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ECON EXAM NOTES.docx

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Department
Economics
Course
EC120
Professor
Peter Sinclair
Semester
Fall

Description
CHAPTER 4 - quantity demanded is negatively related to the price - increase in demand  shift the curve to the right - decrease in demand  shift the curve to the left - change in price is a movement along the curve - change in these shift the curve: o normal good  when income falls, demand falls o inferior good  when income falls, demand rises o substitutes  when demand falls for one good, demand of the substitute increases o complements  demand for one good increases the demand for the other - quantity supplied is positively related to the price - increase in supply  shift the curve to the right - decrease in supply  shift the curve to the left - change in price is a movement along the curve - change in these shift the curve: o when the price of inputs rises, supply decreases o advance in technology raises the supply CHAPTER 5 - demand is elastic if the quantity demanded responds substantially to changes in the price - demand is inelastic if the quantity demanded responds only slightly to changes in the price - availability of close substitutes: more elastic demand if the product is substitutable - necessities – inelastic demands - luxuries – elastic demands - narrowly defined markets tend to have more elastic demands than broadly defined markets o easier to find close substitute for narrowly defined goods - goods tend to have more elastic demand over longer time horizons - demand elastic when elasticity greater than 1 - demand inelastic when elasticity less than 1 - unit elastic when equal to 1 - the flatter the demand curve that passes through a given point, the greater the price elasticity of demand - the steeper the demand curve that passes through a given point, the smaller the price elasticity of demand - when demand is inelastic , price and total revenuemove in the same direction - when demand is elastic , price and total revenue move in theopposite directions - if demand is unit elastic , total revenueremains constant when the price changes - normal goods have positive income elasticities - inferior goods have negative income elasticities - necessities tend to have small income elasticities - luxuries tend to have large income elasticities CHAPTER 6 - price ceiling – the legislated maximum o price ceiliabove the equilibrium not binding o price ceilibelow the equilibrium isbinding constraint  shortage - price floor – the legislated minimum o price ceilibelow the equilibrium not binding o price ceiliabove the equilibrium isbinding constraint  surplus - the wedge between the buyers’ price and sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers - very elastic supply and inelastic demand – sellers bear only a small burden whereas buyers bear most of the burden of the tax - inelastic supply and very elastic demand – sellers bear most of the burden of the tax - a tax burden falls more heavily on the side of the market that is less elastic CHAPTER 7 Total Surplus = Value to buyers + Cost to sellers - Three insights about market outcomes: o Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay o Free markets allocate the demand of goods to the sellers who can produce them at least cost o Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus CHAPTER 8 - The greater the elasticities of supply and demand, the greater the deadweight loss of a tax. - As the size of a tax increases, its deadweight loss quickly gets larger - Tax revenue first rises with the size of the tax, but then as the tax gets larger, the market shrinks so much that the tax revue starts to fall CHAPTER 9 - If the world price is higher than the domestic price, then Canada would become an exporter - If the world price is lower than the domestic price, then Canada would become an importer - when a country exports, domestic produces are better off and domestic consumers are worse off - when a country imports, domestic consumers are better off, and domestic producers are worse off - under free trade, the domestic price equals the world price CHAPTER 13 - profit = total revenue – total cost - when economists speak of a firm’s cost of production, they include all the opportunity costs of making its output of goods and services o accountants don’t count OC - explicit costs – require the firm to pay out some money - implicit costs – do not require a cash outlay - economic profit = total revenue – opportunity costs (explicit and implicit) - accounting profit = total revenue – explicit costs - accounting profit is usually larger than economic profit - short-run: number of workers vary, size of the factory is fixed - long-run: number of workers and the size of the factory may be varied - marginal product – the increase in output that arises from an additional unit of input - diminishing marginal product – marginal product of an input declines as the quantity of the input increases - as the number of workers increases, the marginal product declines, and the production function becomes flatter - total cost curve gets steeper as the amount produced rises - the production function gets flatter as production rises - total cost = fixed costs + variable costs - ATC = TC/Q - AFC = FC/Q - AVC = VC/Q - MC = change in TC/change in Q - AFC declines as output rises because the fixed cost is spread over a larger number of units - AVC rises as output increases because of diminishing marginal product - AFC declines rapidly at first and then more slowly - Whenever MC is less than ATC, ATC is falling - Whenever MC is greater than ATC, ATC is rising - MC crosses the ATC at its minimum Three properties: - Marginal cost eventually rises with the quantity of output - The ATC is U-shaped - The MC curve crosses the ATC at the minimum of ATC - Many decisions are fixed in the short run - Variable in the long run - LRATC much flatter U-shape than the SRATC - When LRATC declines as output increases, economies of scale - When LRATC rises as output increase, disceconomies of scale CHAPTER 14 - A competitive market: o Many buyers and many sellers o The goods offered are largely the same  Buyers and sellers are price takers o Free entry or exit in the long run - Average revenue = TR/Q - For all firms, AR = P - For competitive firms, MR = P - MC – upward sloping - ATC – U-shaped - MC crosses ATC at the minimum of ATC - Three rules of profit maximization o If MR is greater than MC, the firm should increase its output o If MR is less than MC, the firm should decrease its output o At the profit-maximizing level of output, MR and MC are exactly equal - MC = supply curve of competitive firm - Shut down if TR is less than VC ; or if P is less than AVC - Exit if TR is less than TC ;or if P is less than ATC - Enter if P is greater than ATC - Long-run supply curve of a competitive firm lies along the vertical axis, above AVC - Profit = (P – ATC) X Q o If P is above ATC, profit is positive, encourages new firms to enter o If P is less than ATC, profit is negative, encourage some firms to exit - Because firms can enter and exit more easily in the long-run than in the shthe long- run supply curve is typically more elastic than the short-run supply curve CHAPTER 15 - Monopoly – sole sellers of its product and the product does not have close substitutes - Barriers to entry o Monopoly resources  Own key resource o Government-created monopolies o Natural monopolies - As a market expands, a natural monopoly can evolve into a competitive market - Price-maker o Can choose any point on the demand curve, but it cannot choose a point off the demand curve - A monopolist’s marginal revenue is always less than the price of its good o Reason: monopoly faces adownward-sloping demand curve - When a monopoly increases the amount it sells, it has two effects on total revenue o The output effect – more output sold which increases total revenue o The price effect – the price falls which decreases the total revenue - MR is negative when the price effect on revenue is greater than the output effect - If MC is greater than MR, the firm can raise profit by reducing production - Monopoly’s profit-maximizing quantity of output is determined by the intersection of the MR and the MC curve - The MR of a competitive firm equals its price o Price equals marginal cost - The MR of monopoly is less than its price o Price exceeds mar
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