Study Guides (238,201)
Canada (115,008)
Economics (191)
ECON 1050 (57)

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

13 Pages
Unlock Document

University of Guelph
ECON 1050
Eveline Adomait

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
More Less

Related notes for ECON 1050

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.