HONORS PRIN OF MICRO
HONORS PRIN OF MICRO ECO 2023
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This 16 page Class Notes was uploaded by Elmore Funk on Thursday September 17, 2015. The Class Notes belongs to ECO 2023 at Florida State University taught by Joseph Calhoun in Fall. Since its upload, it has received 45 views. For similar materials see /class/205441/eco-2023-florida-state-university in Economcs at Florida State University.
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Date Created: 09/17/15
Microeconomics Final Exam Overview Calhoun 0 Adam Smith wrote The Wrath of the Nations where he discussed the invisible hand 0 Economic way of thinking how economists analyze human behavior how they try to understand human choices Based on 8 guidelines 0 There will always be tradeoffs opportunity costs I No such thing as free lunch you are always giving up your time 0 Individuals choose purposefully people are rational o Incentives matter 0 Individuals think on the margin 0 More info leads to better choices but more info increases costs 0 Secondary effects 0 Valuation is subjective 0 Good theories should be able to predict behavior for average individual not a quotuniquequot individual 0 Positive statement is fact and can be proven o Normative statements are based on opinions o Pitfalls to avoid in economic thinking 0 Violation of the ceteris paribus condition I llother things constant 0 Good intentions do not always lead to good outcomes 0 Association is not causation o Fallacy of Composition I What is good for you is not necessarily good for the group 0 Voluntary trade creates value for both parties 0 Transaction costs reduce gains from trade 0 Middle mad increase gains from trade thus creating value Property Rights 0 Private allow the right of exclusive use to protect and to transfersell property 0 Common allows multiple people to claim ownership rights 4 Property right are important because they create incentives to protect conserve resources and distribute them to people who value them Production Possibility Curve PPC shows the maximum combinations of two goods that can be produced from a set of fixed resources holding technology constant and assuming all resources are being used efficiently PPC is bowed outward because of the law of increasing opportunity costs o If PPC is straight there is constant tradeoff of opportunity costs o If PPC is inward there is a decreasing opportunity cost Factors that shift PPC outward 0 Increase in resources 0 Technological improvements 0 Improving legal systems in order to allow resources to be utilized most efficiently o More hard work less leisure o Encouraging business investment with tax cuts will also tend to shift PPC outward over time Specialization and Division of Labor 0 An individual that focuses on one specific task instead of a series of tasks can become better at his job which increases output which leads to an increase in profit Law of Comparative Advantage in order to maximize output individuals businesses countries should produce goods for which they have the low opportunity cost Change in quantity demanded is a movement along the demand curve that can only be caused by a change in price Change in demand is a shift of the entire curve which may be caused by anything other than a change in price of that particular good such as 0 Changes in consumer income I Decrease in income shifts demand left I Increase in income shifts demand right 0 Changes in the of consumers in market I Decrease in consumers shifts demand to the left I Increase in consumers shifts demand to the right 0 Changes in the price ofa related good I Substitute Goods two goods are substitutes if an increase in the price of the first good leads to an increase in the demand for the second good gt Price of Svedka increases people will buy more of Three Olives and the price of Three Olives will then increase I Complementary Goods two goods are complements if an increase in the price of the first good leads to a decrease in the demand for the second good gt Price of pot increases the demand for Jimmy John s on 420 will decrease The price ofJimmy John s will decrease Why gotchu you re going to spend more of your money on weed which leaves less money for munchies food Jimmy Johns 0 Changes in expectations I If future prices are expected to be higher demand shifts to the right I If future prices are expected to be lower demand shifts to the left 0 Changes in demographics gt Larger of senior citizens will increase demand for nursing homes 0 Changes in consumer preferences Change in quantity supplied is a movement along the supply curve which can only be caused by a change in price of that good Change in supply is a shift of the entire curve which can be caused by factors other than a change in the price such as 0 Changes in resource prices I Resource price increases supply shifts left because costs have risen I Resource price decreases supply shifts right because costs have fallen 0 Change in technology gains are made since costs will be lower because production becomes cheaper 0 Changes in Taxes I Increase in taxes raises costs for supplier I Decrease in taxes drops costs for supplier Political Unrest and Weather 0 gt A hurricane can reduce the supply of oranges in Florida 0 Market prices are determined where the supply and demand curves intersect o Equilibrium occurs when quantity supplied quantity demanded I When equilibrium is reached all gains from trade have been realized 0 How markets respond to changes in supply and demand 0 Shifting One Curve I Increase in Supply Price decreases Quantity increases I Decrease in Supply Price increase Quantity decreases I Increase in Demand Price increases Quantity increase I Decrease in Demand Price decreases Quantity decreases v Remember A market is just a group of buyers and sellers of a particular good 0 Shifting Both Curves I Increase in Supply amp Demand Quantity increases Price is ambiguous I Decrease in Supply Increase in Demand Price increase Quantity is ambiguous I Increase in Supply Decrease in Demand Price decreases Quantity is ambiguous I Decrease in Supply amp Demand Quantity decreases Price is ambiguous Confusing I know Draw out the graphs in the space I left and it ll be much clearer o The Invisible Hand means that selfinterested individuals will produces what is valued by society the most without the direction of a central authority Basically the Government should stay the fout of our business which is what Adam Smith believed in the drive for free ma rkets Elasticity of demand tells us how much more or less the consumer will purchase as price falls or rises 0 Elastic more of a change in amount purchased when price changes bigger change in quantity demanded o Inelastic less of a change in amount purchased when price changes smaller change in quantity demanded 0 Formula for Price Elasticity of Demand I Price elasticity of demand percentage change in quantity Percentage change in price I Elasticity of demand gt 1 then it is elastic I Elasticity of demandltl then it is inelastic 0 Primary determinants of the price elasticity of demand 0 Availability of substitutes most important I The more substitutes the more elastic the demand 0 Percentage of Income if the price of the good is higher percentage of your income then your demand will be more elastic 0 Time the more time available the more elastic the demand you can shop around 0 How elasticity affects total revenue TR 0 Elastic opposite Price goes up down TR comes down up 0 Inelastic same Price goes up down TR goes up down 0 Costs represent the desire of consumers not to sacrifice goods that could be produced if the same resources were employed elsewhere 0 Short run is defined as the period of time in which at least one input is fixed the time period in which a firm cannot alter the size of its plant or addremove equipment 0 The firm can alter variable resources though labor and raw materials Long run is the time period in which a firm can alter the size of their plant and everything else and when firms can enterexit the market Thus all rm s resources are variable in the long run Short Run Cost Curve Graphically Represented 219 MC ATC AVC The ATC Curve is Ushaped because 0 ATC is high at lower levels of production because AFC is high quantity is low so that means AFC is high ATC is high at larger levels of production because MC is high diminishing marginal o returns The MC curve is swoosh shaped because asyou add more variable resource labor to the fixed resource factow there comes a point where the variable resource has reduced efficiency law of diminishing returns 0 In otherwords marginal cost and marginal product move in opposite directions Relationships between the ATC curve and the MC curve When MC lt ATC 9 ATC will fall 0 0 When MC gt ATC 9 ATC will rise 0 When MC ATC 9 ATC is at its minimum V Same relationship applies to the AVC and the MC curve The difference distance between the ATC and the AVC curves is where the AFC is Average Fixed Cost 0 Rememberthat AFC decreases as output increases o Diminishing Returns marginal product is only present in the short run and it determines the shape of the cost curves in the short run 0 Factors that shift the cost curves are 0 Prices of Resources 0 Taxes 0 Regulations I An increase decrease in any of these factors will shift the cost curve upward downward respectively 0 Technology I An increase in technology will shift costs curves downward We know this 0 Sunk costs are historical costs of past decisions that cannot be recovered Sunk costs are not relevant when making current and future decisions Marginal Costs is what is relevant to consider in the short run Two types of Price Controls 0 Price ceilings Price Supply Shortage Demand I l I I Q Q39 00 Quantity P ateanuvvtrhmxtanprmesandmusbesethdawthetthhnum Dnte a he dkmve eenerazesasnanage Generatesdeadwmght ass Nanrprxue39anarssuchasdxsmmmatmn arwamrg mhne Wm detemwve wha Wm get the sand gt Rentcantrm a Pnte aars v e swam Supply F 9mm n 4 Dummy P ateahwerhmnanpnteandmusthesetahavetumhhnumDnteta beequot m Generates 5 5 Generatesdeadwmght Narrvrmehnarsxamwadetermmewhawagthegaad gt Mxmmum wag Taxes a Statutbtymcrkncere atestatheawthatdes gnateswmmDaersreSDansxh ehr vaymg the tax a cthmadame5Meanua amaunta hetaxDamWhaththemnsumerandthe Dradumr MW and demand e asucmes detemwve hawthe anus tax burdens are shared O The more inelastic group bears the burden O Regardless of who bears the burden tax will always increase the price paid by buyers decrease the amount of money received by seller and decrease the quantity transacted o The Laffer Curve shows the relationship between tax rate and tax revenue It implies that at high tax rates an increase in the tax rate will actually lower tax revenue Equi rbrlum Point Maximum f quot T K Revenue z Tax Rates 0 A subsidy is a payment to the buyer or seller of a good or service usually on a per unit basis 0 The more inelastic group benefits from a subsidy o The problem with taxes and subsidies is that it distorts incentives and creates secondary effects which are sometimes undesirable 0 To be effective they must be implemented properly There are four major factors that can undermine the invisible hand and reduce the efficiency of markets 0 Lack of Competition which restricts supply which would lower the quantity available to increase prices 0 Lack of Information which can lead to poor decision making 0 Existence of Public Goods I A public good is non rival and non excludable NateA Duhhzg Ewes mmvmuaxsme meme whee ndes as mum me ueame a Na reduce ts ava ahxhtvta athers Rama 5 atmn a Nan emada t Davfarthegaadzanstm a Snmnetessan v wawded bvthegavemment rm gaads are mm a aHazate emmencw m the market because m tnauawaragaaa but suH tansume m makmg m hard agenerate mm a my far m m eadsta the Newman m Duhhzgaadssmte mmuameswm net Druduze m dan39t uav far m Vresente af Externahhes lTwaTVDES Negatwe externahtv a a me muased an Van a thaugh Vau are m mreeuvmvaxved andvau waum hketasee essaf m Gaudsthh negatwe externa mes are avErDmduted and undergrrted Setand hand Had mmxmm n zcul g am Sum can V ana39 can Actual eqmn m a unkmnd mm nema Q oaaamy Vasmve externahtv a a bEnE Ma Van a thaugh Vau are m dwett v mva ved and yauwaum hketa See mare af 2 Guadsthh Dasmve externa mes are undernmduted and underyrrted m Vamne price Ideal equilibrium supply actual scolal equilibrium demand privaie demand quantity A price taking firm will be 0 Small relative to the market 0 Sell an identical product 0 In a market with many buyers 0 In a market with no barriers to exit or entry A price taking firm can sell all its outputs at the market price but can t price it any higher Price taking firms maximize their profits based on a two step process 0 Decide whether to stay open or closed I A firm will stay open if it can pay for all of the variable costs a When P gt AVC or MR gt AVC orTR gt TVC o If they stay open the firm must decide how much to produce I A firm will continue to produce as long as marginal revenue benefit is greater that marginal cost MR gt MC Profit is the reward that entrepreneurs or firms receive when they produce a good that consumer value more than the resources required for the good s production Losses are the penalty to entrepreneurs or firms for reducing the value of the resources used to create that good o The characteristics of a competitive pricesearcher market with low entry barriers monopolistic competition are 0 There are many sellers 0 Low entry barriers I Anybody can enter the market 0 They sell differentiated but similar products I Dove caters towards women rish Spring caters towards men in the end they a sell soap 0 The firm will close if MR lt AVC or TR lt TVC o The firm will keep producing as long as MR gt MC 0 Note Since each firm produces a differentiated product there is no market supply or demand curve There is only a firm supply and demand curve o In a competitive price searcher market the firm has some control over price thus they can raise prices so that they are greater than their average variable cost But as they raise prices the quantity demanded is reduced 0 ShortRun o If profit exists new firms will enter and steal some profits making the demand for your firms products decrease which will shift the demand curve left o If osses occur existing firms will have to leave because they cannot cover their average variable cost thus the demand for your firm s products will increase and your demand curve will shift right 0 LongRun 0 As firms enter and exit the industry the firms demand curve shifts unti zero economic profit exists I At zero profit there is no more entry or exit a Zero Economic Profit 9 P ATC 0 An entrepreneur is someone who makes decisions based upon uncertainty discovery and business judgment Entrepreneurs play a vital role in economic progress by discovering new products and services that create wealth 0 Market forces provide incentives and signals for entrepreneurs to try new ideas The difference between pricetaker and price searcher markets 0 Due to advertising expenses price searcher products will be priced higher than prices taker products Price Discrimination is the practice of selling the same good to two or more groups of people at different prices The only firms that can price discriminate are the firms that 0 Have a downwardsloping demand curve 0 Can prevent customers from retrading the product 0 Can separate their customers into at least two groups I Elastic I Inelastic Firms price discriminate to increase profits Firms price discriminate by setting a relatively high price for those customers with inelastic demand and a relatively low price for those customers with elastic demand A monopoly is a market structure characterized by a single seller of a welldefined product for which there are no good substitutes and high barriers to entry An entry barrier is something that prevents you from opening a business in a particular industry Some entry barriers are 0 Economies of Scale I When the fixed costs in an industry are large bigger firms can generally achieve lower average total per unit costs than smaller ones 0 Government Licensing and Other Legal Barriers to Entry I Another firm may have a license or patent that precludes you from offering the same goods or services 0 Somebody else owns the vital resource such as oil or diamonds Entry barriers are important for a monopoly because it creates market power In a monopoly the firm will continue to produce as long as MR gt MC Monopolists are not guaranteed ShortRun or LongRun profits because 0 The demand curve could shift left 0 The cost curves could shift up The characteristics of an oligopoly is interdependence among firms which leads to strategic behavior An oligopoly firm is greatly concerned about what the other firms in the industry are doing thus each firm will base part of their decisions on what they think other firms are doing or will do Remember A perfectly competitive firm is not concerned about any other firm A monopolist doesn t have another firm to consider A monopolistically competitive firm is only somewhat concerned about what other firms are doing because they are selling a differentiated product The price and output decision under an oligopoly is that 0 Sometimes oligopolies will act like perfectly competitive firms price takers 0 Sometimes they will act as monopolists price makers 0 Many times they switch between the two Oligopolies will try to collude to keep prices artificially high If firms jointly agreed to keep production low that would generally be good for all firms but the incentive to cheat would be so great that the agreement would not last long The defects of markets with high entry barriers monopoly and oligopoly are 0 Output is higher 0 Price is higher 0 Some gains from trade are not realized 0 Variety is lower Some of the ways to prevent industries with high entry barriers are 0 Antitrust Policies I Policieslaws made to ensure competition is present 0 Reduce artificial barriers to trade such as tariffs taxes quotas and licensing requirements 0 Regulate price and output of firms operating in markets with high barriers to entry 0 Government produces the goods I This often leads to inefficiency gt Think of USPS o Wages differ among people for two general reasons 0 Difference in workers I Productivity if marginal product MP increases then marginal revenue product M RP increase so the individual is more valuable to the firm a If you make more money for your company you than your cubicle neighbs you will get paid more a Marginal Product is the additional production provided by the hiring of an additional worker a Marginal Revenue Product is the additional revenue provided from the additional worker s production I Preferences whether you like your job or not it will affect how hard your work I Race and Gender some jobs are made for men construction while others are more appropriate for women hooters 0 Differences in Jobs I Compensating wage differentials how much extra in wagesalary you will require for a A high risk job the higher the risk the more you should be paid a A job in a poor location a job in Antarctica will pay more than a job in So Cal A job with bad environmental factors pollution I Labor immobility it is costly to move to a new location or train for a new occupation in order to get a job
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