Econ 102 test 2 - Notes and study materials for test 2 PDF

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Notes and study materials for test 2...

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Economics 102 Exam #2 Study Guide Elasticity: responds to change Price Elasticity of Demand: measures how responsive consumers are to change in price Elastic Demand: consumers are extremely responsive to changes in price Inelastic Demand: consumers are not responsive to price changes

Perfectly Inelastic Demand:

Perfectly Elastic Demand:

Consumers are not very responsive to price changes

Consumers are extremely responsive to changes in price

→ a large change in price will result in only a small change in quantity demanded

→ any change in price drops quantity demanded to zero

Relatively Inelastic Demand:

Relatively Elastic Demand:

Consumers are not very responsive to price changes

Consumers are very responsive to changes in price

=> a large change in price will result in only a small change in quantity demand

=> a small change in price will result in large changes in quantity demanded

Elasticity Formula: ED= (%ΔQD)/(%ΔP) *Inverse relationship, answer should be negative* Mid-Point Formula: %ΔQD=(Q2-Q1)/((Q 2+Q1)/2) x 100 %ΔP=(P2-P1)/((P2+P1)/2) x 100 Q2= Ending Quantity P2= Ending Price Q1= Beginning Quantity P1= Beginning Price

Relatively Elastic Demand → |ED| > 1 Relatively Inelastic Demand → |ED| < 1

Total Revenue Test for Price Elasticity of Demand: If P↑ + TR↑ If P↑ + TR↓ or Inelastic

or Elastic

If P↓ + TR↓ if P↓ + TR↑

Income Elasticity of Demand Formula: ED= (%ΔQD)/(%ΔY)

Mid-Point Formula:

%ΔQD=(Q2-Q1)/((Q 2+Q1)/2) x 100 %ΔY=(Y2-Y1)/((Y2+Y1)/2) x 100 Q2= Ending Quantity Y2= Ending Income Q1= Beginning Quantity Y1= Beginning Income

• •

If income elasticity of demand is positive that means the good is normal If income elasticity of demand is negative that means the good is an inferior good

Cross Price Elasticity of Demand: Measures consumers responsiveness to a change in the price of a related good ED= (%ΔQDy)/(%ΔPx)

Mid-Point Formula: %ΔQDy=(QDy2-Q Dy1)/((QDy2+QDy1)/2) x 100 %ΔP=(PX2-PX1)/((PX2+PX1)/2) x 100 QDy2= Ending Quantity of good y PX2= Ending Price of good x QDy1= Beginning Quantity of good y PX1= Beginning Price of good x

• •

If cross price elasticity of demand is positive that means the good is a substitute good If cross price elasticity of demand is negative that means the good is a complementary good Utility Theory

Utility: satisfaction from consumption Goal of Consumers (Households): maximize utility Measures of Utility: 1. Total Utility (TU): measure the total amount of satisfaction from all units consumed 2. Marginal Utility (mu): measures the amount of satisfaction from the next unit consumed mu = ΔTU/ΔQ

Goal of Consumers: maximize utility Goal of Business: maximize profits

Marginal Revenue: revenue from the next unit produced Marginal Cost: cost of the next unit produced

Profit Maximizing Rules: Condition: Production Decision: MR > MC Increase production MR < MC Decrease production MR = MC Maintain production Profit Maximizing Condition: produce every unit that is profitable + no units that take a loss Profit Maximizing Rule: (answers the question on how much to produce) Produce at that level of output identified by the point where MR = MC

Law of Diminishing Marginal Utility: TU=Σmu mu: marginal utility Utils: unit of satisfaction

mu=∆TU/∆Q

3. MU/P = satisfaction per money spent 4. MU x/Px= satisfaction per money spent on good x 5. MU y/Py= satisfaction per money spent on good y

Utility Maximizing Rules: Condition: Consumption Decision: MUX/PX > MU Y/PY → Buy good x MUX/PX < MU Y/PY → Buy good y MUX/PX = MU Y/PY

→

Buy either

Short-Run Production Costs: TC=TFC + TVC Fixed Cost: costs that do not change as TC = total cost

production levels change (ex:Rent)

TFC = total fixed cost Variable Cost: costs that change as TVC = total variable cost

production levels change

Per Unit Costs: ATC = AFC + AVC • •

ATC = average total costs Marginal Cost: cost of the next unit ATC = TC/Q produced MC=∆TC/∆Q

AFC = ATC - AVC • •

AFC = average fixed costs Marginal Revenue: revenue from the next AFC = TFC/Q unit produced

AVC = ATC - AFC • •

AVC = average variable costs Marginal Analysis: decisions that have to AVC = TVC/Q be made for next unit

Example of Short-Run Production Costs Table: Equations:

TC-TVC

TC-TFC

TFC+TVC

∆TC/∆Q

TFC/Q

TVC/Q

TC/Q

Q

TFC

TVC

TC

0 2 5

200 200 200

0 100 200

200 300 400

MC undefined

AFC undefined

AVC undefined

ATC undefined

100/2= 50 100/3=33.3

200/2= 100 200/5= 40

100/2= 50 200/5= 40

300/2= 150 400/5= 80

9

200

300

500

200/9=

300/9=

500/9=

22.22

33.33

55.55

100/3=33.3

200/12=16.

400/12=33.

600/12= 50

3

67

33

100/2= 50

200/14=14.

500/14=35.

29

71

200/15=13.

600/15= 40

3 12 14 15

200 200 200

400 500 600

600 700 800

100/4= 25

100/1= 100

33

700/14= 50 800/15=

15.33

* As long as you know Q and TC you can find the rest of the table! *

Marginal cost curve intersects avg. total cost curve & variable cost curve at their lowest points

Proper Marginal Cost Curve (memorize):

Economic Profits vs Accounting Profits

Accounting Profits: TR - Accounting Costs ↓ TR - Explicit Costs

Economic Profits: TR - Economic Costs ↓ TR - (Explicit Costs + Implicit Costs)

Explicit Cost vs Implicit Cost Explicit Cost: out of pocket expenses (money going out)

Implicit Cost: the opportunity cost of owner provided resources

Accounting Costs: explicit costs Economic Costs: explicit costs + implicit costs

0 Economic Profits → Normal Profits Economic Profits → Above Normal Profits Economic Loss → Below Normal Profits

Normal Profits or Normal Rate of Return Economic Profits → Above normal profits/ Above normal rate of return → Attract Firms Economic Losses → Below normal profits/ Below normal rate of return → Firms will Exit...