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Lecture 19

HON 1302 Lecture 19: In-Class Review for Quiz #3

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HON 1302

Microeconomics Review for Quiz #3 Includes material from Quizzes 1, 2, and 3 Supply and Demand 1. Consider the market for cars, which use steel in production. If the cost of steel increases, what is the effect on supply and/or demand? a. The cost of steel is part of the cost of production for car companies b. Costs of production is a determinant of supply, thus supply is affected c. Since cost of production increases, supply decreases d. As a result, equilibrium price increases and equilibrium quantity decreases Elasticity and Percentage Changes 1. Elasticity of demand = percentage change in quantity/ percentage change in price a. Shows you the how much the quantity changes as a result in the change in price 2. If you know the elasticity, you can know how total will be affected 3. If elasticity is… a. Less than 1 = inelastic good i. If good is inelastic, a firm should raise prices to increase total revenue b. Equal to 1 = unity elasticity i. If good has unity elasticity, one cannot raise revenue by changing prices, so instead the firm should focus on decreasing costs of production c. Greater than 1 = elastic good i. If good is elastic, a firm should decrease prices to increase total revenue 4. Cross elasticity of demand = percentage change in quantity of Product A / percentage change in price of Product B a. Shows how strongly two goods are either complements are substitutes 5. If cross elasticity is… a. Less than 0 = two goods are complimentary b. Greater than 0 = two goods are substitutes Costs and Revenues for a Firm • Total Cost (TC) – the sum of all costs in production o TC = Costs X Quantity o Calculated by finding the area under the average costs curve on the graph • Total Revenue (TR) – the sum of all money received from sale of goods o TR = Price X Quantity o Calculated by finding the area under the average revenue curve on the graph • Average Cost (AC) – the sum of all costs divided by the quantity of goods sold o AC = TC/Q • Average Revenue (AR) – the sum of all money received from sales divided by number of goods sold o AR = TR/Q • Marginal Costs (MC) – the additional cost of producing one unit o MC = Change in Costs / Change in Quantity • Marginal Revenue (MR) – the additional revenue received from selling one additional unit o MR = Change in Revenue / Change in Quantity • Graphs: • How does a firm choose how many units to produce? o Produce where marginal costs equal marginal revenue o The reason for this is because you want to produce up to the point where the revenue received from the sale of a good is less than the costs needed to produce that good o If the costs incurred in producing the good is greater than the additional revenue you will receive, you will start having losses for each unit made Market Structures • Perfect Competition o An id
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