201 ECON FINAL Chapter ONE The optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. -In a centrally planned economy most economic decisions are made by the government. In a market economy decisions are made by the consumers and firms. Most are MIXED economies where government may also play a significant role in combination with the firms and consumers in making decisions. -PRODUCTIVE EFFICIENCY- occurs when a good or service is produced at the lowest possible cost. ALLOCATIVE- is when production reflects consumer preferences. Equity is fair distribution of economic benefits. Government policymakers usually face TRADEoffs between equity and efficiency. -Economics is concerned with positive analysis, with what actually is. It deals with how the economy actually behaves. Conceptualizing and measuring the costs and benefits of different courses of action. Normative is what ought to be. Want to use tradeoffs to normatively decide what course of action should be taken. -Scarcity-unlimited wants exceed the limited resources available to fulfill those wants. -Economics is the study of how people attain their goals giver their scarce resources. -Optimal Decisions are made at the margin. MB=MC Voluntary Exchange- the situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction. -Economic Variable is something that we can measure by, that has different values, such as the wages of workers. Opportunity cost is the concepts that the highest valued alternative that must be given up to engage in a certain activity. Chapter TWO -The basis for trade is comparative advantage. If each party specializes in making the product in which it has the comparative advantage, they can arrange a trade that makes both of them better off. They will be able to obtain the product at a lower opportunity cost. -A free market is one with few government restrictions on how goods or services can be produces or sold, or how factors of production can be employed. In a command
economy, the government-makes almost all the decisions. Free markets have much better track records of providing people with rising standards of living. -Private property rights are the rights of the individual firms to have the exclusive use of their property, including the right to buy or sell it. The enforcement of these rights is vital for the economy. -Production Possibilities Frontier- a curve that shows the maximum attainable combinations of two products that may be produced with available resources. They analyze trade offs of producing two goods. As the economy moves does the production frontier it experiences INCREASING marginal opportunity costs. The more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity. **Economic Growth and GDP have a positive correlations, the ability to produce increasing quantities of goods and services. To find the comparative advantages: First which good are you determining is the comparative advantage? The good you are producing to get the advantage put on top and divide by good you will be giving up. The country that produces that good with the LOWEST cost of giving up another has the comparative advantage. *CHAPTER THREE* -Law of Demand- Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price rises, the demanded will FALL. Variables that shift SUPPLY: 1) Price of inputs 2) Technological Change 3) Substitutes 4) Future prices 5) Number of Firms in a market -Market Equilibrium a situation in which the quantity demanded equals the quantity supplied. -Competitive Market Equil. Is a market with many buyers and many sellers. -If the demand and supply for a product both increase, the equilibrium quantity of the product must also increase. *CHAPTER FOUR*
-Price ceiling- a legally determined maximum price that sellers may charge. Rent Control -Price Floor- a determined minimum price that sellers may receive. The Floors must be above the market equilibrium. Minimum wage. With the floors and ceilings there will be negative economic consequences. -Economic surplus is the sum of the consumer surplus and the producer surplus. -The marginal Benefit is the additional benefit to a consumer from consuming one more unit of a good or service. As the price rises the consumer surplus shrinks. *********To Find the CS and PS -always set the demand and supply curves equal first. -Find the price and quantity -then find the PS first -then plug in zero in the Qd and solve for the highest price. -then use that price to find the CS Chapter TEN Technology: the process a firm used to turn inputs into outputs of goods and services. -when a firm has a technological change (positive) it is able to produce more output using the same inputs, or the same output using fewer inputs. -inventories are good that have not been sold yet but have been produced. -when firms analyze the relationship between their level of production and their costs, they separate the time period involved into the short run and the long run. -The short run is when at least one of the firm's inputs is fixed. The firm's technology and the size of its plant are FIXED but the number of workers is variable - The long run: the firm is able to vary all the inputs, and can adopt new technology and increase or decrease the size of its plant. * TOTAL COST: is the cost of all the inputs a firm uses in production. The fixed cost plus the variable. -Fixed cost= lease payments, factory or retail space payments, insurance, newspaper and television advertising -Variable cost- change as output changes: labor costs, raw materials, and electricity -Opportunity cost- the highest values alternative that must be given up engage to in an activity.
PRODUCTION FUNCTION: the relationship between the inputs employed by the firm and the maximum output it can produce with those inputs. It represents the firms technology. AVERAGE TOTAL COST: the total cost divided by the quantity of output produced. *The TC increases as the level of production increases *The AVG TC is U-shaped, as production increases from low levels, avg. TC falls before rising at higher levels of production. -MARGINAL PRODUCT OF LABOR: the additional output a firm produces as a result of hiring one more worker. * The increase in marginal product of labor result from the DIVISION OF LABOR and from specialization. -The law of Diminishing Returns: adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will eventually cause the marginal product of the variable input to decline. Ex. Adding more and more workers to the same quantity of machines, eventually the workers would get into each other's way and the MP of Labor would become negative. *when the MP is negative, the level of output DECLINES. No firm would actually hire so many workers that they would experience a negative product of labor and fall of total output. -once a point of diminishing returns is reached production increases at a decreasing rate. Each additional worker hired after the third worker causes production to increase by a smaller amount than did the hiring of the previous worker. -the MP of labor curve rises initially because of the effects of specialization and division of labor, and then falls because of the effects of the diminishing returns. AVERAGE PRODUCT OF LABOR: the total output produced divided by the quantity of workers. -when the MPL is increasing, total output increases at an increasing rate -when the MPL is decreasing but still positive, total output increase, but at a decreasing rate. ***The average product of labor is the average of the marginal product of labor. -whenever the marginal product of labor is greater than the average product of labor the average product of labor must be INCREASING.
-the MARGINAL COST is the change in a firm's total cost from producing one more unit of a good or service. It is equal to the change in TC divided by the change in quantity. RELATIONSHIP BETWEEN MC AND ATC AND MPOL -the marginal product of labor is rising for the first three workers, but the marginal cost of producing the good is falling. The marginal product of labor is rising and the marginal cost of output will fall. When the MPOL is falling the MC of production will be rising. -when MC is above average total cost, average total cost will rise. MC will equal the avg. total cost when avg. total cost is at its lowest point. Long-run average cost curve- a curve showing that the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed. -Economies of Scale- exist when a firms long run average cost fall as it increases output. *Chapter ELEVEN* -perfectly competitive firms are unable to control the prices of the products they ell and are unable to earn an economic profit in the long run Reason why? 1) firms in these industries sell identical products and it is easy for new firms to enter these industries. Similarities of Industries: 1) the number of firms in the industry 2) the similarity of the good or service produced by the firm in the industry 3) the ease with which new firms can enter the industry -Prices in perfectly competitive markets are determined by the interaction of demand and supply. The actions of any single consumer or any single firm have no effect on the market price. -Therefore the firm will be a price taker and have to charge the same price as every other firm in the market -a firm in a perfectly competitive market is selling the same product as many other firms. It can sell as much as it wants at the market price but it cannot sell anything at all if it raises its prices by even one cent. The demand curve for a firm's output is then horizontal. -Average revenue is total revenue divided by the number of units sold.
-Marginal revenue- change in total revenue from selling one more unit. Change in TR divided by change in quantity. -profit maximizing level of output is where marginal revenue equals marginal cost. And where difference between total revenue and total cost are greatest. Demand curve is the same as the marginal revenue -Competitive firms have a ELASTIC DEMAND CURVE: HORIZONTAL Firms will shut down in the SHORT RUN IF: -their AVC are lower than the price They will shut DOWN IN THE LONG RUN IF: Their ATV are lower than the price *CHAPTER FOURTEEN* A monopoly exists only in the rare situation in which a firm is producing a good or service for which there are no close substitutes. A monopoly can ignore the actions of all other firms. The firms economic profits are computed away in the long run. - To have a monopoly the barriers of trade must be HIGH 1) government blocks the enter of more than on firm into a market by issuing a patent or public franchise 2) control of raw material for producing a good 3) network externalities 4) economies of scale are so large that one firm has a NATURAL MONOPOLY. -Monopolies have downward sloping demand and marginal revenue curves and, maximize profit by producing where marginal revenue equals marginal cost. They may earn economic -monopolies charge higher prices and produce less, which reduces the consumer surplus and economic efficiency. **Guidelines for Monopoly Definition** Market Definition, Concentration, Standards Horizontal Mergers- mergers between firms in the same industry. More likely to increase market power than vertical mergers. Monopolies cause a reduction in the consumer surplus, increase the producer surplus, and cause deadweight loss and reduction in economic efficiency