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# Economics Quiz 2 Review (Chapters 8, 10-13)

13 Pages
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School
University of Guelph
Department
Economics
Course
ECON 1050
Professor
Semester
Fall

Description
Economics Quiz 2 Review (Chapters 8, 10-13) November-10-13 1:21 PM Chapter 8 - Utility and Demand • Consumption choices are influenced by: ○ Consumption possibilities ○ Preferences • A budget line marks the consumption possibilities (boundary between the combination of goods and services that one can afford) • Consumption possibilities change when income or prices change • A change in price changes the slope of the line • Utility is the benefit or satisfaction that a person gets from the consumption of a good (happiness level) • Total benefit is called Total Utility ○ More consumption usually gives more total utility • Marginal utility is the change in total utility from the consumption of one more good or service • People exhibit diminishing marginal utility - marginal utility decreases as consumption increases • Consumer equilibrium is the situation where consumers have allocated all of their income in a way that maximizes total utility • Marginal utility per dollar is the marginal utility from a good by spending one more dollar ○ Calculated by: • To maximize utility: find the situation where maximum utility per dollar is equal for both goods, and is within income constraint • Utility-Maximizing Rule: total utility is maximized when ○ All available income is spent ○ Marginal utility per dollar is equal for all goods ECON 1050 Page 1 • When the price of a good changes, the marginal utility per dollar changes as well - therefore changing buying demand ○ If the price halves, the MUd doubles • When income levels change, the amount bought changes (that constraint changes) • The paradox of value is that the price of essential goods are low, while the price of non-essential goods are high ○ This is because of the difference in total and marginal utility  Total utility of essential goods is huge, while the marginal utility is low  Total utility of non-essential goods is low, while the total utility is high • Behaviour economics studies the way people make decisions ○ People are limited from making rational decisions by:  Bounded rational (rational limited by the computing power of the brain)  Bounded willpower (knowing regret)  Bounded self-interest (limitedself-interest - helping others)  The endowment effect (people value things higher when they own it) • Neuroeconomics is the study of the activity of the brain when a person makes an economics decision Chapter 10 - Organizing Production • A firm is an institution that hires factors of production and organizes those factors to produce and sell goods and services • Each firm organizes the production of goods using two systems and solve the principle-agent problem (induce an agent to act in the best interest of a principal): ○ Command system  Managerial hierarchy ○ Incentive system  Market-like mechanism inside firm - compensation scheme to get workers to work • A firm's goal is to maximize profit • Economic profit is total revenue minus total cost ○ • Normal profit is the average profit that is earned • To achieve maximum economic profit, a firm must make 5 decision: ○ What to produce and in what quantities ○ How to produce ○ How to organize and compensate its managers and workers ○ How to market and price its products ○ What to produce itself and buy from others • Three constraints limit a firms ability to maximize profit: ○ Technology constraints ○ Information constraints ○ Market constraints • An opportunity cost is incurred when it uses capital ○ Implicit rental rate is the opportunity cost  2 parts: economic depreciation, forgone interest • Economic depreciation is the fall in market value of a firm's capital • Forgone interest is the funds that could have been used for some other purpose to create interest ECON 1050 Page 2 • Technological efficiency occurs when the firm produces a given output by using the least amount of inputs • Economic efficiency occurs when the firm produces a given output at the least cost • Types of businesses: ○ Sole-proprietorship  Single owner with unlimited liability ○ Partnership  Two or more partners with unlimited liability ○ Corporation  One or more limited liability stockholders • Perfect competition occurs when there are many firms, they each sell an identical product, there are many buyers, and there are no restrictions on the entry of new firms • Monopolistic competition is a market structure where a large number of firms compete by making slightly different products (product differentiation) • Oligopoly is a market structure where a small number of firms compete • Monopoly is a market structure where only one firm produces a good or service, and there is a barrier to entry • Four-firm concentration ratiois the percentage of the value of sales by the four largest firms in an industry • Herfindahl Hirschman Index (HHI) is the percentage of the market share of the 50 largest firms in a market squared • Firms are more efficient than markets as co-ordinators of economic activity because they can achieve ○ Lower transaction costs (costs that arise from aspects of an exchange - e.g. finding business) ○ Economies of scale (when the cost of producing a unit of good falls as its output rate increases) ○ Economies of scope (when a firm specializes its resources) ○ Economies of team production (when groupsspecialize in tasks) Chapter 11 - Output and Costs • Two time frames that distinguish decisions ○ Short run  A time frame where the quantity of at least one factor of production is fixed- called plants (e.g. sometimes capital, land, entrepreneurship)  To increase output in the short run, the firm must increase the quantity of variable factors of production (labour) ○ Long run  A time frame where the quantity of all factors of production can be varied (can change its plant)  To increase output in the long run, the firm can change its plant as well as the quantity of labour  Long run decisionsare not easily reversed, called sunk costs • The relationsh
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