Notesale: Turn your study into money

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Chapter 4
Markets and Competition
1
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Goods are offered for sale are all exactly the same
b
...
Both buyers and sellers are price takers
2
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Sum of the quantities demanded for each individual buyer at each price
b
...
Income
a
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Increase in income=increase in demand
b
...
Increase in income-decrease in demand
2
...
Substitutes
i
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Complements
i
...
Number of Buyers
a
...
Input Prices
a
...
Technology
a
...
Number of Sellers
a
...
Price above the equilibrium, quantity exceeds demand, surplus, causing the price to fall
until equilibrium
2
...
Availability of close substitutes
a
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Necessities
a
...
Luxuries
a
...
Definition of the Market
a
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Time horizon
a
...
Ped= (% change in Qd)/ (% change in P)
a
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Total Revenue
a
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P x Q
c
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If demand is price elastic (greater than one), an increase in price decreases total
revenue because the decrease in the quantity demanded is proportionately larger
than the increase in price
e
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Income Elasticity of Demand
a
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Normal Goods
i
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Inferior Goods
i
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Necessities
i
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Luxuries
i
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Cross-Price Elasticity of Demand
a
...
CPed= (% change in Qd1) / (% change in P2)
c
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Negative for complements

Elasticity of Supply
1
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Elasticity is zero, supply is perfectly inelastic (vertical)
3
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Price Ceilings
a
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Price ceiling is set below EQ P, it is binding
i
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Price Floors
a
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Price floor above EQ P, binding constraint
i
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Taxes
a
...
Tax placed on buyers, demand shifts downward, quantity sold decreases, price
paid buyers increases, price received by seller decreases
c
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Tax discourage market activity, Qs decreases
ii
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Effect of a tax is collected from buyers = tax collected from sellers
iv
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Free markets allocate to buyers whose WTP is greater or equal to EQ
2
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Quantity of goods that maximizes TS
Chapter 8
Dead Weight Loss
1
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World price is above domestic price, country has comparative advantage, should export
2
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When a country allows trade and becomes an exporter of a good, domestic producers are
better off, domestic consumers are worse off
2
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Height of the demand curve is the value of the good to marginal consumer
2
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Negative Externality
a
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Total Surplus is value to the consumers minus the social cost curve, optimal
quantity that maximizes TS is less than EQ Quantity
4
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Social Value exceeds private value
b
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Policies
a
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Limit behaviors
b
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Align private incentives with social efficiency
ii
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Tradable pollution permits
Chapter 13
What are Costs?
1
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TC= (Explicit + Implicit)
i
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Input costs that require an outlay of money (resources, wages,
rent)
ii
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Input costs that do not require an outlay of money, forgone salary
2
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EP= TR – (Explicit + Implicit) “TC”
3
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AP= TR – explicit costs
4
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Firms decision about supplying goods and services is motivated by economic
profit

Production and Costs
1
...
Shows relationship between Q of inputs used to make a good and Q of output
2
...
Increase in output that arises from an additional unit
3
...
Marginal product of an input declines as Q of input increases, slope gets flatter
as more inputs added
4
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Shows relationship between Q of output produced and total cost of production
b
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Equations
a
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Is U-shaped b/c at low levels of output, ATC are high due to high fixed
costs
ii
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Diminishing returns cause increase in AVC, increase AC
b
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AFC= FC/Q
d
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B/c of Diminish MP, MC is increasing or upward slopping
ii
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Whenever MC is greater than ATC, ATC is rising
iv
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Short Run
a
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Long Run
a
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U-Shaped, but flatter than Short Run
3
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At low levels of output, long run ATC falls as the quantity of output increases
4
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High levels of output, long run ATC rises as the quantity increases
Chapter 14
What is a Competitive Market?
1
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There are many buyers and sellers in market (Price takers)
b
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Firms can freely enter or exit the market

2
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TR= PxQ
b
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AR is equal to price of the good
c
...
Equals change in TR
ii
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MR=price of good
3
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MR is fixed at the price of the good and MC is increasing as output rises
b
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MR exceeds MC, firms should increase output to increase profit
ii
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At profit maximization, MR=MC
c
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Long Run supply curve is portion of MC curve that lies about ATC curve
e
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If price is above ATC, firm is profitable
4
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Short Run Market Supply curve is upward sloping
b
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If firms are making losses, firms will exit market, rise until economic profit
=0
ii
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Beside LR perfectly elastic
1
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Firms have different costs; only marginal firm earns zero
economic profits while more efficient firms ear profits in long run

Chapter 15
Monopoly Production and Price Decisions
1
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Must lower price to sell greater Q, sale of additional unit effects TR (PxQ)
i
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Price Effects: P is lower (on the marginal unit and on the units it was
already selling)
iii
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Maximizes Profit
a
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As Q increases, MR decreases and MC increases
ii
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At high levels of output, MC>MR, decrease of output increase profit
iv
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Welfare Cost of Monopoly
a
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When Monopolist charges price that exceeds MC, = DWL
4
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Rational Strategy b/c to maximize profit they charge close to individual WTP
b
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Arbitrage- buying a good at a low price market, selling to high price
market, PD is not possible
c

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