get an item; the real cost of an item 5 Main Factors that can Shift the Supply Curve-(1) Changes in input prices (2) changes in prices of related goods or services (3) changes in technology (4) changes in expectations (5) changes in number of producers Price floor- minimum price buyers are required to pay for a good or service Price ceiling - a maximum price sellers are allowed to charge for a good or service Deadweight loss- inefficiently low quantity. The loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity; a loss to society; a reduction in total surplus; a loss in surplus that accrues to no one as a gain. Perfect Competition (PC) A perfect competition or perfectly competitive market is one where there are 1) Many buyers and sellers 2) Selling identical products 3) No barriers to entry and exit An example of this is agricultural goods as wheat, corn, rice, apples etc. There are thousands of small producers of these goods, each producing a very small percentage of the total market. Even if you are a big farmer, your output is but a drop in the national wheat market. There are millions of buyers. The product (wheat, rice, milk etc.) are identical in the eyes of the consumer. We can barely tell the difference between wheat produced in state A or B or C. Wheat is wheat. The market price is set by the "invisible hands" of supply and demand. Both buyers and sellers have information about the market price. There are no barriers either legal, social, financial or others to entry and exit. It means that it is relatively easy and inexpensive to start (or stop) producing these goods on a small scale. Given these characteristics, no single producer can dictate or command prices. So, the price of these perfectly competitive goods is determined in the market place. A single producer accepts the price as given and decides to either produce that commodity (or not). But they cannot make any dent in the market price by their individual decisions. Thus PC firms are price takers. Example If few extra farmers come in and start producing wheat or a few exit, there will be no difference in the national supply of wheat, and hence no effect on price. Thus wheat prices are "a given." Let's assume it is $6.00 per bag of wheat. Thus the demand curve a farmer faces is a horizontal line at that price, meaning he can sell any quantity he produces (small or large or very large) at that market price. So an individual firm's demand curve is horizontal. Whether he produces a 2000, 8000, 12000 or a 100,000 pounds of wheat, or more, he can sell each unit at the market price of $ 6.00 per bag. Characteristics of Monopoly There is one producer and seller of the product. There are no close substitutes in the market. The firm and the industry are the same, single producer and seller. The monopolist is the price maker. There are strict barriers to entry. Since there are no close competitors, the monopolist can enjoy super normal profits not only is the short run, but also in the long run. Elasticity of demand Elasticity measures the change in quantity demanded (Qd) of good x due to a change in its price. Based on the basic economic laws of demand and supply, as prices increase, the quantity demanded goes down and as prices go down, the quantity demanded increases Price and quantity demanded have an inverse relationship. Elasticity is a precise (exact) mathematical measure of the change in quantity demanded due to a price change. Elasticity of supply Elasticity measures the change in quantity supplied (Qs) due to a change in price. Based on the basic economic laws of demand and supply, as prices increase, the quantity supplied goes up and as prices go down, the quantity supplied decreases. Price and quantity supplied have a direct relationship. Elasticity is a precise / exact measure of the change in quantity supplied due to a price change
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