Final Exam Study Guide

Final Exam Study Guide - Final Exam Study Guide by Joe...

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Unformatted text preview: Final Exam Study Guide by Joe Price Introduction to Microeconomics Jerome Segura I. Chapters 1-3 A. Economics - the study of how society manages its scarce resources. 1. Microeconomics - the study of how households and firms make decisions and how they interact in the markets. 2. Macroeconomics - the study of economy-wide phenomena, including inflation, unemployment, and economic growth. B. Production Possibilities Frontier (PPF) — a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. motivation possibilities farmer 1. Model a) Inefficient vs. Efficient vs. Unobtainable (1) Inefficient points of production are those that are beneath the PPF. On this example: point D. (2) Efficient points of production are those that fall on the PPF. On this example: points F, A, B, and E. (3) Unobtainable points of production are those that cannot be obtained given the current factors of production. On this example: point C. b) Shifters (1) A technological advance can allow an economy to produce at a previously unobtainable point on the PPF. (2) Model '1 .~' -;:~‘zmsmawaxmmuzwm: “miwii‘wflwfimi C. Opportunity Cost — whatever must be given up to obtain an item. Not only money, but also time and other missed opportunities. 1. Comparative Advantage vs. Absolute Advantage a) Comparative Advantage - the ability to produce a good at a lower opportunifl cost than another producer. b) Absolute Advantage - the ability to produce a good using fewer inputs than another producer 2. Specialization and Trade a) The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have the comparative advantage. The gains from trade are based on the comparative advantage. b) Trade makes everyone better off because it allows people to specialize in activities in which they have the comparative advantage. II. Chapters 4-6 A. Markets - a group of buyers and sellers of a particular good or service 1. Competitive Market - a market in which there are many buyers and sellers so that each has a negligible impact on the market price 2. To be a perfectly competitive market, a) The goods offered for sale are all exactly the same, and b) The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. (1) Because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are considered to be price takers. B. Types of Goods 1. Normal Good - a good for which , other things equal, an increase in income leads to an increase in demand 2. Inferior Good - a good for which, other things equal, an increase in income leads to a decrease in demand 3. Substitutes - two goods for which an increase in the price of one leads to an increase in the demand for the other 4. Complements - two goods for which an increase in the price of one leads to a decrease in the demand for the other C. Supply and Demand 1. Demand a) Law of Demand - the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises b) Quantity Demanded - the amount of a good that buyers are Willing and able to purchase c) Demand Schedule - a table that shows the relationship between the price of a good and the the quantity demanded d) Demand Curve - a graph of the relationship between the price of a good and the quantity demanded (1) Movements Along the Demand Curve — a change in the price of the good itself represents a movement along the demand curve. (2) Shifts in the Demand Curve - a change in quantity demanded will shift the entire demand curve. (a) Income (b) Price of related goods (c) Tastes (d) Expectations (e) Number of Buyers e) Market Demand vs. Individual Demand (1) An individual demand curve shows the price one consumer is willing to pay for a quantity of a certain good. (2) The market demand for a good is found by summing the individual demand curves along the x-axis. 2. Supply a) Law of Supply - the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises b) Quantity Supplied - the'mount of a good that sellers are willing and able to sell c) Supply Schedule - a table that shows the relationship between the price of a good and the quantity supplied d) Supply Curve - a graph of the relationship between the price of a good and the quantity supplied (1) Movements Along the Supply Curve - a change in the price of the good itself represents a movement along the supply curve. (2) Shifts in the Supply Curve - a change in quantity supplied will shift the demand curve. (a) Input prices (b) Technology (c) Expectations (d) Number of Sellers e) Market Supply vs. Individual Supply (1) An individual supply curve shows the price one seller is willing to sell for a quantity of a certain good. (2) The market supply for a good is found by summing the individual supply curves along the x—axis. 3. Equilibrium a) Equilibrium - a situation in which the market price has reached the level at which quantity supplied equals quantity demanded. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing to sell. b) Law of Supply and Demand - the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. c) Equilibrium Price - the price that balances the quantity supplied and the quantity demanded d) Equilibrium Quantity - The quantity supplied and the quantity demanded at the equilibrium price e) Analyzing Changes in Equilibrium (1) Decide whether the event shifts the supply or demand curve (or both). (2) Decide in which direction the curve shifts. (3) Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity. 4. Surplus vs. Shortage a) Surplus - a situation in which the quantity supplied is greater than the quantity demanded. b) Shortage - a situation in which quantity demanded is greater than quantity supplied. c) Model ' L ‘ m r. i' ' L ,ii i d: ' mammary-3 mm , _ _ _ _ _ i. _ I , , i' D. Taxes 1. Tax Incidence - the manner in which the burden of a tax is shared among participants in a market 2. How Taxes Affect Market Outcomes a) When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a a market shrinks the size of the market. b) A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, the buyers and sellers share the tax burden.The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. c) The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold. d) Implications (1) Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium. I (2) Buyers and sellers share the burden of taxes. In the new equilibrium, buyers pay more for the good, and sellers receive less. e) Model Latin: enemy 3. Price Controls a) Price Ceiling - a legal maximum on the price at which a good can be sold. (1) If a price ceiling is above the equilibrium price, it does not affect equilibrium. (2) If a price ceiling is below the equilibrium price, it is called a binding constraint on the market. It will likely cause a shortage of the good. (3) Model b) Price Floor - a legal minimum on the price at which a good can be sold (1) If a price floor is below the equilibrium price, it does not affect equilibrium. (2) If a price floor is above the equilibrium price, it is called a binding constraint on the market. It will likely cause a surplus of the good. (3) Model III. Chapters 7-9 A. Welfare Economics — the study of how the allocation of resources affects economic well-being 1. Consumer and Producer Surplus a) Consumer Surplus - the amount a buyer is Willing to pay for a good minus the amount the buyer actually pays for it b) Producer Surplus — the amount a seller is paid for a good minus the seller’s cost of providing it c) Total Surplus - the sum of consumer and producer surplus (1) Consumer surplus = value to buyers - Amount paid by buyers (2) Producer surplus = Amount received by sellers — Cost to sellers (3) Total surplus = (Value to buyers - Amount paid by buyers) + (Amount received by sellers - Cost to sellers) (4) Total Surplus = Value to buyers - Cost to sellers 2. Efficiency - the property of a resource allocation of maximizing the total surplus received by all members of society. a) A market is efficient when total surplus (both consumer and producer surplus) are maximized. b) Efficiency is reached at equilibrium price. c) Model ' flew/3‘? wwwewtwm'wywmwmm mumw»m»mw, 2: ; - ‘ ‘ 3. Tax Revenue - the amount a government collects from any given tax. Tax revenue can be calculated by multiplying the amount of the tax times the quantity of goods sold under the tax. 4. Dead Weight Loss - the fall in total surplus that results from a market distortion, such as a tax a) Recall that taxes cause market inefficiency. This is represented on a graph by the dead weight loss. b) Model B. Laffer Curves - a graph which shows how, as a tax grows larger, it distorts incentives even more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if a tax gets large enough, tax revenue starts to fall. 1. Model C. International Trade 1. World Price — the price of a good that prevails in the world market for that good 2. Gains and Losses of an Exporting Country a) When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off. b) Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers 3. Gains and Losses of an Importing Country a) When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off. b) Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. 4. Tariff - a tax on goods produced abroad and sold domestically a) Model 5. Other Benefits of International Trade a) b) c) d) Increased variety of goods Lower costs through economies of scale Increased competition Enhanced flow of ideas 6. Arguments for Restricting Trade a) b) The Jobs Argument - jobs are taken away from domestic workers. The National-Security Argument - if a foreign country is producing a domestic country’s essential goods and political tension grew between the countries, the foreign producer could restrict and choke the domestic consumer. The Infant-Industry Argument - domestic producers often need to charge prices above the world price, and can not enter the world market. The Unfair-Competition Argument — Not all countries have the same laws governing production The Protection-as-a—Bargaining Chip Argument - binding situations IV. Chapters 13-17 A. Costs of Production 1. Total Revenue - the amount a firm receives for the sale of its output 2. Total Cost - the market value of the inputs a firm uses in production a) Explicit Cost - input cost that require an outlay of money by the firm b) Implicit Cost - input costs that do not require an outlay of money by the firm 3. Profit - total revenue minus total cost a) Economic Profit - total revenue minus total cost, including both explicit and implicit costs b) Accounting Profit - total revenue minus total explicit cost 4. Production Function - the relationship between quantity of inputs used to make a good and the quantity of output of that good B. Firms in Competitive Markets 1. Competitive Market - a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker a) There are many sellers in the market. b) The goods offered by the various sellers are largely the same. c) Firs can freely enter of exit the market. 2. Profit Maximization - producing more does not always lead to an increase in profit. A firm must take into account the total cost of a good and the total revenue in calculating the profit maximization. a) If marginal revenue is greater than marginal cost, the firm should increase its output. b) If marginal cost is greater than marginal revenue, the firm should decrease its output. I c) At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal. 3. Short Run vs. Long Run a) Short Run (1) Shut Down - the firm shuts down if the revenue that it would get from producing is less than its variable costs of production. (2) If firms in the marekt are profitable, then new firms will have an incentive to enter the market. b) Long Run (1) Exit - the firm exits the market if the revenue it would get from producing is less than its total costs. (2) In the long-run equilibrium of a competitive market, firms must be operating at their efficient scale. C. Monopoly — a firm that is the sole seller of a product without close substitutes 1. 4. Model a) Monopoly Resources — a key resource required for production is owned by a single firm. b) Government Regulation - the government gives a single firm the exclusive right to produce some good or service. c) The Production Process - A single firm can produce output at a lower cost than can a larger number of producers. Natural Monopoly - a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Price Discrimination - the business practice of selling the same good at different prices to different customers a) Perfect Price Discrimination - a situation in which the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price. b) Consumer Surplus Under Perfect Price Discrimination Model ,,_, as L L are: c) Feasibility — of course, having knowledge of of a buyers willingness to pay is very hard to calculate and maintain. US Market Structure a) Because a monopoly has exclusive power over its production, it has a high level of market power unlike most competitive firms. D. Monopolistic Competition 1. 2. Oligopoly - a market structure in which only a few sellers offer similar or identical products Monopolistic Competition - a market structure in which many firms sell products that are similar but not identical a) Many sellers — there are many firms competing for the same group of customers. b) Product differentiation - each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve. c) Free entry and exit - firms can enter or exit the market without restriction. E. Game Theory - the study of how people behave in strategic situations 1. Duopoly - an oligopoly with only two members. 2. Collusion - an agreement among firms in a market about quantities to produce or prices to change 3. Cartel — a group of firms acting in unison F. Economics of Cooperation 1. Payoff Matrix Model 2. Nash equilibrium - a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. 3. When firms in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost). 4. Prisoner’s Dilemma - a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. 5. Dominant Strategy - a strategy that is best for a player in a game regardless of the strategies chosen by the other players. ...
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Final Exam Study Guide - Final Exam Study Guide by Joe...

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