MGEA02H3 Study Guide - Final Guide: Demand Curve, Opportunity Cost, Perfect Competition


Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland
Study Guide
Final

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ECMA04HGordon Cleveland Cleveland@utsc.utoronto.ca, (416) 287-7317
Office MW-364, Mon + wed 1-2pmwww.utsc.utoronto.ca/~cleveland
Video: www.utsc.utoronto.ca/~ecma04/online.html
Sept 14, 2009lecture 01
Lectures posted on UTSC intranet every Sunday
First test 25%
Second test25%
Final exam 50%*7th, 8th, or 9th December
Tests: mostly MC (10 choices), problem-based rather than memorization, some theory
questions
Tests can be wiped out if marks are lower than final, weight added to final
Course based on: knowledge of basic economic theory, problem solving using theory &
math
Download student handbook (tutorial questions and weekly problem sets—do in a group)
Microeconomics: study of individual markets ( D&S, P&Q), how decisions are made
through markets to allocate resources to alternative possible uses
Economics is the study of the use of scarce resources to satisfy unlimited human wants
Resources (factors/ inputs of production)
oLandincluding air
oLabourhuman resource
oCapitalcapital equipment, tools, machinery, factories (physical goods)
Scarce and have alternative uses, therefore choices (to economize) need to be made
Economic decision: what (produced)? How (to produce)? For whom (to produce)?
How does a market economy make decisions
oWhat to produce: buyers and sellers interact in output market
oHow (technology, labour) and for whom (who consumes): interact in input markets
(markets for factors or resources)
Opportunity cost: the opportunity cost of taking an action is measured by the value of the next
best alternative action (ex. The value produced by the resources used if you had used these same
resources in an alternative way.)
oBased on scarcity, if you do sth, you have to give up sth else you might have done
oValue of the alternative foregone (value of the benefit that could have been generated by the
resources in their next best use)
oEx. Movies, each worth $30 (utility or satisfaction value) price of movie = $15
surplus of $15, but another opportunity cost is time
oExplicit and implicit cost (both given up)
oMost individuals act rationally in their economic behaviour, meaning if benefits of action X are
greater than the cost, individual will take the action: B(x) > C(x), action X taken
oC(x) is the opportunity cost of X (explicit + implicit)
oOpportunity cost of going to Uni:
explicittuition, books, transportation
implicittime for jobs
apartment rental, food and entertainment not included because its necessary w/o Uni
Sep 16, 2009lecture 02
the opportunity cost of getting married
oimplicit: your next best alternative, time with friends
www.notesolution.com

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ECMA04HGordon Cleveland Cleveland@utsc.utoronto.ca, (416) 287-7317
Office MW-364, Mon + wed 1-2pmwww.utsc.utoronto.ca/~cleveland
Video: www.utsc.utoronto.ca/~ecma04/online.html
oexplicit: marriage costs
opportunity cost of taking a month-long vacation
owhat you couldve done with that time (depend on when you take it)
universities have young people because they cant make as much money yet, benefits to
young people are higher
adults take evening courses because they make money during the day
senior citizens, teachers and university professors take holidays because they have periods
of time off work with a low opportunity cost
people charge interest for loans is because there is alternative uses to the money
when resources are scarce, choices must be made about how these resources will be used
real cost of using the resources in one way will be that you give up the output you might
have gotten by using them in an alternative way
economics focuses on how choices are made and their consequences are
market economy: individuals make choices (demand and supply) and markets bring
decisions together
otradeoffs are everywhere: there is no such thing as a free lunchMilton Friedman
production possibilities frontier helps us think about choices, opportunity
costs, and economic efficiency
oshows a set of output possibilities possible with a fixed
amount of resources
oshows max possible production of each good, given the
efficient production of the other good
PPF shows:
oallocation of resources to alternative uses
oattainable region (green), unattainable (red)
oeconomically efficient (pink) and inefficient (grey)
oopportunity cost
oshape: bowed outwards (resources not perfect
substitutes)—can be straight line in some cases
oas you move along the curve, you give up less and less to gain more
opportunity cost of x: OCx = -dY/dX,
oamount of good y given up in order to get a little more of good x (value of the
alternative foregone)
opportunity cost of y: OCy = -dX/dY or -1/(dY/dX)
onumber of units of X given up when this economy produces a little bit
more of Y
opportunity cost may be constant along PPF
o–dY/dX is constant, PPF is linear, d²Y/dX²= 0
Opportunity cost may be increasing along PPF
o–dY/dX is increasing, PPF is convex or bowed outward, d²Y/dX² < 0
Ex.1 : y = 14 x/6 - x²/12
oShows possible combinations of two goods (when not wasting resources)
oOCx = -dY/dX = -(-1/6-1/6x) = 1/6 + x/6
oTherefore, OCx depends on the level of X produced
www.notesolution.com

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ECMA04HGordon Cleveland Cleveland@utsc.utoronto.ca, (416) 287-7317
Office MW-364, Mon + wed 1-2pmwww.utsc.utoronto.ca/~cleveland
Video: www.utsc.utoronto.ca/~ecma04/online.html
oSecond derivative is -1/6, which shows increasing costs, OCx rises as X produced
increase
If society is able to express a value for X and Y using value (utility) function, we can
predict the societys choice of where to locate along the PPF
oImagine a value function V = 3x + 6y
oEach unit of good Y is worth twice as much as each unit of good X
osub PPF into value function:
V = 3X + 6Y = 3X + 6(14 x/6 x^2/12)
= 3X + 84 X X^2/2
= - (X^2)/2 + 2X+ 84
odV/dX = -x +2 = 0 sub x = 2 into PPF
x = 2y = 13.33
September 21, 2009lecture 03
midterm: October 17th, 5-7pm , November 20th 3-5pm
Demand curve: behaviour of buyers
Supply curve: behaviour of sellers
Equilibrium occurs when the behaviour of buyers and sellers is consistent
Price brings these behaviours into equilibrium (amount buyer wants to buy matches
sellers want to sell)
Demand has negative slopse, supply has positive slope (positive or zero in long run)
Supply in short run: with existing firms only, using existing productive capacity
oIf new firms enter the industry, supply shifts to the right (more supplied at each
possible price)
Market: a set of institutional arrangements that bring buyers and sellers together to
negotiate the terms (ex. price) for exchanging goods (tangible) or services (intangible)
Perfectly competitive market:
omany buyers, many sellers (price takers)
oproduct is homogeneous or standardized (little brand loyalty)
operfect information (no one is fooled)
ofreedom of entry and exit in long run (no barriers)
producers have no market power, and price is main form of competition
Law of demandnegative slope: QD = 600 10P, or P = 60 0.1 QD, could be QD = 10P-1 =
10/P
QD is a function of own price (P) movement along demand curve
Shifts of demand curve: QD = f(P, PS, PC, I, Popn, Tastes…)
oPrice of substitutes (butter margarine)
oComplements (popcorn/cola)
oIncome of consumers—normal good (dQd/dI>o) vs inferior good (income rises,
demand for cheap goods shift left)
oPopulation (dQd / dPop >0)
oTastes
September 23, 2009lecture 04
Supply curve: positive slope
www.notesolution.com
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