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Final

Microeconomics FINAL EXAM Review Khyati Antani.pdf

16 Pages
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Department
Economics
Course Code
ECN 104
Professor
Tsogbadral Galaabaatar

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th th Microeconomics class 6-12 May 18 to June 8 /2013 Chapter 6 Firm: A single business organization. Ex: Nike, Adidas, Reebok, Etc. Industry: A group of firms producing similar products. Ex. Sporting industry Monopoly: Only one firm in the entire industry. Examples of firms: – Tina’s taxi service: Sole proprietorship| Tim Horton’s: Franchise| | S&K associates: Partnership | Bombardier: Corporation | Canada Post: Crown corporation Change in total product **TP= Total Product | MP= Marginal Product MP=  Not really important Change in Worker input TP AP= Average Product  AP= ** # of Workers Short Run Production: Some resources are fixed other resources are variable Short Run Production (Below): # of Workers TP MP AP 0 0 - - Increasing 1 10 10 1 Returns 2 25 I 15 I 12.5 3 45 20 15 4 60 25 15 Diminishing 5 70 10 14 Returns 6 75 II 5 II 12.5 7 75 0 10.7 Negative 8 70 -5 8.75 Returns 9 63 III -7 III 7 (Theoretically) 75 Bell Shaped Curve TP TP I II III AP # Of Workers MP Microeconomics class 6-12 May 18 to June 8 /2013 Relationship between TP & MP (Total product & Marginal product) 1. When MP increases, TP increases at a faster rate 2. When MP decreases, but is positive, TP increases at a slower rate 3. When MP is zero, TP is maximum 4. When MP is negative, TP decreases Relationship between MP & AP (marginal product & Average product) 1. When MP > AP, AP ↑ 2. When MP < AP, AP ↓ 3. When MP = AP, AP is Maximum The law of diminishing returns: Other things being equal, as we add more and more variable resources to fixed resources eventually TP increases at a slower and slower rate. Explicit: Out of pocket expenses paid to others Costs Implicit: Costs of using one’s own resources, which is not paid out **(Total Revenue) TR= Price x Quantity** Accounting Profit= Total revenue - explicit costs Economic Profit= TR – (Explicit cost + Implicit cost) = Accounting profit – implicit cost If economic profit is ‘0’ (break-even) it means the producer still gets to keep the accounting profit/Implicit cost. “This is called normal profit” Short run cost of production: TFC (total fixed costs, Ex. Rent, insurance premiums, Overhead costs) Constant at all levels of output (TC) Total Costs TVC (total variable cost) a. ↑ with level of output b. If output is 0, TVC=0 TC=TFC+TVC In the short run if output is ‘0’, TC=TFC Microeconomics class 6-12 May 18 to June 8 /2013 AFC (average fixed cost) AFC=C Q TVC AVC (average variable cost) AVC= Q TC TFC + TVC ATC (average total cost) ATC= ORATC= OR ATC= AFC + AVC Q Q Q TFC TVC TC AFC AVC ATC MC 0 100 0 100 - - - - 1 100 90 190 100 90 190 90 2 100 170 270 50 85 135 80 3 100 240 340 33.3 80 113.3 70 4 100 300 400 25 75 100 60 5 100 370 470 20 74 94 70 6 100 450 550 16.7 75 91.7 80 7 100 540 640 14.3 77.1 91.4 90 8 100 650 750 12.5 81.3 93.8 110 9 100 780 880 11.1 86.7 97.8 130 10 100 930 1030 10 93 103 150 TC TVC Costs -TFC is a horizontal straight line -TVC starts at 0, increases first at a slower rate & then at a faster rate TFC -TC=TFC+TVC 100 TFC Q Microeconomics class 6-12 May 18 to June 8 /2013 ATC AVC -AFC decreases as output increases. “This is called spreading MC the overhead: AFC - AVC is a U-shaped curve Costs -ATC is also a U-Shaped curve and a)It is higher than AFC & AVC b)Its min pt. is after the min AVC c) It comes closer & closer to AVC as output increases -MC (Marginal Cost) -MC= △in TC AFC -MC is also a U-Shaped curve & it intersects AVC & ATC at their 0 Q minimum points CLASS 7 & 8 Continuation of Ch. 6 LAC: Long run average cost Initially, as a firm expands, its scale of output, it experiences ‘economies of scale’ (Advantages) 1. Bulk purchase Reductions in the ATC 2. Spreading the overhead 3. Cheaper finance 4. Division of labour Lower LAC 5. Managerial specialization 6. Better R&D (research and development) 7. Cheaper per unit marketing costs Eventually, if a firm becomes too big, it experiences ‘Diseconomies of scale’ (Disadvantages) 1. Co-ordination is difficult Increases in the ATC 2. Decision making longer Higher LAC 3. Strong unions 4. Close inspection by gov’t LAC: A flat U shaped curve I II III LAC Economies Diseconomies LAC <=> I: Increasing returns to scale LAC ↓ LAC ↑ LAC II: Constant returns to scale III: Decreasing returns to scale Minimum Optimum range efficient scale of output Q 1 Q Q2 Microeconomics class 6-12 May 18 to June 8 /2013 CHAPTER 7 -9 Joint intros Classification of markets # of sellers Ch9 Ch7 (Imperfect Competition) Ch8 -Perfect/Pure -Monopolistic -Oligopoly -Monopoly (MONO) competition (PC) -1 seller -Large # of sellers competition ex. LCBO, Microsoft (MONO COMP) Similarities in the markets: 1. Large #’s of buyers 2. Common goal of maximizing profit 3. Similar cost conditions 4. In every market P=AR 5. Profit is maximized at that level of output at which the gap between TR & TC is the greatest 6. Total profit is maximized at that level of output, at which MR=MC CHAPTER 7 Perfect/ Pure competition Features: 1. Large # of sellers; no single seller influences the market 2. Identical products: buyers have no special preference 3. Freedom to enter 4. Individual sellers have no control over price “Price taker” 5. Ads: not important in this market Price Determination Market ss 1 Seller 12 P P 10 dd 2 dd 1 Q Q th th Microeconomics class 6-12 May 18 to June 8 /2013 **Price=AR** | ** TR=Total revenue** Revenue for a PC seller P Q TR (PxQ) AR (TR/Q) MR(△in TR) 10 0 0 - - 10 1 10 10 10 10 2 20 10 10 10 3 30 10 10 10 4 40 10 10 10 5 50 10 10 TR 1 TR TR curve for a PC seller is P TR P TR2 a) An upward sloping P=AR=MR b) Straight line P/AR dd curve c) Starting from the origin 0 Q 0 Q **For a single seller under PC (perfect competition) Demand is perfectly elastic** Short run TR, TC approach TC 1. At TR 1 TR1 a) At output Q 1 & Q2, TR=TC: breakeven TVC B b) Any output less than Q1 TR or TRTC= profit TR TR3 A & D Profit is maximized at that level of output, at which the gap or difference between TR and TC is the TC E greatest. TR 4 F At Q TR=CQ ★ Profit TC=DQ ★ Profit=CD Q ★ Q1 Q 2 2. If the P↓ & TR shifts to 2R , Q Then at best TR=TC: break even 3. If the P↓ further and TR shifts to3TR then, TRTVC continue to produce: minimize loss 4. If TRTC: Profit 2. If TR =TC: Break even 3. If TRTVC 4. If TR < TVC: Shut down TC TR 1rofit **Study TVC TR2Break even from this graph ** (M/C) TR3Minimize Loss TR & TC TR 4hut down Short Run: MR/MC Approach 1. So long as MR>MC, producing additional units increases total profit 2. If MR
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