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This 12 page Reader was uploaded by Lauren Kaindl on Monday January 19, 2015. The Reader belongs to E201 at Indiana University taught by in Spring2014. Since its upload, it has received 303 views. For similar materials see Microeconomics in Economcs at Indiana University.
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DEPARTMENTAL SECTION According to the syllabus Category I Opportunity Cost Accounting Costs and Implicit Costs 2 questions Opportunity cost the highestvalued alternative that must be given up to engage in an activity Explicit accounting cost a cost that only involves spending money Implicit cost a nonmonetary opportunity cost Category II Production Possibility Curve 1 question A curve showing the maximum attainable combinations of two products that may be produced with available resources and technology 3971 311 II39i Tlpi39139 i39 my pmw mr WFquotELI539 E 39Lilllii 5a Unattainable qmrtrrl nl I39EI3939il39 P 9 1 3 I 12 u 539 L quotquot Elin l39ililgg39 Eel tlulEHI 1 Category III Comparative advantage Absolute advantage 1 question Comparative advantage the ability of an individualfirmcountry to produce a good or service at a lower opportunity cost than competitors Absolute advantage the ability to produce more of a good or service than competitors when using the same amount of resources Choose to participate in trade because other firms have the comparative advantage Category IV SD shifts movements etc 5 questions Demand As price goes up quantity goes down Supply As price goes up quantity goes up Market equilibrium where supply demand Surplus quantity supplied is greater than quantity demanded Shortage quantity supplied is less than quantity demanded Econ 201 Final Exam Study Guide 1 Category V Normal inferior goods 1 question Normal good the demand increases as income rises and decreases as income falls Inferior good demand increases as income falls and decreases as income rises Giffen good goods with an upwardsloping demand curve Category VI Elasticity 2 questions Elasticity a measure of how much one economic variable responds to changes in another economic variable Perfectly elastic if absolute value 00 horizontal line Perfectly inelastic if absolute value 0 vertical line Price elasticity of demand AQD Avg Q APD Avg P Factors Availability of substitutes if substitutes present then higher elasticity Time if more time then higher elasticity Luxury vs Necessity if luxury then higher elasticity Definition of market if other brands then higher elasticity share of budget if bigger share then higher elasticity If absolute value is greater than 1 then elastic If absolute value is less than 1 then inelastic If equal 1 then unit elastic Income elasticity AQD Avg Q A Income Avg Income If positive then normal good If greater than 1 elastic then luxury If less than 1 inelastic then necessity If negative then inferior good Cross price elasticity AQD of Good 1 Avg QofGood 1 AQD ofGood 2 Avg QofGood 2 If positive then substitutes If negative then compliments Econ 201 Final Exam Study Guide 3 If zero then unrelated Price elasticity of supply AQs Avg Q APs Avg P Factors Time If greater than 1 then elastic If less than 1 then inelastic If zero then perfectly inelastic If infinity then perfectly elastic Category VII Elasticity and Tax 1 question More inelastic means more tax burden Price floor a legally determined minimum price that sellers may receive Price ceiling a legally determined maximum price that sellers may charge Deadweight loss loss in economic surplus Internalizing externalities Coase Theorem if transactions costs are low private bargaining will result in an efficient solution to the problem of externalities Government regulation Subsidy financial support to promote economic activity Excise tax put on a particular good or service Pigovian tax to internalize externalities Category VIII Costs Marginal analysis 1 question gt mho lsand Equatlone W W quot u Category IX Economic profit of a competitive market 2 questions The profitmaximizing level of output P r i EB l Hmquot c 15 ll ms 2 er I lel ME ti h T prom 3931quot L I39j I 4M 7 7 DEmE HS 2 i Margina PEUIEFMquot I 7 7 7 7 Fmiil per unit of wl m F ATE u I a a Qua rimy Proli1sxmyaxnmmrng buts El 539quot larval of output Category X Monopoly 1 question Characteristics One firm marginal revenue marginal cost the difference between total revenue and total cost is greatest Unique type of product no close substitutes Entry is blocked due to 0 Government blocking entry of other firms One firm has control over key resource 0 0 Network externalities 0 Large economies of scale natural monopoly Examples include firstclass mail delivery and tap water Monopolists are price makers but chose pricemaximizing price and output when MRMC Government has regulated monopolies with antitrust laws Category X Externality Public good 1 question Externality a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service Due to lack of property rights Private cost producer s cost External cost cost for those not involved Social cost total production cost private external Private benefit received by the consumer Econ 201 Final Exam Study Guide 5 External benefit benefit to those not involved Social benefit total benefit ExcludahIa Nona v Emirate Gouda Rivalry consumed by one person and no one else Rival E I ml Big Maize ExcludabIIIty only those who pay for the good can Running shoes consume it Momma I L Category XII Consumer choice 1 question Law of diminishing marginal utility consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time Optimal decisions within a budget are made when MUP of good 1 MUP of good 2 as long as it is below the budget Three consumer mistakes 1 They consider monetary costs but ignore opportunity costs 2 They fail to ignore sunk costs has already been paid and cannot be recovered 3 They are unrealistic about their future behavior Endowment effect the tendency to be unwilling to sell something they already own even if they are offered a price that is greater than the price they would originally pay for it Category XII Consumerproducer surplus efficiency 1 question Consumer surplus the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays Total amount of consumer surplus is equal to the area below the demand curve and above the market price Producer surplus the difference between the lowest price a firm would be willing to accept and the price it actually pays Total amount of producer surplus is equal to area above the supply curve and below the market price Both are affected by price floors and price ceilings Econ 201 Final Exam Study Guide 6 CHAPTER SUMMARIES Chapter 1 Economic model a simplified version of the world to analyze reallife economic situations Positive analysis quotWhat is vs Normative analysis quotwhat should be Fundamental questions What goods and services will be produced How will the goods and services be produced Who will receive the goods and services produced Types of economies Market economy interaction between consumers and firms Centrallyplanned economy government determined Mixed economy combination of both Types of efficiency Production efficiency production at the lowest cost Allocative efficiency distribution is consistent with preferences Chapter 2 Production possibilities frontier PPF shows maximum attainable combinations of two products that may be produced with available resources Points above curve are unattainable Points below curve are inefficient Product market the market for actual goods and services Factor market markets for the factors of productions Labor Capital machines and technology Natural resources Entrepreneur Comparative advantage produce a good or service at the lowest opportunity cost Absolute advantage produce more of a good or service using the same resources Trade with countriesfirms who have a greater comparative advantage Econ 201 Final Exam Study Guide 7 Two key groups who participate in markets are households and firms Chapter 3 Market equilibrium where the demand curve intersects the supply curve Chapter 4 Economic Effects of Taxes Less of that good or service will be consumed Loss of consumer surplus Loss of producer surplus Greater deadweight loss Tax incidence the actual division of the burden of a tax between buyers and sellers in a market Econ 201 Final Exam Study Guide 8 Chapter 5 Commandandcontrol approach government imposes quantitative limits Marketbased approach setting up a capandtrade system Pigovian taxes and subsidies taxes and subsidies set by the government to bring about an efficient level of output in the presence of externalities Four categories of goods see chart page 6 Private goods Pubhcgoods Quasipublic goods Common resources Freeriding benefitting from a good without paying for it Tragedy of commons the tendency for a common resource to be overused results from lack of clearly defined and enforced property rights Chapter 6 Elasticity see page 3 Chapter 10 Consumer Choice see page 6 Chapter 11 In the short run a firm s technology and size of it factorystoreoffice are fixed In the long run all inputs are variable no fixed costs Marginal product of labor the additional output produced by a firm as a result of hiring one more worker specialization and division of labor cause the marginal product of labor to rise for the first few workers hired Law of diminishing returns marginal product of labor declines after certain number of workers Average product of labor the output per worker Economic cost explicit cost implicit cost Economic profit Total revenue explicit cost implicit cost Accounting cost total revenue explicit cost Econ 201 Final Exam Study Guide 9 Economies of scae firm s longrun average costs fall as it increases output Diseconomies of scae firm s longrun average costs rises as the firm increase output Constant return to scae firm s longrun average costs remain unchanged as it increases output Minimum efficient scae the level of output at which all economies of scale are exhausted Chapter 12 Perfectly Competitive Markets Characteristics Many firms Identical type of product High ease of entry Examples include growing wheat and growing appes Firms in a perfectly competitive market are price takers Demand for one firm s product is horizontal at given price price average revenue marginal revenue Profitmaximizing level is where marginal revenue marginal cost Profit Price Average Total Cost Quantity Marginal cost supply curve Deciding whether to produce or shut down in the short run If price is greater than average variable cost then continue to produce f price fall below average variable cost then shut down Deciding whether to enter or exit market in the long run If economic profit then enter If economic loss then exit Chapter 13 Monopolistically Competitive Markets Characteristics Many firms Differentiated type of product High ease of entry Examples include clothing stores and restaurants Econ 201 Final Exam Study Guide 10 Demand for firm s product is downwardsloping Price average revenue at marginal revenue Marginal revenue curve should be below demand curve Price cuts leads to Output effect good thing one more unit sold Price effect bad thing less revenue per unit Profitmaximizing output level in the short run where marginal revenue marginal cost Zero economic profit in the long run produce where demand average total cost Chapter 14 Oligopoly Characteristics Few firms Identical or differentiated type of product Low ease of entry barriers of entry are 0 Large economies of scale 0 Ownership of a key input 0 Governmentimposed barriers Examples include manufacturing computers and manufacturing automobiles Game theory study of how people make decisions in situations in which attaining their goals depends on their interactions with others used to analyze oligopoly must include 1 Rules that determine what actions are allowable 2 Strategies that players employ to attain their objectives in the game 3 Payoffs that are the results of the interactions among the players strategies Collusion an agreement among firms to charge the same price or otherwise not to compete illegal in the United States implicit colluding signal to other firms to cooperate legal ex Price leadership explicit colluding meet with other firms and agree to cooperate illegal ex Cartel Dominant strategy a strategy that is best for the firm no matter what strategies other firms use Trigger retaliation strategy punish other firm is not cooperative in the first stage but cooperate is other firm is cooperative in the first stage Nash equilibrium each firm chooses the best strategy given the strategies chosen by other firms Econ 201 Final Exam Study Guide 11 Cooperative equilibrium players cooperate to increase their mutual payoff Noncooperative equilibrium players do not cooperate but pursue their own selfinterest Prisoner s dilemma a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off Sequential games analyze how one firm makes a decision to deter the entry of new firms into the industry and then another firm reacts to that decision Five competitive forces to determine overall level of competition in an industry 1 Competition from existing firms 2 Threat from potential entrants 3 Competition from substitute goods or services 4 Bargaining power of buyers 5 Bargaining power of sellers Chapter 15 Monopoly Characteristics One firm Unique type of product no close substitutes Entry is blocked due to 0 Government blocking entry of other firms 0 One firm has control over key resource 0 Network externalities 0 Large economies of scale natural monopoly Examples include firstclass mail delivery and tap water Monopolists are price makers but chose pricemaximizing price and output when MRMC Effects of monopolies 0 Reduction in consumer surplus 0 Increase in producer surplus 0 Larger deadweight loss reduction in economic efficiency Government has regulated monopolies with antitrust laws to promote competition Sherman Act Clayton Act Federal Trade Commission Act Horizontal merger firms of the same industry combine Vertical merge different stages of production combine Econ 201 Final Exam Study Guide 12