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ECN 203 Midterm Review.docx

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ECN 203

ECN 203 Midterm Review Strong Assumption vs. Weak Assumption - Abstract from reality - More realistic - Model is LESS credible - Ex. Sun will come out tomorrow Both depend on one’s perception of reality “Ceteris Paribus” • All other things held equal/ constant Maintained Assumptions • Taken as a constant in the state of the world TO BER ELAXED: • “Foundation” other assumptions rest on NO SCARCITY 1. Individual seek to maximize utility NO PRODUCTION NECESSARY NO FUTURE 2. Individual knows “preference ordering” 3. Everyone is rational (internally) NO RISKUNCERTAINTY Factors of Production 1. Natural Resources 2. Physical Capitol 3. Human Capitol- knowledge/skill embodied through education/power (brain) 4. Labor- raw human productive capacity (brawn) Decreasing Return to Sales • Δ Output < Δ Scale • Long run • Example: 1,000 workers in 5,000 sq. ft. factory produce 1 million items. IF… 2,000 works in 10,000 sq. ft. factory don’t produce 2 million items; there is a decreasing return to sales. Diminishing Marginal Product • Short run • More workers produce more product BUT the production rate will go down • Marginal Product (MP) = additional output from adding that one worker o MP eventually diminishes o First each adds more to output, then each adds less Perfectly Competitive Market 1. Many buyers and sellers • Equal access to market (free entry/exit) • Equal access to information 2. Homogeneous Product 3. Each individual is a price taker • No one person as the market power to set the price • Market price is determined by aggregate actions “Price-taker” • Don’t have the price setting power • No influence on market power • No matter how much output you sell, the market price remains the same • Don’t increase or decrease price because consumer can get the identical product @ market price • Demand curve is horizontal Price Elasticity of Demand • Determined by: o Luxury vs. necessity o Substitutes o Time frame o Price relative to wealth/income • Change in quantity demanded when price changes • ℇ > 1 = elastic (responsive)…luxury • ℇ < 1 = inelastic (nonresponsive)…necessity • ℇ = 1 = unitary elastic Inferior Good
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