verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
ACCT - 23020 - 002
verified elite notetaker
verified elite notetaker
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This 8 page Class Notes was uploaded by Sara Stoyer on Thursday January 28, 2016. The Class Notes belongs to at Pennsylvania State University taught by in Summer 2015. Since its upload, it has received 10 views.
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Date Created: 01/28/16
Chapter 1 The nature of economics Economics The study of the economy, that is, the ways in which we produce goods and services, distribute the incomes generated in the process, and consume the things produced. Microeconomics The study of choices made by individuals, households, and firms; also microeconomics is concerned with the interaction of households and firms in markets. Macroeconomics The study of the economy as a whole including inflation, unemployment, economic growth, and public finance. Market Economy Decisions about production and the allocation of resources are made on the basis of prices generated by voluntary exchanges between producers, consumers, workers, and the owners of the means of production. Feudal Economy Command Economy Free Market Economy A market economy in which prices are free to adjust, up or down, according to market condition and without direct government interference. State capitalism A capitalist economy is organized by capitalist. Positive theory Explains how things are. Normative theory Indicates what should be done to achieve an objective. Chapter 2 Demand Law of Demand All else equal, as the price of a good falls the quantity demanded rises. As the price of a good rises, the quantity demanded falls. Causes of changes in demand (shifts in demand curve) Incomes of buyers, prices of related goods, tastes and preferences, consumer expectations, and the number of buyers in a market. Demand curve is downward sloping Chapter 3 Supply Law of Supply All else equal, as the price of a good falls the quantity supplied falls. As the price of a good rises the quantity supplied rises. Causes of changes in supply (shifts in supply curve) Prices of resources, technological advances, method improvements, prices of other goods, subsidies and taxes, expectations, and number of sellers. Supply curve is upward sloping Chapter 4 Prices in competitive market structures Competitive market structure A market in which there are many sellers and many buyers, so numerous that no one of them or small group of them has any appreciable influence on price of on the total quantity supplied or demanded. Monopoly A market structure in which all, or essentially all, of a good or service is produced by a single seller. Oligopoly A market structure in which a good or a service is provided by a few sellers, each of whom recognizes that its actions can affect the actions of other firms, in turn, the actions of other firms can affect those of the first. Money Anything that is generally acceptable to sellers in exchange for their goods and services. Market equilibrium price The price where the quantity demanded equals the quantity supplied. Market equilibrium quantity The amount of a good demanded and supplied at the equilibrium price. Surplus Exists when at the current price the quantity of an item supplied exceeds the quantity demanded. Shortage Exists when at the current price the quantity of a good demanded exceeds the quantity supplied. Calculation for equilibrium price and quantity given supply and demand equations Q= 2P+22 Q= 4P8 Quantity supplied=Quantity demanded 4P8= 2P+22 6P= 30 P= $5 Q= 4(5)8 Q= 12 Graphs supply and demand diagrams showing shifts in demand or supply (not both) and changes in equilibrium price and quantity Chapter 5 Consumer and producer surplus Consumer surplus For an individual buyer is the maximum amount the buyer was willing to pay for an item less the amount the buyer actually paid for it. Producer surplus For a seller is the amount a seller actually receives for an item less the minimum amount the seller was willing to accept. Market surplus The sum of consumer and producer surplus. Barriers to market efficiency Taxes and subsidies, price ceilings and floors, production quotas, imperfect markets, externalities, and public goods. Deadweight loss Calculate total consumer surplus and total producer surplus Willingness to pay price paid=individual consumer surplus ICS+ICS+…= Total consumer surplus Price received minimum acceptable price= individual producer surplus IPS+IPS+…=Total producer surplus Chapter 6 Price elasticity of demand and supply Price elasticity of demandThe ratio of the percent change in the quantity demanded of an item to the percent change of its price. Price elasticity of supplyThe ratio of the percent change in the quantity supplied of an item to the percent change in the market price of a good or service. Elastic ED or ES is > one Inelastic ED or ES is < one Determinants of demand or supply elasticity market period Calculate price elasticity of demand ED= %ChangeQ= (change in quantity demanded/ average of quantities) x 100% = ((Q1Q0)/((Q1+Q0)/2)) x 100% %ChangeP== (change in price/ average of prices) x 100% = ((P1P0)/((P1+P0)/2)) x 100% Calculate price elasticity of supply ED= percent change in quantity supplied(%ChangeQ)/ percent change in price(%ChangeP) %ChangeQ= (change in quantity supplied/ average of quantities) x 100% = ((Q1Q0)/((Q1+Q0)/2)) x 100% %ChangeP== (change in price/ average of prices) x 100% = ((P1P0)/((P1+P0)/2)) x 100%\ Chapter 7 More about elasticity Income Elasticity of demand= percent change in quantity demanded(%ChangeQ)/ percent change in income(%ChangeI) Cross price elasticity of demand Measures the relationship in the demand for a pair of products if the price of the second product is changed. EXY= (% change in quantity demanded of product X(% change QX))/(% change in price of product y(% change Py)) Supplementary goods Exy>0 Complementary goods Exy<0 Chapter 8 Rational economic behavior and marginal analysis Rationality means acting purposefully, consistently, and logically in using all available information to achieve an objective Bounded rationality People intend to make choices that best serve their objectives within a limited ability to acquire and process information Opportunity cost The highest valued alternative that must be given up to engage in an activity Marginal benefit The additional benefit obtained from an additional unit of that activity Marginal cost The additional cost incurred from a unit increase of that activity Chapter 9 Consumer choice Utility Satisfaction a consumer derives from the consumption of a good or market basket of goods Marginal utility The additional satisfaction that a consumer obtains from the consumption of an additional unit of a product Law of diminishing utility As a consumer increase the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases Maximization of total utility The total utility from the consumption of a goods A, B, C… is maximized subject to a budget constraint when, for the last unit of each good consumed. Calculations: Marginal utility Total utility gained from the use or consumption of another unit Marginal Utility per dollar spent MU of A/Price of A = MU of B/Price of B=…. Budget allocation to maximize total utility Chapter 10 Profit and loss Profit revenue – cost Accounting profit revenue all costs of operations and taxes Operating Cash Flows the cash generated from a firm’s normal business activities Dollars in dollars out Earning before interest and taxes + depreciation – taxes = OCF Economic profit OCF – Sustaining investments – cost of financial capital = economic profit Value added – revenue – purchases Chapter 11 The costs of production Variable cost costs that change with changes in the level of output Total Variable Cost= unit manufacturing cost X output quantity Fixed cost costs that do not change with changes in the level of a firms output Total Cost= TVC+FC Average cost= total cost/output Marginal cost the increase in total cost required to increase output by one additional unit = change in total cost/ change in output Chapter 12 The single product firm in a competitive market structure Principle of profit maximization A firm in a competitive market structure will maximize profit (or minimize loss) in the short run by producing the maximum quantity for which the market price exceeds the unit production cost. Shut down price If the market price of a good is less than or equal to the minimum unit production cost, the firm should shut down. Allocative efficiency producing what people want when each good or service produced in quantities up to a level where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it Productive efficiency how goods and services will be produced occurs when goods and services are produced at the lowest possible costs Profit= total revenue total cost Marginal cost= Chapter 13 Monopoly Monopoly a market structure in which a single firm provides a welldefined product for which there is no close substitute Barriers to entry government grants a firm an exclusive right to serve a specified product market A single firm has control of a key resource necessary to produce a good There are substantial network externalities in supplying a good or service Economies of scale are so great that one firm has a natural monopoly Natural Monopoly a market structure in which the economies of scale are so great that a single firm can produce an item at a lower average cost than would be possible if more than one firm produced it Monopoly profit maximization A monopolist will choose a pricequantity combination on his demand curve the highest level of output for which marginal revenue is greater than or equal to marginal cost. Economic effects of monopoly An unregulated monopolists price is typically higher and its output lower than would be obtained in a competitive market There is a transfer of wealth from consumers to the monopolist Productive resources are used inefficiently Calculations Price and quantity for monopoly profit maximization MR= change in total revenue/ change in quantity MC= change in total cost/ change in quantity Graph Chapter 14 Oligopoly and the theory of games Oligopoly a market composed of a few firms, and it is the most prevalent type of market structure Barriers to entry Economies of scale Capital investment requirements Control of important resources Patents Exclusive access to locations for business Markup price Payoff matrix Prisoners dilemma Dominant strategy a strategy that is better than all other strategies no matter what strategies other agents use Nash equilibrium attained when each agent choses the best strategy given the strategies chosen by other agents Markup price P=(1+m)X AC Chapter 15 Labor markets Marginal product of labor the increase in the amount of output from an additional unit of labor holding all other inputs fixed Value of the marginal product of labor the value added for a unit of output multiplied by the marginal product of labor VMPL = V x MPL Wage Rate Price paid for the use or service of labor per unit of time Hiring principle for profit maximization A firm will hire another worker only if the value of that worker to the firm was greater than or equal to the wage that would need to be paid. Demand for labor Supply for labor Equilibrium in a labor market W0= V X MPL= (P0C) X MPL Chapter 17 Price controls Price ceiling legally established maximum price for a good or service. Price floor legally established minimum price for a good or service Surplus Quantity supplied is greater than the quantity demanded Shortage quantity demanded is greater than the quantity supplied Deadweight loss Chapter 18 Public goods Public good Non excludable and non rival in consumption Free rider person who benefits from a good or service without paying for it Demand for public goods determined by its marginal benefit to society Supply for public goods constructed from its marginal cost to society Marginal cost=given Marginal Benefit = all of the incremental willingness to pays added together Net Benefit = total benefit – total cost Chapter 21 The economies of information Asymmetric information a condition in which one party to a transaction is less informed than the other party Adverse Selection the tendency for people to enter into agreements in which they can use their private information to their advantage and at the disadvantage of the less informed party Moral Hazard a situation in which one of the parties to an agreement has an incentive after the agreement has been made to act in a manner that bring additional benefits to himself or herself at the expense of the other party
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