Review of Micro for fall exam 2010 economic issues

Review of Micro for fall exam 2010 economic issues - Review...

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Part I:Chapters 1 to 7 Review of Micro for the Final Exam Fall 2010
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Diagram: The Circular-Flow Model Households Businesses Product Markets $ $ $ $ Dollar Flow Real Flow Resource Markets
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Production Possibilities Frontier Computers 3000 1000 2000 700 A Cars E F 0 1000 900 C Opportunity Cost of next 200 cars is 1000 computers. Opportunity cost of 1 car is 5 computers Opportunity Cost
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Positive versus Normative Analysis Positive : Statements or assertions dealing with matters of fact or questions about how things are (descriptive analysis). Normative : Statements that reflect individual opinions (prescriptive analysis).
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Demand and changes in quantity demanded Demand – willingness and ability to purchase a product or service. The willingness and ability to purchase a product are influenced by factors that include: price of a good Price of other related goods Income individuals have to send Expected future prices of all goods Population size Preference/taste of individuals
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Supply and changes in the quantity supplied Supply – willingness and ability to sell a product. The willingness and ability to sell a product are influenced by factors that include: price of a good Price of factors of production Expected future price of all goods Technology Number of suppliers
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Price Determination (Supply and Demand Analysis) Quantity of Price of hamburgers 2000 1,600 $3.00 $2.50 1,400 0 S $3.50 D 1,800 surplus shortage 1,200
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Elasticity . . . … is a measure of how much buyers and sellers respond to changes in market conditions. . . … allows us to analyze supply and demand with greater precision.
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Price Elasticity of Demand The percentage change in the quantity demanded given. . . . . . a one percent change in the price. A B Demand P Q
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Calculating Elasticity E d = % Q % P = Q/Q ave P/P ave Where Q = quantity demanded P = price Q ave = average quantity demanded P ave = average price
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Factors affecting the price elasticity of demand The price elasticity of demand is influenced by: Necessities versus Luxuries Availability of Close Substitutes Definition of the Market: Narrow versus Broad Time Horizon
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Ranges of Elasticity . . . Perfectly Inelastic Consumers are “ completely unresponsive ” to price changes. Perfectly Elastic Consumers are “ extremely responsive ” to price changes. Unit Elastic Response is “ equal to ” change in price.
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Elasticity of Demand Illustrated Perfectly Inelastic P 2 1 Even if price increases a lot quantity demanded stays the same.
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Elasticity of Demand Illustrated Perfectly Elastic P 1 A small increase in price will cause demand to drop off completely.
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Computing Elasticity Coefficient Demand for Ice Cream 2.20 2.00 10 8 E D ($2.20 - $2.00) / $2.00 +2.20/2 (8 - 10) / 10 + 8/2 = 1.29
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Elasticity and Total Revenue E D > 1 then P Q TR and
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Elasticity and Total Revenue E D < 1 then P Q TR and
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Elasticity and Total Revenue The demand will be characterized as elastic or inelastic based on the results of the previous calculation.
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Review of Micro for fall exam 2010 economic issues - Review...

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