S G D P G Q Opportunity Cost : the value of Costs : expenses a firm Mct=s→ pt Q in the next best alternative incurs from engaging in its McT=s← Pt Qt Absolute Advantage : fewer resources business activities D → P T Q 4 D ← P 1 Q 1 are used in production Profit : total revenue ( TR ) minus * Comparative Advantage : lower opp . total cost ( TC ) Determinants Of cost of production Marginal Revenue :( MR ) addi - Demand : population , Terms of Trade : ratio of goods at tional revenue a firm receives income , prices of subs Which countries agree to trade at from selling one more unit 4 complements , tastes 1 Production Possibilities Frontier : Marginal Cost : ( MC ) the preferences , expectations ( PPF ) a graphical representation of the additional Cost a firm incurs Determinants of Supply : goods a country can produce given When they sell I more Unit MC shifters , expect a - their productivity E constraints Market Power : the ability Of a tons , # of sellers Consumption Possibilities Frontier : firm to set its own price p ( C PF ) : graphical depiction of what Producer surplus : ( Ps ) differ . ' E price to Max profit : a country can consume given its end between price received $6 6- productivity , constraints , da trading da the cost of production I - opportunities Law of Demand : The price - : Mc - • Spontaneous ( emergent ) order : of a good or service is - , iii. MR D 0 4 5 10 a phenomenon in Society that is inversely related to the • individual Firm in Perfect Competition the result Of human action but quantity demanded ( PT Qtr ) c individual firm 's supply ) B = 5 p 1 1 1 1 1 1 1 H 1 1 1 1 not human design Law of Supply : Prices Galan - . . =3 , ; ; .ly#..y.EIiYb?3IFr? Demand : the relationship between titles supplied are directly QHOO " = ' a. ÷ . a EEM " the price of a good or services related ( PTQT ) bk ( Pqmerwagrgtoattsqwmweasitintion the quantity demanded Perfectly Competitive Equili - 100 • S = MC Inferior Goods : as income increases , brium : occurs at a price where sellers . demand decreases QD is equal to Qs • a p 100 SOO 900 Normal Good : as income increases , Dead weight Loss : LDWL ) the 20 s=Mc = demand increases reduction in total surplus from I = Ims Substitute Goods : an increase Market inefficiencies 12=11111 •%;y•• Iii ( ill PE nrr ( decrease ) in the price Of One 8=1111 iii. 111111 good causes an increase ( decrease ) Winners from Int ' l Trade : = shortage • Consumers / producers from I I I D In the price of the other good i i 1 i i 1 1 1 11 Q increased variety 4001^600 Complimentary Goods : an increase QD=Qs ( decrease ) in the price of one • firms 1 Workers in export p mc=s good causes a decrease ( increase ) intensive industries in the demand for the other good ° lower prices Ts § " SI " ' ' . Consumer Surplus : ( CS ) differ . Losers from Int ' 1 Trade : a end between consumers ' • firms 1 workers in import willingness to pay ( wtp ){ the intensive industries s s→ s← price ( p ) of the good or service ° increased expenditures D P Q Pf QP PTQt Revenue : income a firm On displaced Workers D → pp QT p ? Qp Pga ? receives for engaging in its CPSGIPWIPMEP ts= ( s + Ps D ← Pt Qt PTQ ? P ?Qt business activities
1. S G D P G Q Opportunity Cost : the value of Costs : expenses
a firm Mct=s pt Q in the next best alternative incurs from engaging
in its McT=s Pt QtAbsolute Advantage : fewer resources business
activities D P T Q 4 D P 1 Q 1 are used in production Profit :
total revenue ( TR ) minus * Comparative Advantage : lower opp .
total cost ( TC ) Determinants Of cost of production Marginal
Revenue :( MR ) addi - Demand : population , Terms of Trade : ratio
of goods at tional revenue a firm receives income , prices of subs
Which countries agree to trade at from selling one more unit 4
complements , tastes 1 Production Possibilities Frontier : Marginal
Cost : ( MC ) the preferences , expectations ( PPF ) a graphical
representation of the additional Cost a firm incurs Determinants of
Supply : goods a country can produce given When they sell I more
Unit MC shifters , expect a - their productivity E constraints
Market Power : the ability Of a tons , # of sellers Consumption
Possibilities Frontier : firm to set its own price p ( C PF ) :
graphical depiction of what Producer surplus : ( Ps ) differ . ' E
price to Max - profit : a country can consume given its end between
price received - $66- productivity , constraints , da trading da
the cost of production - I . - opportunities Law of Demand : The
price - : Mc- Spontaneous ( emergent ) order : of a good or service
is - , iii.MR D 0 4 5 10 a phenomenon in Society that is inversely
related to the individual Firm in Perfect Competition the result Of
human action but quantity demanded ( PT Qtr ) c individual firm 's
supply ) B = 5 p 1 1 1 1 1 1 1 H 1 1 1 1 not human design Law of
Supply : Prices Galan - . . =3 , ;; .ly#..y.EIiYb?3IFr? Demand :
the relationship between titles supplied are directly QHOO " = ' a.
. a EEM" the price of a good or services related ( PTQT ) bk (
Pqmerwagrgtoattsqwmweasitintion the quantity demanded Perfectly
Competitive Equili - 100 S = MC Inferior Goods : as income
increases , brium : occurs at a price where sellers . demand
decreases QD is equal to Qs a p 100 SOO 900 Normal Good : as income
increases , Dead weight Loss : LDWL ) the 20 s=Mc = demand
increases reduction in total surplus from I = Ims Substitute Goods
: an increase Market inefficiencies 12=11111 %;y Iii ( ill PE - -
nrr( decrease ) in the price Of One 8=1111 iii.111111 good causes
an increase ( decrease ) Winners from Int ' l Trade : = shortage
Consumers / producers from I I I D In the price of the other good i
i 1 i i 1 1 1 11 Q increased variety 4001^600 Complimentary Goods :
an increase QD=Qs ( decrease ) in the price of one firms 1 Workers
in export p mc=s good causes a decrease ( increase ) intensive
industries in the demand for the other good lower prices Ts " SI" '
' . Consumer Surplus : ( CS ) differ . Losers from Int ' 1 Trade :
a end between consumers ' firms 1 workers in import willingness to
pay ( wtp ){ the intensive industries s s s price ( p ) of the good
or service increased expenditures D P Q Pf QP PTQt Revenue : income
a firm On displaced Workers D pp QT p ? Qp Pga ? receives for
engaging in its CPSGIPWIPMEP ts= ( s + Ps D Pt QtPTQ ? P ?Qt
business activities
2. Own price elasticity of demand : If Demand increases . . . S
a measure of the responsiveness Income elasticity of demand : Of
consumers to a change in a Measure Of Consumers ' S p . P , the
price of a good or service responsiveness TO Changes in Dz Dz E D=
!j?aQp " income . a D ' a. a . D ' IE D= %4Q 's t.IQ > tap tap )
t.IQ E , , ( Oas long as the law of ' 1. II when supply is more
elastic When supply is more inelastic demand holds IED ( 0 inferior
good If Supply decreases . . . IE , , 71 elastic E , , =1 unit
elastic IED=O no relationship p . sz s . E , ( I inelastic IED 7 0
normal good p , i s , pp s , Percent change from x. toxz : Cross
Price elasticity of Demand D D 2 - ' 100.1 . ( Good At Good B) ' .
a measure Of QQ ' on a X , t.AM/.LlQ t.IQ > tap consumers '
responsiveness for when demand is more inelastic when demand is
more elastic* The more horizontal a demand Good A when the price of
B Curve is , themoreelasticitis s s p Changes . * Ifa profit -
Maxim 't , IT E"f .EE#ggq2in9firmiscurrehHyxqD=yaQD( Good A) "
%ttEp ( s on floor = 1111 " pricing in an inelastic 31111 11 11
Ceiling = = . ' 1.41 > ( GOODB ) binding ps shore . = region of
demand , ceiling 3000 p D . = ii. iii. ii. a they should KED )0
substitutes 489070 38,0,6%0 increase price K If a profit -
maximizing firm is KE D=0 Unrelated prefloor s postfloors currently
pricing in an elastic KEDCO Complements bo%Moo|cs 120451 , 11111
floor region of demand , it is Unclear 1111 , new '= DWL whether
they should change KASIKEDI increases , the - aa - nonbinding Ps =
Ps - price relationship blwthezgoods floor = is . is * Revenue is
maximized ata P soo 300 s , price where demand is increases unit
elastic Price Floor :a government mandated a sz HIE ,> 1 I { PT
minimum price g- Cs S B D) subsidy Revenue Costs ( QH
RevenueCoststprice ceiling :a government Ernie DWL , F Wedge
Profitytproatpyofitt Profitytprof.tl?Ygfittmandated maximum price
3- " ' " ' " ' " " I B,PIsefTIDeterminants of More Tax Burden : the
amount by which stooyjo Q D Elasticity of Demand Elastic if ... a
tax causes prices to increase need less necessary ( decrease ) for
consumers ( producers ) Presubsidy Post Subsidy availability of
more available * More inelastic side is more CS A + B A + B+F+E
close substitutes substitutes affected by taxes subsidies PS F + G
Ft G + Btc market definition more narrow time horizon longer
Externalities : an action COST - ( B+C+D+EtF ) percentage of larger
TS At B+F+G At B+F+G - D consumer 's budget percentage Causesa
positive Negative * D= DWL effect On a third party Negative
Externality Own Price Elasticity Of egiadhY+ social cost = private
# + external cost supply :a measure of the Social Costs -- private
quantity &Wm}efFfiFe Sprivate cost responsiveness Of producers
outcome I competitive outcome costs + external Costs ==TO Changes
in prices = = D= private benefit - social benefit Social Benefits -
private Asean { s=%} benefits + external benefits Positive
E+emE.li?adYnys=priva+ecos+=sociaicos+ quantity DWL from Es )
Oiflawof supply holds Cease Theorem : The women 've { s ) I elastic
competitive outcome ; = social Benefit = private benefit + external
Es =/ unit elastic Socially Efficient = , = , Dprivate benefit
benefit Esc1 inelastic Outcome to an ex - Qpcose Determinants of
More Elasticity# supply Elastic if ... lethality Will be teach - K
Transaction costs can be time horizon iongertimehori . Ed Privately
if trans - prohibitively high in some cases zonslwlingoods ) action
costs are low , so the initial assignment of property production
shorter Production regardless Of the rights is important for
efficiencytime time ( across goods ) . perishability less
perishable Initial Property rights K The initial assignment of
property capital lower capital Total Surplus : Consumer surplus 't
rights affects payments blw parties requirements requirements
Producer Surplus + 1- externality
3. Intro Economics : the study of how goods Er services are
produced { allocated Macroeconomics : economy wide factors -
Unemployment , interest rates , GPP , etc . Microeconomics : the
study of how agents make choices tradeoffs
4. Absolute G Comparative Advantage Specialization When can
trade make people better off ? Model of International Trade
Elements includes : Could also include - Countries CZ )
transportation costs - goods (2) preferences - number of Workers
cost of production - labor productivity Model : Average Worker
Productivity TVs T-shirts Uxemburg 101 hour 501 hour Burdini I 1
hour 401 hour Luxemburg : 100 Worker hours Burdini : 200 worker
hours Opportunity Cost : the value of the next best alternative i.
e. Opp . cost of attending ND is the salary of a full - time job
Absolute Advantage L in producing a good or service ) : fewer
resources are Used in production comparative advantage : lower
opportunity cost of production David Ricardo ( 1772 - 1823 ) Theory
of Comparative Advantage AH Countries Can benefit from trade by
specializing in their comparative advantages regardless of absolute
advantages
5. LUX has the absolute advantage in producing TVs E T-shirts
Opportunity Cost of 1 TV : LUX - 10 TVs : 50 T-shirts Lux has 1 TV
: 5 T - shirts a comparative - advantage in opp . cost of ITV
producing TVs bk of lower But - Opp . cost 1 TV : Llotshirtsopp.
cost of 1 TV Opportunity Cost of 1 T-Shirt Lux - 50 T-shirts :
IOTVS Bur has a 1 T - shirt : ' 15 TV - comparative But - 40
T-shirts : | Tv advantage in 1 T-shirt : 1,40 + v / Producing
T-Shirts * In a 2 good , 2 country economy , a country Can't have a
comparative advantage in both If split Labor Hours * specialize 4 (
wlih a country ) Don't Trade TVs T-shirts TVs T-shirts Lux :
50.10=500 50-50=2500 100.10=1000 0 Bur : 100 . I = 100 100.40=4000
0 200.40=8000 600 tvs { 6,500t-shirts vs . 1000 tvs { 8000
shirts
6. . Lux gives up 25 = SOOTVS if they T produce ZSOO Stopp .
cost of producing 1 TV + - Shirts Most # of tvs LUX Would be
Willing to give up for 2. SOO + - shirts : 500 Min . # of TVs that
BUR needs to be willing to give up ZSOO t-shirts : 2500 -40 = 62 .
S q 40 = Opp . cost of producing 1 TV ( Burundi gives up 2500/40=62
. S tvs if they produce 2500 t - shirts ) Terms of Trade : ratio of
goods at which countries agree to trade at Suppose Luxembourg 4
Burundi trade 2. soot - shirts for 250 tvs TVs T . shirts
Luxembourg 1000 - 250=750 0+2500=2500 Burundi 0 + 250 = ZSO
8000-2500=500 Production Possibilities Frontier LPPF ) : A
graphical depiction of the goods a country can produce given their
productivity 4 constraints
7. PPFS and CPFS ; pros { Cons of Trade Burundi 's PPF Quantity
* straight of Line because TVs opportunity slope : - ' 140 cost is
200 Constant (1200) = This Could 8000 Change L guns (40200) G
butter example luantity of T-shirts better resources would be Used
first ) butter Consumption Possibilities Frontier LCPF ) :
graphical depiction of what a country can Consume given its
productivity , constraints { trading opportunities World Terms for
Trade : 10 t-shirts for Itv consumption with specialization { *
held another country trade all + - shirts to trade with blc for TVs
On Burundi can only g s 1000 . produce 8000 t-shirts 800. 3 g- TVs
slope = - ' 110 8 ( PF production s if complete X S specialization
S A J 200 800 50%0 10800 T-shirts
8. Winners da Losers from International Trade Winners Losers
Consumers da producers firms G workers in import from an increased
variety intensive industries of goods da services . reduced
government revenue firms G workers in export from tariffs ( taxes
on imports ) intensive industries MAYBE lower prices increased
expenditures on displaced workers Trade has essentially the same
impact , but Viewed politically different - cheaper - displaced
workers
9. Markets da Demand Unregulated markets can give the best
outcome Spontaneous ( or emergent order ) : a phenomenon in Society
that is the result of human action but not human design- prices
companies must set prices in an attempt to find the perfect price
based on economic activity - ex : language How are prices
determined ? Why do they change ? How do they affect market
activity ? * When the price of a good goes up , people want to buy
less of it Law of Demand : The price of a good or service is
inversely related to the quantity demanded Demand : the
relationship between the price of a good or service 4 the quantity
demanded Quantity Demanded Price price ( P ) 200 - Tickets 42 200
iso - 42 150 52 100 ioo - 77 50 Dencaurnvde 86 0 so - If a demand
curve is o , Quantity downward sloping , it 412 154 717 86 ( Q )
satisfies the law of demand
10. * When the price of a good increases , the demand for that
good stays the same If the price of a good increases , demand does
not change , so instead the quantity demanded decreases ( movement
along the curve ) p Apples A shift to the right in the demand Curve
is associated with an increase in demand D , Dz p Q Bananas As
population increases , demand increases 3- - - - - , - . . , pop 9
1 1 D ! b , ! Dz W p 200 700 Q demand increases , Overalls If
income goes up , demanddecreases if inferior good ,ex : Would
rather buy nicer clothes,, possible,Inferior Goods : as income DaD
, i possible a increases , demand decreases Ormal Good : as income
increases , demand increases
11. P Jelly p Peanut Price of jelly 4 Butter Quantity Demanded
of Peanut Butter ii.=:: : !a ! ! Q Dz D , Q 140 200 Increase in
price of labor increase in demand for physical capital p Physical
capital Price of labor T Demand of Capital - increasing D , DZ Q *
Determinants of Demand - population- income - prices of substitutes
E complements - expectations- tastes 4 preferences . substitute
Goods : an increase ( decrease ) in the price of one good causes an
increase ( decrease in demand for the other good . Complimentary
Goods : an increase ( decrease ) in the price of one good causes a
decrease C increase ) in the demand for the other good
12. Demand ; Market Power P Doritos If Cost of Production T
Then Demand stays the same But price T Q P TVs today ) If
expectations 1 ( expect price of TV to decrease in future ) thlh 1)
today of tvs Dz D ' Q Consumer Surplus ( CS ) : difference between
Consumers ' willingness to pay LWTP ) G the Price CP ) of the good
or service Cs = WTP - P p P Total CS= 125 10 - 10 - WTP = 7 p = 5 P
= SO ( S = I bh WTP - 3O+h Unit = 'z( SO ) ( S ) p= s . (S{ . Pts -
= 125 D D 310 Q 0 2's go Q
13. Supplier Behavior w/ Market Theory of the Firm Power
Revenue : income a firm receives for engaging in its business
activities Costs : expenses a firm incurs from engaging in its
business activities profit : total revenue LTR ) minus total cost
CTC ) TR - TC P Coffee io . Total Revenue : Price Quantity = TR
when Q =3 is 73=5121 > - a TR when Q=4 is 64 = $246 = MR =TRy -
TR 3=24-21 = $3 = B c 4 T 4 = D Btc A + B C - A 0 1 1 }4 1 1 11 i.
to Q Marginal Revenue CMR ) : additional revenue a firm receives
from selling 1 more Unit i. e. derivative of total revenue function
P p Q TR MR i. 10 0 0 q = 9 1 9 7 i 8 2 16 = 7 3 21 5 i D 3 1 1 1 1
1 1 1 1 1 1 Q 6 4 24 , 5 5 25 - i * MR is twice as Steep as 4 6 24
- 3 demand { has same Vertical 3 7 21 - s intercept as demand 2 8
16 - > * is linear { firm can set , q 9 prices 0 10 0 - 9
14. Marginal Cost ( MC ) : the additional cost a firm incurs
when they sell 1 more unit of output $ $ $ $ 5 - 5 - 4 - MC MC 3- 3
- a capacity constraint MC | I Q ' - 1 1 Q Q Q 100 900 100 900 1100
00 I no capacity constraint, stable cost structure
15. Market Outcomes P MAXTR :S P . For Q > 4 price tomax-
profit : MR< MC I $6 produce less - = . For Q< 4 . - o GMRhp
Q : F.mc MR > MC - - - : .mr D produce more TRTQT TRIVQT 0 ' 1
its To : 1. Find Q* where MR=MC P*= 70 p . a , MCsoi : 2. Trace "
up " to the demand s *= curve for P* i.It's !noB'' ' E Q * = best .
Market Power : the ability for a firm to set its Own price . Cost :
whatafirmmustpayto produce something . Price : what a firm charges
for what it produces CS= WTP - p Producer Surplus ( PS ) =P - MC
Difference between price received 's the Cost Of production
16. P woo - What is the CSG PS from the transaction of the
wY*Eb88I . ;:is , zothtv ? = I mc CS= 700-600=100 Ii MR D Q T T ' '
zfto ' ' ' ' ' go WTP p* PS = 600-200=400 T T p* MC P Cs = 1 1 11 -
= PS = - MC:MR D Q P P, Pz mc , MCT Pt QT Mcz MR D Q Q , Qz P D Pz
PT QT P , D , MC Dz MR , MRZ Q Q , Qz
17. P Income T p , * Bananas are inferior good D Pz Pt Qtr MC D
,MRZ Dz MR ' Q Qz Qi P Us Autos If Ds+ee| :' Mcz then Pstealn MC ,
Mcauto T MR DQ Panto T Qz Qi Qauto t Types of Shifts Changes in PEQ
D pp QT D Pt Qt MCT PT Qt Mct Pt QT ) Pcorn T Mcchips T Pchipstn
Qcnipst 2) Psalsat Dchips Pchipstn Qchipst SO Pcnipstn Qcnips
?
18. Market Outcomes Between 2006 E 2008 , PinsuranceTQ= Changes
in Predictions supply - side problem MC or D about PGQ D Pt QT ex :
problems occurred when D Pt Qt insurance incorporated MCT PT Qt how
health information Mct Pt QT systems ( MCT ) Characteristics of
Perfect Competition : - homogeneous goods - free entry E free exit
( no barriers to enter 1 exit market ) - large number of firms -
large number of customers - full information * In perfect
competition , firms take market price as given ( price takers ) P
Individual Firm in perfect . At a price of $5 , firm can
competition sell as many units as possible market firms have no
incentive to price = 5 D= MR set lower price because they can sell
unlimited units at $5 Q . every firm is small , and there p vs .
are so many firms that if a Firm w/ firm raised their price , no
Market Power One would buy MR D Q
19. = y individual firm 's supply curve - MC =s If P =3 , Q =
60 - If P= 6 , Q = 90 Pz = 6 ; Dz = MRZ p , =3 't .#D. = MR , *
would not want to produce = l 1 i I l l 1 1 11 USS than 10 bk
unprofitable 10 60 90 Q , Qz . MR , > MC , Law of Supply :
Prices E quantities supplied are directly related As PTQT Or Pt Qtr
* s= Market supply P Individual Firm in P Perfect Competition
Market Level in Perfect Competition ( individual firm 's supply ) (
w/ 100 sellers ) MC = S s = MC B = 5 1 1 1 1 1 1 1 1 1/1 11 D3= MR
} P , =3 1 1 1 1 1 - 1 1 1=1 1 1 D , = MR , Pz = 1 1 - i 1 1 1 1=1
1 1 1 [1 1 11 Dz = MRZ . 1 Q Q tz , 0,93 100 SOO 900 9 00 ( because
100 sellers ) * When the price of a good goes up , supply stays the
same C i. e. an increase in the price of a good does not change
supply but instead Changes the quantity supplied )
20. P * s ' = Mc ' shift to the right in - sz = ME Supply or
demand is 4 t ii iii. i 1 1 1 1 i , 1 associated With increase in
Supply or demand i 1 1 1 s ' Q Determinants of Supply : - marginal
cost shifter - change in input prices - technological productivity
change- weather - expectations about future prices - number of
sellers P Individual Firm p in Perfect Competition Market Level MC
S = MC myriad . =D= Mr 43 !"!."." ;. . - D = Q Q Q*
21. Perfect Competition E supply P 20 S = MC = = At P= 12 -
surplus Qs = 600 Q D= 400 = ~ 12=1 1 I 11 I 1 1 1 ( (11 QS ) Q D PE
" ' " Surplus Of 600-400=8Ill11 itT.FI 1 1 11 ( 200 units - . At P=
8 = shortage Qs = 400 Q D= 600 = = = D Qs < QD = - . 1 I I 1 I I
I I 1 1 Q Shortage Of 600 - 400=400p 600 200 Units QD = QS A
perfectly competitive equilibrium occurs at a price where the
quantity demanded is equal to the quantity supplied P MC=S Cs PS =p
- MC " ( ' b's" " .io#surpfusEsYIEIps D Q
22. P p S S = MC p= 7001-45 . , soap # e- DWL 500 - pig- DWL P
= 300 D Ps D I 1 Q 1 Q 30 50 30 50 At P= 700 At P= 300 Q D= 30 Qs =
30 Dead Weight Loss ( DWL ) : the reduction in total surplus from
market inefficiencies p S = MC Mf negative surplus generated D= WTP
Q * total surplus tells nothing about who benefits A perfectly
competitive equilibrium is both stable 4 efficient L i. e.
maximizes total surplus )
23. Expectations C for seller ) T s PT Qt p p S , 52 S , B c- A
52 S Pz S P , Pf Q T P , A PT Qf pz B . Q Q Q , Qz Qz Q , Shifts in
S } D Changes in PdQ Mct =s Pt QT MCT =S PT Qt1) PT QT D Pt Qt
24. Elasticity Own Price Elasticity of Demand : a measure of
the responsiveness of consumers to a change in the price of a good
or service E. = gallop ' ( percent change in quantity demanded ) p
( percent change in price ) own price elasticity of demand 1 1 or T
1 EDCO as long as the law of demand holds If IE ,, 1 > 1 Demand
is elastic it Q' ' 1 > 1%4 PI ( big response ) If LED 1=1 Demand
is Unit elastic 1%4 QDI = ltllpl If 19>1 ( 1 Demand is inelastic
HIQDI ( It . API ( little response ) If the absolute value of ED =
2 and P increases 10.1 . the QP = - 20% a , / 10.1 . |=2 Q D= - 2(
10%1=-201 . If P increases from $2 to $34 QD decreases from 2000 to
1600 , is E ,> elastic luhitelasticl inelastic ? 1600 - 2000 -
400 2000 2000 = -20%3- 2 = 1 go , inelastic 2 2
25. Percent Change from X. Xz : Xz - Xi 100% X , Qz - Qi Qi =
Qz - Q , P , ED = pz - p , Q , Pz - P , Pi P a . If P 89 , What is
ED ?P ,=8= I I -2 - 1 - 2 2 - = = - 4 = 9-8 1 - 8 8 elastic1 1 ,
lz1 1 1 1 1 1 1 Q QZQ , : = If P 21 , what is Ep ? = 9-8 1 = 8 8 1
. - - 1 - 2 - 1 4 FEE2 2 inelastic1 1 1 1 1 1 1 1 lqlqQ Q , Qz :
%6% . see Feeney- 11 1 11 1 . . - = - - 1 1 1 1 1 1 1 Q
26. p * The more horizontal a demand P, l ' ' ' ' 1 ' 111 curve
is , the more elastic it is Pz 1 1 1 1 1 1 1 1 1 1 D , Dz For D , ,
there's a large t.IQ 's Q in comparison to % QP , so D , is more
elastic than Dz P Remember : Mastic If I EDI L I inelastic yunit
elastic IEDI = I Unit elastic tgneiastic IEDI > 1 elastic a * If
a profit maximizing firm is currently pricing in an inelastic
region of demand , they should increase price * If a profit
maximizing firm is currently pricing in an elastic region of demand
, it is unclear whether they should change price If IEDI ( I { PT
If IEDI > I E. PT Revenue T Costst ( Qd ) Revenue t Costst ( Qtr
) profit T Profitt Profitt Profitt profitTd profit ? 4 Revenue is
maximized at a price where demand is unit elastic If demand is
inelastic , an increase in price increases revenue If demand is
elastic , a decrease in price increases revenue
27. Determinants Of Elasticity of Demand More Elastic If ...
need . less necessary . availability of close substitutes . more
available substitutes market definition . more narrow definition
time horizon . longer time horizon percentage of consumer 's budget
smaller percentage Own Price Elasticity of Supply a measure of the
responsiveness of producers to changes in prices { 5 = % QQ s % 4 P
If the law Of Supply holds , Es > 0 If Es > 1 supply is
elastic Es = 1 supply is Unit elastic Es < 1 supply is inelastic
P 52 S , is more elastic than Sz P, 11 11 11 1 ' ' ' 5 ' The more
horizontal a Supply Be in i , curve is , the more elastic it is Q
Jeterminants of Elasticity of Supply More Elastic If ... . time
horizon . longer time horizons L within goods ) production time
shorter production time ( across goods ) . perishability . less
perishable . capital requirements lower capital requirements
28. If Demand increases . . . S Be S Pz P , P , Dz Dz D , D , 1
Qz Q I Qz t.IQ > tap tap ) t.IQ when supply is more elastic when
supply is more inelastic If Supply decreases . . . pz 52 Sz . S ,
PZ S , P , P , D D Qz Q ) QZ Qi t.AM/.LlQ t.IQ > ' tap When
demand is more inelastic when demand is more elastic
29. A B C s s inelastic Pz 1 1 1 1 1 1 1 Pz 1 1 1 1 1 1 R S P,
1 11 1 1 11 = = Dz p , . 11 1 11 1 1 ' . elastic = - p , 1 1 | , ,
- - - - Dz - D Di == = = 2 == elastic = =D, inelastic - = D , - = Q
, Qz Q , Qz Qi QZ * perfectly competitive market , firms don't have
market power A : an academic hospital with excess capacity (
elastic supply ) treating high severity patients ( inelastic demand
) B : a non - academic hospital with moderate capacity L relatively
neutral supply ) with a moderately severe case load ( relatively
neutral demand ) C : A capacity constrained group of rural
practitioners C inelastic supply ) treating low severity patients L
elastic demand ) If there is an equivalent increase in demand ,
which market would expect the largest increases in price ? Market
C
30. A B C S , S , S , P, I I I I I I 1 P, I I 1 1 11 I s P ' l
' = s s Pz I I I 1 I i 1 1 - 2 % I I 1 - I I I 1 1 - DZ % I I I 1 I
[ 1 1 - 2 I D inelastic = = elastic = = D Qi Qz Q , Qz Q , Qz A :
Gas stations close to car rental agencies at airports L inelastic
demand because of renters needing gas before returning cars ) B :
Gas stations operating in large suburban shopping areas ( elastic
demand because large amount of Competition ) C : Gas stations
clustered off of interstate exits ( relatively neutral demand
because competing With other gas stations at exit { other
surrounding exits ) Income Elasticity of Demand : A measure of
Consumers ' responsiveness to changes in income I E D= %aQ ' ' If
IEDCO then inferior good %dI IED = 0 tbheonaunsorghgtteogshib
between DEI IE 's > 0 then normal good Cross price elasticity of
Demand ( Good At Good B ) : A measure of consumers ' responsiveness
for Good A When the price of Good B changes KEDAB = %4QD( Good A)
If KED > 0 substitutes % Llp C Good B) KED =O Unrelated KED ( 0
Complements * As 1) ( EDI increases , the relationship blwthez
goods increases
31. Government RegulationPrice Ceiling : A government mandated
maximum price Examples : interest usury laws ( maximum interest
rates ) , necessities ( utilities in US ) , rent control , price
gouging laws often leads to shortages because suppliers lose
incentive S nnmgbkEEF.ly a on 3 1 1 11 ItI 1 Ceilingbinding ps
shortage Ceiling 3000 D 4000 7000 QS QD Price Floor : A government
mandated minimum price Examples : minimum wage , agricultural
support , alcohol } tobacco S 7 Y floor D 3000 6000 QD QS prefloor
postfloor S S CSbthodoirn ,9o .gs, , , 120 twlpsl=L 1 bwld floor -
Old - nonbinding Ps = Ps - floor = D - D 500 300
32. wage wage households S 7 5 floor 7 floor 6 1 1 1 1 - 6 11 -
1 1 1 - . - - - D - = - - . - firms - D a = = a 17500 200 500 490
10 people unemployed 300 people unemployed The success of raising
Minimum wage depends on how elastic the demand curve is . P Mcz 3-
in $2 MC , $2 per Unit tax On producers I - Q p D Individual Market
Level - Firm - MC post tax 7- Sposttax- ( + $2 ) - wpYff=5 - s - S
pretax- MC pretax - - 3 - - - - 1 - I I I I I I I 1 Q I I I I I I I
I I Q 5 100 SOO 900 A per unit tax on producers shifts the market
supply Curve " Up " by the amount of tax ( S ) P sposttax Consumers
pay $5 consumers pay = 5.11iii. s pretax After - tax price for
Sellers = $3 sellers receive =3i Iii - - D = Q
33. P s post tax Consumers pay $5 5.tax wedge { t $2 s pretax
After - tax price for sellers = $3 3- is Total tax revenue :$
2500=511000 ' Q 500 Tax Wedge: The difference between the price
consumers pay G sellers receive due to tax Tax Burden ( Or Tax
Incidence ) : The amount by which a tax causes prices to increase L
decrease ) for Consumers ( producers ) Tax Burden Consumers : 5 - 4
= $1 per unit Producers : 4 - 3 = $1 per unit * The more inelastic
side Will bear a majority of the tax burden p Tax Revenue # of
units solid per unit tax S post tax 500 2 buyers pay = 5 i 1 l l I
i 5 Pretax $ 1000 severs receive =3%sFn*Et " E. D DWL= (2200)=200
500 700 Q
34. Sposttax - S pretax 8- Original price = $6 buyers pay >
> - ' = $6 + $2 tax = $8 6- - sellers receive > s - - = If p=
8 Qs= 40 - = I D Q D= 20 2040 surplus = 40-20=20 Units producers
don't pass full Tax onto consumers P A per unit tax on consumers t
. $2 Shifts demand " down " by D pretax the amount of tax D post
tax Q p Producersurplus tax revenue CS s - tax - S $500 Revenue DWL
, 3h's " ' " ' " ' ' E ' I ispjoesttatxax consumer surplus tax
revenue 5007100 Q $500 In perfect competition , market outcomes ( P
,Q , surplus ) don't depend on which side of the market pays the
tax P s Tax Burden buyers Consumers : 110 - 100=51101 unit pay =
110 4 Producers : 100-60=15401 unit 100 - srLIFE 60 - D pretax 40
so QDPost tax
35. Subsidies s , $2 subsidy to producers - $2 52 t s , $40
subsidy to producers 120 . iii iii. Buyers pay $80 no - 52
producers receive $120 80 1 1 1 1 1 1 it= D Producer price = Cost
to consumers + subsidy , T 120 = 80 + 40 50 70 Total Cost of
subsidy = per unit subsidy # of units sold 2800 = 40 70 Pre -
subsidy Post - Subsidy CS 1250 2450 PS I 250 2450 Cost - 2800 TS
2500 ) 2100 Total Surplus for 7Oth Unit : CS 80-80 = 0 ps 120 - 120
= 0 Cost - 40 TS - 40
36. 5 , Presubsidy Post Subsidy CS A+B A + B+F+E A 52 ps F + G
F+G + B + C B D) subsidy Cost - ( B+C+D+EtF ) F Wedge TS A+B+F+G At
B+F+G - D G * D= DWL D Total Surplus always decreases * $2 Subsidy
to Consumers $2 Dz :$40 subsidy to Consumers Dz After - sub price
for consumers : D , $120 - $40 = $80 Producers receive : $120 $70
Subsidy to consumers % . . , ...,% . , s NOSUB price for Consumers
:$ 100 = aftersubpricefor Consumers : $40 == Dz Consumer benefit '
. $60 I I D , * More inelastic side gets more benefits
37. Externalities Externalities : an action causes a positive
or negative effect on a third party ( a market inefficiency ) - ex
: secondhand smoke Social Efficiency : the outcome maximizes total
surplus Private Costs : the value of costs only incurred by the
firm External Costs : the value of costs imposed by negative
externalities Social Costs : private costs + external costs Ex :
What is the socially efficient number of transactions if there is a
per unit external cost of $20 associated with the production of the
good ? 4,000 units Sz = S , + social cost 70 - I I I 1 S , so l ' '
- HOW many units Will be sold in a perfectly competitive market ? =
= D 1 1 5000 units 4000 5000 52 $20 per unit externality 70 iii. '
. s , Sale Of 4000 th Unit : so ill ' E ' . ( S = 65 - 50 = $15 -
PS = 50 - 45 = $5 ) External Cost = $20 40005000 Total Surplus =
0
38. social Cost = after tax supply curve private cost 45 - zs -
What per unit tax should the , D government impose ? $20 5000
Pigouvian Tax : a tax designed to correct negative externalities
Absent government intervention , a competitive market production
level in the market for a negative ( positive ) externality will
result in more ( less ) units being produced Private benefit :
value of benefit only to consumers External Benefits : Value of
benefits imposed by positive externalities Social Benefit : private
benefit + social benefit Pigouvian Subsidy : a subsidy designed to
account for positive externalities
40. Coase Theorem Your roommate shores . You value peace E
quiet at $100 Roommate values not having to wear nasal strips at
$50 socially Efficient Rules Protect Peace Rules Protect the
Outcome : E Quiet Right to Make Noise Roommate wears Outcome :
Roommate Outcome : Roommate nasal strips wears the nasal Wears
nasal strips strips You pay between $50 G $100 to roommate Cease
Theorem : The socially efficient Outcome to an externality program
will be reached privately if transaction costs are low , regardless
of the initial assignment of property rights Transaction Costs :
the costs incurred in making an economic exchange ( e. g. time ,
contracting , litigation Costs ) Property Rights : Entitlements
which holders Cannot be forced to give up Liable : legally
responsible to compensate another party for damages Socially
efficient outcome ( Coasian Framework ) : Final assignment of
property rights that maximizes net benefits ( benefits - costs
)
41. Example : Factory { Farmer # 1 - cost of pollution reducing
technology = $95,000 - 1,000 farmers - average Cost of pollution =
$1001 farmer Socially efficient outcome : factory adopts technology
95,000 70,000 ) large small If Farmer A keeps a large herd , Farmer
B Will keep a large herd . ( 40,000 > 20,000 ) large small Both
farmers have a dominant strategy of always Choosing a large herd
Solutions to Tragedy of the Commons - private solution through
negotiation - social norms - use restrictions - licenses -
establish property rights - sanctions 1 punishments - littering
fine - WTO - taxes 1. generate revenue 2. Curb Use
45. Free Rider Problem : individuals can benefit from public
goods without paying a share of the cost Spending on public goods
can generate a social multiplier ( i. e. the total benefits exceed
the benefit received by the individual ) Solutions to DWL from
market power : - price ceiling at $5 problem : How does the
regulatorknow E Update this price ? - subsidy to consumers 1
producers problem : rewarding the firm for charging too high of a
price S post subsidy price ceiling
46. Theory of the Firm Industrial Organization ( 10 ) Building
Blocks Explicit Costs : physical transfers of money for business
activities Implicit Costs : foregone profits from engaging in
business activities ( Opportunity costs ) ( I . e. foregone
interest ) Accounting profit = Total Revenue - Explicit Costs
Economic Profit = Total Revenue - Explicit Costs - Implicit Costs
If economic profit = 0 , then the firm is making exactly as much
accounting profit as they would be in their next best alternative
Note : we will assume " costs " include explicit E implicit costs
Sunk Costs : a cost that has already been paid E cannot be
recovered Sunk Cost Fallacy : incorporating sunk costs into
decision making
47. Suppose a firm has made a $10,000 lease payment at the
beginning of a month . If it pays $5000 in labor , material , G
implicit costs , it will generate $6000 in revenue . Broad96000 -
sooo - oooo = -9000 }pwritdauceDon't Produce profit = - 10000 Fixed
Costs : Costs that remain constant as output Changes Variable Costs
: Costs that change as output changes Total Costs ( TC ) = Total
Fixed Costs CTFC ) + Total Variable Costs CTVC ) Short Run : a
period of time in which some costs are fixed Long Run : a period of
time in which all costs are Variable Exit Rule : exit the industry
in the long run if current E future projected economic profit is
negative TC > TR Total Cost ( TC ) = AFC + AVC. Average Total
Cost ( ATC ) = Quantity of Output ( Q ) Average Fixed Cost ( Afc )
= Total Fixed Cost CTFC ) Q Average Variable Cost ( AVC ) = Total
Variable Cost ( TVC ) Q Marginal cost = TC Q
48. ;offing, =PF.tatIFE.t8 70 ( 300 ) - 60 ( 300 ) = 3000 MR DQ
3 Ways to Write Out Profit 1. Total Revenue - Total Cost 2 . P . Q
- ATC . Q 3 . Q ( P-A_TC) profit per unit
49. Game Theory Game Theory : the formal study of strategic
decision making pioneered by Jon von Neumann ( 1903 - 1957 ) Nash
Equilibrium : a set of strategies such that no player has incentive
to unilaterally deviate i. e. Conditional on what everyone else
does , no one Wants to change their decision irm B High Low High 8
, 8 0 , IQ Firm A - Nash Equilibrium Low 1-0,0, payoff to pay off
to row player column player Dominant Strategy : a strategy that
leads to at least as high of a payoff as any other strategy
regardless of other players ' strategies Prisoner 's Dilemma : the
Category of games in which players have a dominant strategy to "
cheat ' ; preventing beneficial cooperation from Occurring Builders
Metric Us Metric 5 , LO 0,0 Toolmakers us 0 , O, 2- , 4- 2 Nash
Eauilibria
50. Coordination Game : the category of game in which multiple
Nash Equilibria exist , each corresponding to the players
coordinating on their actions Player B ROCK Paper Scissors ROCK 0,0
- 1,11 , -1 Rafter paper 1 , - I 0,0 - 1 itScissors - 1,11 , - I
0,0 Nash Equilibrium : being as random as possible Mixed Strategy
Nash Equilibrium : a Nash Equilibrium in which players randomize
over a set of actions [ enter I fight C- S , s ) don't fight ( 10 ,
10 ) don't enter ( 0,20 ) payoff to first moveI tfay Off to second
mover ( Eehters , I doesn't fight ) is a Nash Equilibrium E a
Subgame Perfect Nash Equilibrium LE doesn't enter , I fights if
entry ) is a Nash Equilibrium Sequential Rationality : players must
behave optimally at every stage of the game
51. Sub game Perfect Nash Equilibrium : A Nash Equilibrium that
satifies sequential rationality Ci. e. it rules out non - credible
strategies ) Backwards Induction : the process of working backwards
to ensure that sequential rationality is satisfied product L - 10 ,
-10 ) B product don't produce ( SO , l ) A product ( I , 50 ) don't
produce B ( 10 , 10 )don't produce ( A produces ; B doesn't produce
if A produces , B produces if A doesn ' t ) is a Subgame Perfect
Nash Equilibrium doesn't satisfy sequential rationality ( A doesn't
produce ; B produces if A produces ,d B produces is A doesn ' t )
is a Nash Equilibrium product ( -10 , 2) B $12 Subsidy product
don't produce ( SO , l ) to B if They A product ( 1 , 62 ) choose
to don't produce B produce don't produce ( 10 , 10 ) SPNE : ( A
doesn't produce ; B produces no matter What )
52. Industrial Organization Industrial Organization ( 10 ) :
the study of the strategic behavior of firms , regulatory and
antitrust policy , and market Competition Oligopoly : a market
Structure dominated by a few firms Monopoly : a single entity
producing a good or service with no close substitutes Sources of
Monopoly ( Market ) Power : patents , copyrights , trademarks
access to rare resource ( e. g . DeBeers ' diamonds ) production
process - high fixed costs ( utilities ) innovation ( e.g. iPod )
tastes government ownership ( e. g . USPS ) Natural Monopoly : a
monopoly with decreasing average total cost over the entire
relevant range of output :( AMTE Q
53. How much profit does this natural monopolist make if they
are not regulated ? : . Profit = Total Revenue - Total Costs = = P
. Q - ATC Q 50 8000 = 60 ( 400 ) - 40 ( 400 ) I- ATC - MC - MR D 1
1 I I I I I I I Q 500 What price ceiling would the government set
to ensure that the monopolist makes zero economic profit ? P profit
= P . Q - ATC . Q = Q ( P - ATC ) : If P= ATC , profit = 0 : para
Price ceiling to ensure monopolist makes so : zero economic profit
= $30 . Mc pricing - Atc If P= 30 , ATC = 30 Profit = 0- MC- D 1 1
1 1 1 1 1 1 1 Q sooniwdpffiocinng Average Cost Pricing : Regulating
a monopolist To price at average cost In long run , monopolist
probably Will not exit market because still making accounting
profit E making as much as in 2nd best alternative K Can't know
accounting profit from graph accounting profit will always be
greater than economic profit ; so if economic profit =O , then
accounting profit is positive
54. : Socially efficient quantity = 800 Isocially efficient
price = $20 50 I- ATC - MC - MR D I 1 I I I I I I I Q 500 Marginal
Cost ( Plus ) Pricing : regulating a monopolist to price at
marginal cost , which requires a subsidy to the firm in Order to
Cover fixed costs If P = 20 , ATC = 28 profit = 20 . 80 - 28 . 80 =
- $6400 If the monopolist is regulated to price at marginal cost (
Without subsidy ) , the firm Will exit in The long run because it
is making negative economic profit Cons of ATC Pricing : - low
quality products - firm doesn't have incentive to cut Costs If
entry occurs : . Competitive effect : entry increases price
competition which leads to a greater overall quantity C total
surplus increases ) cost effect : firms individually Will produce
less which increases average costs reduces surplus
55. Characteristics of Monopolistic Competition - large amount
of buyers sellers } same as perfect - low barriers to entry 's exit
Competition - differentiated products In the long run in
monopolistic competition , If short run economic profits are
positive increased entry reduced demand for individual firms
reduced profits If short run economic profits are negative
increased exit increased demand for remaining individual firms
increased profits In long run , in monopolistic competition E
perfect Competition , economic profits are zero
56. Health Economics Health Economics : a branch of economics
that analyzes both micro - E macroeconomic health G medical Care
related issues in an environment with scarce resources Premium :
the payment made to an insurer solely to Obtain Coverage Premiums T
P T QT Moral Hazard : changes in behavior due to risk protection
Adverse Selection : when an individual knows more about their true
risk level than an insurer and is thus more likely to purchase (
select into ) insurance - i. e. history of breast cancer Principal
- Agent Problem : occurs when an entity L " the agent " ) is able
to make decisions on behalf of another entity ( " the principal " )
, E their incentives are not necessarily aligned St. Joseph
Purchase Don't Purchase Memorial Purchase 30 , 40 70 , 30 Don't
Purchase To, 850 , 60