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ECO100Y5 exam review.docx

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University of Toronto Mississauga
Kalina Staub

- to find the opportunity cost - > you find the highest value out of all the values: $ 15, $ 10, $5 ( 15 is the opportunity cost) - normative statement is a statement that cannot be backed. it is an opinion. - price ceiling: lead to excess demand, with the quantity exchanged being less than in the free market equilibrium - price floor: a floor that is set at or below the equilibrium price has no effect beacuse free market equilibrium remains attainable Excludable (there is a limit) Non excludable Rivalrous Private good, free market Common property resources: water, lakes, grazing land, over use becomes a problem Non - rivalrous Club goods: museums, roads, National defence marginal cost for letting one more person in is zero, fees are charged when goods Free rider problem, private become rivalous firms will never provide substitutes - if two goods satisfy similar needs or desires, such as butter and margarine. if the price of a good rises, the demand for its substitute will rise complement - two goods are complement if they are consumed jointly, such as hamburger meat and buns. if the price of a good rises, the demand for its complement will fall; if the price of a good falls, the demand for its complement will rise supply curve: - horizontal - elasticity is infinite - vertical - elasticity is zero (perfect inelastic) shortage = excess demand surplus = excess supply inferior good: a good for which quantity demanded falls as income rises - its income elasticity is negative (negative) normal good: a good for which quantity demanded rises as income rises ( positive (income inelastic - less than 1 or income elastic - greater than 1)) the condition required for a consumer to be maximizing utility: MUx/Px = MUy/ Py Price elasticity: (change in Quantity/average in quantity) / (change in price/ average in quantity) price elasticity of demand: percentage change in quantity demanded / percentage change in price price elasticity of supply: percentage change in quantity supplied / percentage change in price income elasticity of demand: percentage change in quantity demanded / percentage change in income TC = TFC +TVC ATC = TC/Q ATC = AFC +AVC AFC = TFC/Q AVC = TVC / Q MC = change in TC / change in Q R = P x Q average revenue = P x Q / Q marginal revenue = change in total revenue / change in quantity change in deposit = change in reserve x 1/rr The substitution effect increases the quantity demanded of a good whose price has fallen and reduces the quantity demanded of a good whose price has risen. The income effect leads consumers to buy more of a product whose price has fallen, provided that the product is a normal good. Giffen Goods - an inferior good for which the income effect outweighs the substitution effect so that the demand curve is positively sloped. - Normal goods: shift the curve outward (substitution effect + income effect +) - Inferior goods: shifts curve slightly outward (substitution effect + income effect - ) - Giffen goods: positive slope D-curve (income effect > substitution effect) Totalexpenditure=Price×Quantity - Inelastic demand, elastic supply - consumers bear the burden - Inelastic supply, elastic demand - producers bear the burden Normal goods - increase in income leads to increase in demand (income elasticity is positive) Inferior goods - demand decreases as income rises (negative income elasticity) Necessities - positive income elasticities less than one (increase in income of 10% leads to an increase in QD of less than 10%), basic food items Luxuries - positive income elasticities greater than one (increase in income of 10% leads to an increase in QD of more than 10%) Accounting profits = Revenues - Explicit costs Economic profits = Accounting profits - opportunity costs - Conditions for Long-Run Equilibrium: 1. Existing firms must be maximizing their profits, given their existing capital. Thus, short-run marginal costs of production must be equal to market price 2. Existing firms must not be suffering losses. If they are, they will not replace their capital and size of industry will decline over time 3. Existing firms must not be earning profits. If they are, new firms will enter and the size of industry will increase over time 4. Existing firms must not be able to increase their profits by changing the size of their production facilities. Thus, each firm must be at the minimum point of its LRAC curve - For a competitive firm to be maximizing its long-run profits, it must be producing at the minimum point on its LRAC curve. - In long-run competitive equilibrium, each firm's average cost of production is the lowest attainable, given the limits of known technology and factor prices Changes in Technology - In industries with continuous technological improvement, low-cost firms will exist side by side with older high-cost firms. The older firms will continue operating as long as their revenues cover their variable costs. Declining Industries - as equipment becomes obsolete because firm cannot cover variable cost, it will not be replaced unless the new equipment can cover its total cost, capacity of industry will shrink - The antiquated equipment in a declining industry is typically the effect rather than the cause of the industry's decline - Rule 1: A firm should not produce at all if, for all levels of output, TR < TVC. Equivalently, the firm should not produce at all if, for all levels of output, the market price < AVC. - shut down price: the price that is equal to the minimum of a firm's AVC. At prices below this, a profit-maximizing firm will shut down and produce no output - MR = (delta TR)/(delta Q) Short Run Profit Maximization - recall two general rules about profit maximization 1. the firm should not produce at all unless price > average variable cost 2. if the firm produces, it should produce a level of output such that marginal revenue = marginal cost - unemployment rate: number of unemployed expressed as a fraction of the labour force ¿unemployed UeRate= ∗100 ¿labour force - full employment only occurs when unemployment is frictional and structural (when actual GDP is equal to potential GDP) Measured from the expenditure side, GDP is equal to the total expenditure on domestically produced output. GDP is equal to C +aI + a + Na . a AE=C+I+G+(X−ℑ) - autonomous expenditure: elements of expenditure that do not change systematically with national income - induced expenditure: any component of expenditure that is sys
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