Midterm Review

Midterm Review - PP)??— .- 2 sup N cum-C b it” a” Mme...

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Unformatted text preview: PP)??— .- 2 sup N cum-C b it” a” Mme 5‘ ‘3' h Owls Cr . . Econ Midterm #2 Rev1ew Arc ‘ 0’“ 0‘7 M 9 average fixed cost-TFC/output ‘ “cf? I average variable cost-TVCfoutput I marginal cost-the extra cost of producing 1 more unit of output; A Total Cost/ A Output---)in short run AVariable Cosfl A Output {00" ' look at notes from guest teacher (demand curve in pure competition market, / Wed demand curve for industry) We? law of diminishing marginal utility-added satisfaction declines as a consumer acquires additional units of a given product utility—satisfaction Consumer choice and budget behavior—Assume: o Rational behavior-consumers want to get the most for their money 0 Preferences-consumers have clear cut preferences for certain goods/services; they have a good idea of how much MU they will get from successive units of various products Budget constraint-at any point in time the consumer has a fixed, limited amount of money income every consumer faces a budget constraint Prices-goods are scarce relative to the demand for them, so every good carries a price tag (price is not afi'ected by the amounts of specific goods each person buys) The diamond-water paradox—instance where essential goods have much lower prices than unimportant goods due to the supply of the products (e.g. diamonds vs water) Major characteristics of pure competition market in short run 0 Very large numbers-large number of independently acting sellers, often offering their products in large national or international markets Standardized product-as long as price is the same, consumers will be indifferent about which seller to buy the product from (perfect substitutes); not differentiation “price takers"-individual firms exert no significant control over product price.each firm produces a small fraction of total output that increasing or decreasing it will not influence total supply or prim. IT CANNOT CHANGE MARKET PRICE IT CAN ONLY ADJUST TO IT free entry and exit-no significant legal, technological, financial or other obstacles prohibit new firms from selling their output in any competitive market 0 eC>1Vhy is demand curve of pure competition market horizontal? A; 0 Elastic demand-9price takers, fixed by market forces of supply and demand Fixed costs-costs that in total do not vary with changes in output; associated with the very existence of a firm’s plant and must be paid even if its output is zero (eg. rental payments) materials/most labor) I Normal profit-the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial abiliy must receive to induce it to perform entrepreneurial functions for a firm I Economic profit-total revenue less economic costs (explict and implicit, implicit including a normal profit to the enrepreneur) M \I\ Law of diminishing returns-assuming technology is fixed, as successive units of a OXW \5 variable resource (e.g. labor) are added to a fixed resource (e.g. capital or land), ‘/'-1 beyond marginal product that can be attributed to each additional unit of the \(‘\ VS“ A variable resource will decline “filavgg @Economies of scale-reductions in the ATC of producing a product as the firm 3&0?“ expands the size of plant (its output) in the long run Mg)“, ‘ (6‘ 0 Labor specialization (hiring more workers means jobs can be divided, less {7 V\\\( tasks to perform increases efficiency) 0“ o Managerial specialization (experts supervise their expertisegreat efficiency and lower unit costs) 0 Efficient capital (most efficient equipment) 0 Other factors (start up costs, advertising costs decline as more units are produced and sold) I Diseconomies of scale-increases in the ATC of producing a product as the firm expands the size of its plant (output) in the long run 0 Bad management 0 Inflation 0 Labor strikes I Constant returns to scale-unchanging ATC of producing a product as the firm expands its plant (its output) in the long run I Why does the government give farmers subsidies? 0 many farmers have low incomes so they should receive higher prices and incomes through public help 0 the family farm is a fundamental us institution 0 farmers are subject to natural hazards—need gov. help to insure against these disasters 0 farmers sell in purely competitive markets but need to buy supplies from industries with market power—subsidies offset disadvantageous terms of trade I agriculture=pure competition market 6 problems with agriculture 3 0 short run-prices/income unstable due to: (inelastic demand curve, depending on foreign market) 0 Inelastic demand for agricultural products I for agricultural products in the aggregate, elasticity coefficient is between .20 and .25 I low value on additional farm output due to I low substitutability (do not switch from 3 meals a day to 5 or 6 because of decline in price and you cannot substitute other products for food) I diminishing marginal utility (high income economies are saturated with food—additional products are subject to rapidly diminishing utility) o 2. Fluctuations in output I farmers have limited control over their output (natural occurrences and highly competitive nature of farming and ranching makes it difficult for those producers to form huge combinations to control production) I price inelasticity will magnify small changes in output into relatively large changes in agricultural prices and income 0 3. Fluctuations in demand I a relatively small decline in demand gives farmers significantly less income for the same amount of farm output I a slight increase in demand provides a sizable increase in farm income for the same volume of output I farm production is insensitive to price changes in the short run because farmer’s fixed costs are high 0 long run-declining industry due to: I 1. The supply of farm products has increased rapidly because of technological progress I 2. The demand for farm products has increased slowly (inelastic WRT income) I price supportsprice floors ordered by the gov 0 lead to surplus output, gain to farmers, loss to consumers, efficiency losses, social losses, environmental costs, international costs (reading page 372-3) 0 ...
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This note was uploaded on 06/26/2009 for the course ECON 205 taught by Professor Kamrany during the Fall '07 term at USC.

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Midterm Review - PP)??— .- 2 sup N cum-C b it” a” Mme...

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