Econ Final

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Inverse relationship between price and quantity demanded because

1. Diminishing marginal utility 2. The income effect 3. The substitution effect

Assumptions

1. Rational behavior 2. Preferences 3. Budget Constraint 4. Prices

Absolute advantage

A country can produce more

Categories of profit

Accounting profit - TR minus explicit costs Normal Profit - only takes into account explicit Economic Profit - TR minus explicit and implicit costs

At equilibrium the following occurs

All buyers willing and able to pay will obtain

Ceteris paribus

All things equal

Average product

Also called labor productivity Output per unit of labor input

Comparative advantage

Can product it cheaper/less opportunity cost

Shifts of the cost curve occur for

Changes in either resource prices of tech Price of labor either increase or decrease Discovery of more efficient tech

Determinants of demand

Consumer expectations Income (Normal vs. inferior) Tastes Number of buyers Prices of Related goods

Fallacy of composition

True for parts is true for whole

Responsiveness of consumers to a price change is

Elasticity of demand % change in quantity demanded of product / % change in price of product OR Change in quantity demanded/ midpoint / change in price/ midpoint >1 elastic <1 inelastic = 1 unit elastic

How responsive producers are to price changes is

Elasticity of supply % change in quantity supplied of product / % change in price of product >1 elastic <1 inelastic = 1 unit elastic

Producer surplus

Difference between the actual price producers receive and the minimum acceptable price Benefits consumers

Consumer surplus

Difference between the maximum price a consumer is willing to pay and the actual price Benefits consumer

From firms point of view, there are two types of costs

Explicit costs - monetary payment Implicit - opportunity costs

Marginal product

Extra output of product associated with adding a unit of a variable resource

Assumptions of PPC curve

Full employment Fixed resources Fixed technology

Law of Diminishing returns

Get less out of resources as you add more Assumes: 1. Tech is fixed 2. All units of labor are of equal quality

Economies of scale

Help explain downsloping part of LR-ATC curve 1. Labor specialization 2. Managerial specialization 3. Efficient capital 4. Average design and development costs decline with greater output

Three market periods

Immediate market period - time immediately after a change in market price but too short for producers to respond with change in quantity supplied Short run - too short to change plant capacity but can change other things Long run - can change everything

Diseconomies of scale

Issues with efficiently controlling and coordinating a firm's operations

Allocative efficiency occurs at quantity levels where

MB = MC Maximum willingness to pay = minimum acceptable price Combined surplus is at a maximum

Average product displays same tendencies as marginal product

MP > AP: AP goes up MP intersects AP where AP is at max

You keep making decisions until

MU of A/ = MU of B/ Price of A Price of B

Cross elasticity of demand

Measures how sensitive consumer purchases of X are to a change in the price of Y % change in quantity demanded of x / % change in price of y > 0 = substitute goods < 0 = complementary goods = 0 independent goods

Economizing Problem

Our economic wants exceed our economic means

Efficiency: combined consumer and producer surplus

Productive efficiency Allocative efficiency

Determinants of supply

Resource prices Technology Taxes and subsidies Prices of other goods Producer Expectations The number of sellers in the market

Shortage vs. scarcity

Shortage - finite in quantity and demand is greater Scarcity - something is finite in quantity Something has value due to scarcity Shortages exist because a third party entity wants to determine what the price should be

Determinants of price elasticity of demand

Substitutability Proportion of income Luxuries vs. necessities Time (More elastic with more time)

Total Revenue test

TR goes down, demand is inelastic TR goes up, demand is elastic I think this is when price decreases

A product has utility if it can satisfy a want

Utility and usefulness are not synonymous Utility is subjective Utility is difficult to quantify

Allocative effiency

every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing

Resource Market and Product Market Cycle

http://images.slideplayer.com/7/1648617/slides/slide_31.jpg

Productive efficiency

the economy could not produce any more of one good without sacrificing production of another good


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