Study Guides (238,105)
Canada (114,924)
Economics (136)
ECON 201 (65)
All (3)

All Lecture Notes for Final.doc

14 Pages
Unlock Document

University of Calgary
ECON 201

Chapter 21 – Consumer Theory • Objective – to determine how a consumer will behave given income and the prices of commodities • Utility Analysis o Utility – amount of satisfaction a consumer obtains from consumption o Assumption – utility is numerically measurable  “utils”(coke has 13 utils, ice tea has 11 utils) o Problem – assumption is unrealistic • Indifference Curve (IC) Analysis o Assumptions  Utility is ordinally measurable (coke is preferred over ice tea)  Indifference between bundles may exist  More is preferred to less o IC Definition – a curve showing all combinations of 2 goods that give the consumer the same level of satisfaction o Example (See Notes)  Marginal Rate of Substitution (MRS) – the rate at which a consumer is willing to trade one good for another while staying at the same level of satisfaction  MRS is the slope of an IC o Properties  Downward sloping  Convex to the origin (bowed in) • MRS decreases going left to right • Issue of relative scarcity  ICs further from the origin preferred and those closer to origin o IC map – set of ICs  See Notes  ICs are individualized  ICs cannot be summed  If tastes change, ICs change • Budget Line (BL) o Example (See Notes) • Consumer Equilibrium – maximize satisfaction subject to budget constraint o See Notes • Change in Income (See Notes) o BL shifts in parallel fashion  Income increase – BL shifts to the right  Income decrease – BL shift to the left (inward) o General case  Income consumption curve (ICC) – joins equilibrium in case where income changes  Engel Curve – plot income vs. quantity demanded • Change in Price (See Notes) o General case  Price Consumption Curve (PCC) – joins equilibrium in case where one price changes  Demand Curve – plot price vs. quantity demanded Chapter 13 – Firms: Concepts and Assumptions • Firms – units within which production takes place o Proprietorship – single owner and operator  Easy and inexpensive to set up  Complete control (with more control, also comes more responsibility)  Income subject to one level of taxation (with a proprietorship, when you report an income, you can deduct many different expenses)  Unlimited liability  Difficult to raise money (proprietorships can’t make stocks or bonds, they can borrow money from a bank and even that can be hard, because you are such a small business)  Most numerous in economy (they are one person businesses, but there are lots and lots of them) o Partnership – multiple owners  More money sources/ specialization advantages vs. proprietorship  Unlimited or limited liability  Mist be reorganized upon any personnel change o Corporation – separate legal entity from individuals who own it  Ownership easily transferred  Limited liability  Many potential sources of money  Income subject to two levels of taxation  Small shareholders have little say in running company  Create the most economic activity • Financing o Debt – borrowed money  Bank loans • Bond issues – bowwow money from public on long-term basis • Only available to corporations o Equity – owner provided money  Initial inflow  Reinvested profits  Stock issues • Only available to corporations o Order of Claim of Company’s assets  banks, bondholders, stockholders (taking the most risk) • Costs o Explicit costs – input costs that require an out lay of money by the firm  Ex: labor, raw material costs o Implicit costs – cost that do not require an outlay of money by the firm  Ex: opportunity costs associated with money tied up in a business, compensation for risk taking, possibly use of owners’ time o Opportunity Costs = explicit + implicit costs o Sunk Costs – costs that have been committed and cannot be recovered (if you have spent money, there is no way of getting it back); irrelevant in terms of current and future decision making • Profits o Profits = revenues less costs o Accounting profits = revenue minus explicit costs o Economic Profits = revenue minus (explicit + and implicit costs)  Economic profit < accounting profits o Normal profits – level of profits necessary to prevent owners from withdrawing resources form an industry  Zero economic profits  Positive accounting profits are necessary, but not sufficient to guarantee normal profits • Time Frames o Very Short Run – all inputs and technology is fixed perfectly inelastic supply o Short Run – at least one input fixed, technology is fixed o Long Run – all inputs variable, technology is fixed o Very Long Run – everything variable (anything can happen) Chapter 13 – Short Run Production Theory • Production Function – the relationship between the quantity of inputs used and the quantity of output produced • Definitions o Total Product (TP) – quantity of output produced = output (Q) o Average Product (AP) = TP divided by units of a variable input  Ex: Fixed Input = Capital (K) • Variable Input = Labor (L) o AP = TP/L o Marginal Product (MP) – change in output that comes about when an additional unit of a variable input is employed • MP = TP/L • Examples and Graphs o (See Notes) • Relationship Between Product Curves o Increasing marginal returns  Prior to 1, MP is rising • Specialization efficiencies  MP = TP/L = slope of TP • TP increases at increasing rate o Diminishing returns – as equal extra amount of a variable input are applied to a fixed input, beyond some level output will increase at a decreasing rate  Between 1 and 3, MP is falling but it is positive (as long as it stays positive, the TP is rising) o Negative returns  Beyond 3, MP is negative, and TP is falling o MP and AP  Prior to 2, MP > AP and AP is rising  At 2, Mp cuts AP at AP’s maximum  Beyond 2, MP < AP and AP is falling • Costs o Total Fixed Costs (TFC) – costs that do not vary without output o Total Variable Costs (TVC) – costs that vary with output o Total Costs (TC) = TFC + TVC o Average Fixed Costs (AFC) = TFC/Q o Average Variable Cost (AVC) = TVC/Q o Average Total Cost (ATC) = TC/Q o Marginal Costs (MC) – change in total cost that comes about when an additional unit of output is produced  MC = TC/Q o Example (See Notes) • Relationship Between Cost Curves o TFC is horizontal, AFC declines as output increases  At 1, TFC = TVC and AFC = AVC o MC and TC and MC and MP  Prior to 2, MC falls (increasing marginal returns)  MC = TC/Q = slope of TC (& TVC)  TC flattens  Beyond 2, MC rises (diminishing returns) and TC steepens o MC and AVC  Prior to 3, MC < AVC and AVC falls at 3, MC cuts AVC at AVC’s minimum  Beyond 3, MC > AVC and AVC rises o MC and ATC  Prior to 4, MC < ATC and ATC falls at 4, MC cuts ATC at ATC’s minimum  Beyond 4, MC > ATC and ATC rises • Capacity – level of output corresponding to minimum of short run ATC curve Chapter 13 – Long Run Production Theory • Returns to Scale (RTS) – long run relationship between the amount of output produced and the amount of inputs used o Constant RTS – a given % increase in the amount of inputs or costs outlay results in an equal % increase in output  See Notes o Increasing RTS (economies of scale) – a given % increase in cost outlay results in a greater % increase in output  See Notes o Decreasing Returns to Scale (diseconomies of scale) – a given % increase in cost outlay results in a smaller % increase in output  See Notes • Long Run Average Cost (LRAC) – over a large range of output a firm initially faces economics of scale but eventually experiences diseconomies of scale o (Minimum) Efficient Scale (MES) – level of output corresponding to the minimum point on an LRAC curve  Lowest possible per unit cost point that you can get (it is as efficient as you can possibly be) o Relationship between short run ATCs and LRAC – LRAC is an envelope curve enclosing all the short run ATCs  See Notes o Shifts in LRAC  Change in technology (See Notes)  Changes in input prices (See Notes) 4 Basic Market Structures • Market Structure – a set of characteristics of a market organization that are likely to affect a firm’s behavior and performance • Spectrum o See Notes • Profit Maximization: All Structures o Profit () = Total Revenue (TR) – Total Cost (TC) o Revenue Curves  Total Revenue (TR) = P x Q  Average Revenue (AR) = TR/Q = P x Q/Q = P  Marginal Revenue = TR/Q • Additional revenue that comes about when 1 more unit of output is sold o Conditions  See Notes Chapter 14 – Perfect Competition • Assumptions o A very large number of very small firms (if a firm is added or disappears, it has no effect in market supply) o Standardized product (they are all producing the exact same thing and consumers know that they are the same) o Firms are price takers (you have no influence on market price) o Freedom of entry and exit o No non-price competition • Demand o Market Demand – downward clopping demand curve o Firm Demand – horizontal at market price o See Notes • Profit Maximization o Set MC=MR in order to find the profit maximizing level of output (Q)  See Notes o Is firm making a profit or a loss? o = TR – TC o TR = AR x Q – ATC x Q o = (AR – ATC)Q o Economic profits AR>ATC (see above) o Normal Profits AR=ATC  See Notes o Economic Losses ARAVC  See Notes o AR
More Less

Related notes for ECON 201

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.