Principles of Microeconomics Final Exam Review Notes PDF

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Belmont University Principles of Microeconomics (ECO 2220) Final Exam Review and Notes...

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Principles of Microeconomics Belmont University ECO 2220 Principles of Microeconomics Final Exam Review/Notes

scar ci t y l i mi t edr esour cesandunl i mi t edwant s economi cs st udyofhowsoci et ymanagesi t sscar cer esour ce effici ency t hepr oper t yofsoci et yget t i ngt hemostf r om i t sscar cer esour ces t hepr oper t yofar esour ceal l ocat i onofmaxi mi z i ngt het ot alsur pl usr ecei v edbyal l member sofsoci et y equal i t y t hepr oper t yofdi st r i but i ngeconomi cpr osper i t yuni f or ml yamongt hemember sofsoci et y oppor t uni t ycost what ev eri sgi v enupt ogetsomet hi ngel se r at i onalpeopl e s y st emat i cal l yandpur posef ul l ydoi ngt hebesty oucant oachi ev ey ourobj ect i v es mar gi nalchange ani ncr ement al adj ust mentt oanexi st i ngpl an i nc ent i v e somet hi ngt hati nducesaper sont oact

mar k eteconomy

aneconomi cs ys t em wher ei nt er act i onofhousehol dsandfir msi nmar k et sdet er mi nest heal l ocat i onofr esour ces pr oper t yr i ght s t heabi l i t yofani ndi vi dualt oownandex er ci secont r olov erscar cer esour ces t hei nvi si bl ehand Adam Smi t h;t hepr i nci pl et hatsel f i nt er est edmar k etpar t i ci pant smayunknowi ngl y maxi mi z et hewel f ar eofsoci et yasawhol e mar k etf ai l ur e as i t uat i oni nwhi cht hemar k etf ai l st oal l ocat er esour ceseffici ent l yandcan' tr eac h soci al l yopt i malquant i t y ex t er nal i t y whenoneper son' sact i onshav eani mpactonaby st ander mar k etpower t heabi l i t yofani ndi vi dualorgr oupt osubs t ant i al l yi nfluencemar k etpr i ces pr oduct i vi t y t heamountofgoodsands er v i cespr oducedf or m eachuni tofl abori nput monopol y t hecasei nwhi cht her ei sonl yonesel l eri nt hemar k et ci r cul ar flowdi agr am adi agr am oft heeconomyt hatshowst heflowofgoodsands er v i ces,f act or sofpr oduct i on,andmonet ar ypay ment sbet weenhousehol dsandfi r ms

f act or sofpr oduct i on i nput ss uchasl and,l abor ,andcapi t al Pr oduct i onPos si bi l i t i esFr ont i er( PPF) agr apht hats howst hecombi nat i onsofout putt heeconomycanpossi bl ypr oduce gi v ent heav ai l abl ef act or sofpr oduct i onandt heav ai l abl epr oduct i ont echnol ogy

posi t i v est at ement s descr i pt i onsoft hewor l dasi ti s( descr i pt i v e) nor mat i v es t at ement s

pr escr i pt i onf orhowt hewor l doughtt obe( pr escr i pt i v e) Davi dRi car do ( 17721823) Engl i sheconomi s twhof or mul at edt he" i r onl awofwages, "accor di ngt o whi chwageswoul dal way sr emai natt hes ubsi st encel ev elf ort hewor k er sbec ause ofpopul at i ongr owt h. Adam Smi t h I nv i si bl ehand+t heor yoff r eemar ket Laffer Suppl ySi deEconomi cs( Reaganomi cs) Lafferc ur v e:fi ndopt i mum t axr at e mustgi v ei ndi vi dual si ncent i v et oi nv est wi l lgener at emor er ev enuef ort hegov er nment CoaseTheor em suggest st hateconomi cal l yeffici entout comescoul dar i sewi t houtgov er nmenti nt er v ent i oni nt hepr esenceofmar k etext er nal i t i es( peopl ecansol v epr obl emst hr ough bar gai ni ngont hei rown) Pi gouvi anTax( cor r ect i v et ax) at axonagoodwi t hext er nalcos t s( meantt odi scour agecost sf ort hi r dpar t i esand soci et yasawhol e)mus tl evyt ax espr opor t i onalt ot heext er nalcost s;enhanceeconomi ceffici ency absol ut eadvant age t heabi l i t yt opr oduc eagoodusi ngf eweri nput st hanot herpr oducer s compar at i v eadv ant age t heabi l i t yt opr oduc eagoodatal oweroppor t uni t ycos tt hananot herpr oducer gai nsf r om t r ade t hei ncr easei nt ot alpr oduct i onduet os peci al i zat i onal l owedbyt r ade mar k et

agr oupofbuy er sandsel l er sofapar t i cul argoodorser vi ce compet i t i v emar k et amar k eti nwhi cht her ear emanybuy er sandsel l er ss ot hateac hhasanegl i gi bl e i mpactont hemar k etpr i ce quant i t ydemanded t heamountofgoodt hatbuy er sar ewi l l i ngandabl et opur chase l awofdemand t hecl ai mt hat ,ot hert hi ngsequal ,t hequant i t ydemandedofagoodf al l swhent he pr i ceofagoodr i ses demandschedul e at abl et hatshowst her el at i ons hi pbet weent hepr i ceofagoodandt hequant i t ydemanded

demandcur v e agr aphoft her el at i onshi pbet weent hepr i ceofagoodandt hequant i t ydemanded

nor malgood agoodf orwhi ch,ot hert hi ngsequal ,ani ncr easei ni ncomel eadst oadecr easei n demand char act er i z edbyaposi t i v ei ncomeel ast i c i t y subst i t ut es t wogoodsf orwhi chani ncr easei nt hepr i ceofonel eadst oani ncr easei nt hedemandf ort heot her compl ement s t wogoodsf orwhi chani ncr easei nt hepr i ceofonel eadst oadecr eas ei nt hedemandf ort heot her quant i t ysuppl i ed t heamountofagoodt hatsel l er sar ewi l l i ngandabl et os el l l awofs uppl y t hecl ai mt hat ,ot hert hi ngsequal ,t hequant i t ysuppl i edofagoodr i seswhent he pr i ceoft hegoodr i ses suppl ys chedul e at abl et hatshowst her el at i ons hi pbet weent hepr i ceofagoodandt hequant i t ysuppl i ed

suppl yc ur v e agr aphoft her el at i onshi pbet weent hepr i ceofagoodandt hequant i t ysuppl i ed

equi l i br i um as i t uat i oni nwhi cht hepr i cehasr eachedt hel ev elwher equant i t ys uppl i edequal s quant i t ydemanded

equi l i br i um pr i ce t hepr i cet hatbal ancesquant i t ysuppl i edandquant i t ydemanded

equi l i br i um quant i t y t hequant i t ysuppl i edandt hequant i t ydemandedatt heequi l i br i um pr i ce

sur pl us as i t uat i oni nwhi chquant i t yi sgr eat ert hant hequant i t ydemanded

shor t age as i t uat i oni nwhi chquant i t ydemandedi sgr eat ert hanquant i t ys uppl i ed

Lawofsuppl yanddemand

t hecl ai mt hatt hepr i ceofanygoodadj ust st obr i ngt hequant i t ysuppl i edandquant i t ydemandedf ort hatgoodi nt obal ance

el ast i ci t y ameasur eoft her esponsi v enessoft hequant i t ydemandedorquant i t ysuppl i edt o changei noneofi t sdet er mi nant s( ex :v er yel ast i cdemand=l uxur ypr oduct ,notnecessi t y) -el ast i c=cur v ecl osert ohor i zont al ! ( l essDWL) -i nel ast i c=cur v ecl osert ov er t i cal ! ( mor eDWL) pr i ceel ast i ci t yofdemand ameasur eofhowmucht hequant i t ydemandedofagoodr espondst oac hangei n t hepr i ceoft hatgood

el ast i c whent hequant i t ydemandedorsuppl i edr espondssubs t ant i al l yt oachangei none ofi t sdet er mi nant s i nel ast i c whent hequant i t ydemandedorsuppl i edr espondsonl ysl i ght l yt oac hangei noneof i t sdet er mi nant s Ques t i on: Ass uppl y( demand)gr owsr el at i v el ymor ei nel as t i c ,pr oducer s( consumer s)beara gr eat erbur denoft het ax . Ques t i on: Ass uppl y( demand)gr owsr el at i v el ymor eel ast i c,pr oducer s( consumer s)beara smal l erbur denoft het ax . t ot alr ev enue t heamountpai dbybuy er sandr ecei v edbysel l er sofagoodcomput edasPxQ i ncomeel ast i c i t yofdemand ameasur eofhowmucht hequant i t yofagoodr espondst oachangei nconsumer s' i ncome

cr oss pr i ceel ast i ci t yofdemand ameasur eofhowmucht hequant i t ydemandedofonegoodr espondst oachange i nt hepr i ceofanot hergood

pr i ceel ast i ci t yofsuppl y ameasur eofhowmucht hequant i t ysuppl i edofagoodr espondst oachangei nt he pr i ceoft hatgood

i nf er i orgood agoodchar act er i z edbyanegat i v ei ncomeel ast i ci t y pr i cecei l i ng al egalmax i mum ont hepr i ceatwhi chagoodcanbesol d( pr ev entpr i cesf r om get t i ngunaffor dabl e) pr i cefl oor al egalmi ni mum ont hepr i ceatwhi c hagoodcanbes ol d( l abor-mi ni mum wage)

t axi nci dence

t hemanneri nwhi cht hebur denofat axi sshar edamongpar t i ci pant si namar k et ( spl i tbet weenb&s ;dependsons&del ast i ci t y) t axwedge t hedi ffer encebet weenwhatt hebuy erpay sandt hesel l err ecei v esaf t erat axhas beeni mposed

wel f ar eeconomi cs t hes t udyofhowt heal l ocat i onofr esour cesaffect seconomi cwel l bei ng wi l l i ngnes st opay t hemaxi mum amountt hatabuy erwi l lpayf oragood cons umers ur pl us t heamountabuy eri swi l l i ngt opayf oragoodmi nust heamountt hebuy eract ual l y pay sf ori t

cos t t hev al ueofev er yt hi ngasel l ermustgi v eupt opr oduc eagood pr oducersur pl us t heamountasel l eri spai df oragoodmi nust hesel l er ' scos tofpr ovi di ngi t

deadwei ghtl oss t her educt i oni nt ot als ur pl ust hatr esul t sf r om at ax

l afferc ur v e agr aphs howi ngt her el at i onshi pbet weent hesi z eofat axandt het axr ev enuecol l ect ed

posi t i v eext er nal i t y as i t uat i onwhenaper son' sact i onshav eabenefici ali mpactonaby st ander negat i v eext er nal i t y as i t uat i onwhenaper son' sact i onshav eanadv er sei mpactonaby st ander

soci alcos t

t hesum ofpr i v at ecost sandext er nalcost s i nt er nal i zi nganext er nal i t y al t er i ngi ncent i v ess ot hatpeopl et ak ei nt oaccountt heext er naleffect soft hei ract i ons cor r ect i v et ax( Pi gouvi an) at axdesi gnedt oi nducepr i v at edeci si onmak er st ot akei nt oaccountt hes oci al cos t st hatar i s ef r om anegat i v eext er nal i t y Coaset heor em t hepr oposi t i ont hati fpr i v at epar t i escanbar gai nwi t houtcostov ert heal l ocat i onof r esour ces,t heycans ol v et hepr obl em ofext er nal i t i esont hei rown( nogovi nt er v ent i on) t r ansact i onc ost s t hecost st hatpar t i esi ncurdur i ngt hepr ocessofagr eei ngandf ol l owi ngt hr oughona bar gai n pr i v at egoods BOTHexcl udabl eandr i v ali nconsumpt i on publ i cgoods NOTex cl udabl eNOTr i v ali nconsumpt i on commonr esour ces r i v ali nconsumpt i onbutnotex cl udabl e cl ubgoods ex c l udabl ebutnotr i v ali nc onsumpt i on

f r eer i der aper sonwhor ecei v est hebenefitofagoodbutav oi dspayi ngf ori t cos t benefi tanal y si s

as t udyt hatcompar est hecos t sandbenefit st osoci et yofpr ovi di ngapubl i cgood t r agedyoft hecommons apar abl et hati l l ust r at eswhycommonr esour cesgetusedmor et hani sdesi r abl e f r om t hest andpoi ntofs oci et yasawhol e t ot alcos t t hemar k etval ueoft hei nput safir m usesi npr oduct i on

ex pl i ci tcost s i nputcost st hatr equi r eanout l ayofmoneybyt hefir m i mpl i c i tcos t s i nputcost st hatdonotr equi r eanout l ayofmoneybyt hefi r m economi cpr ofit t ot alr ev enuemi nust ot alc ost ,i ncl udi ngbot hexpl i ci tandi mpl i ci tcost s

account i ngpr ofit t ot alr ev enuemi nusexpl i ci tcost( TR-ex pl i ci tcost ) pr oduct i onf unct i on t her el at i onshi pbet weenquant i t yofi nput susedt omak eagoodandt hequant i t yof out putoft hatgood mar gi nalpr oduct t hei ncr easei nout putt hatar i sesf r om anaddi t i onaluni tofi nput di mi ni shi ngmar gi nalpr oduct t hepr oper t ywher ebyt hemar gi nalpr oductofani nputdecl i nesast hequant i t yoft he i nputi ncr eases fix edcost s cos t st hatdonotv ar ywi t ht hequant i t yofout putpr oduced v ar i abl ecost s cos t st hatv ar ywi t ht hequant i t yofout putpr oduc ed

av er aget ot alcost

t ot alcos tdi v i dedbyt hequant i t yofout put

av er agefix edcost fix edcost sdi v i dedbyt hequant i t yoft heout put

av er agev ar i abl ecost v ar i abl ecost sdi vi dedbyt hequant i t yofout put

mar gi nalcost t hei ncr easesi nt ot al costt hatar i sesf or m anext r auni tofpr oduct i on

effic i entsc al e t hequant i t yofout putt hatmi ni mi z esav er aget ot alcost

economi esofsc al e t hepr oper t ywher ebyl ongr unav er aget ot alcostf al l sast hequant i t yofout puti ncr eases

di s economi esofs cal e t hepr oper t ywher ebyl ongr unav er ageToalcos tr i sesast hequant i t yofout puti ncr eases

cons t antr et ur nst oscal e t hepr oper t ywher ebyl ongr unav er aget ot alcosts t ay st hes ameast hequant i t yof out putchanges

pr i cet ak er s buy er sandsel l er si nacompet i t i v emar k ett hatmustacceptt hepr i cet hatt hemar k et det er mi nes av er ager ev enue t ot alr ev enuedi vi dedbyt hequant i t ysol d

mar gi nalr evenue t hechangei nt ot alr ev enuef r om anaddi t i onaluni ts ol d

shutdown as hor t r undeci si ont ot empor ar i l yceasepr oduct i ondur i ngaspeci ficper i odoft i me duet ocur r entmar k etcondi t i ons ex i t al ongr undeci si ont oper manent l yceasepr oduct i onandl eav et hemar k et

sunk ac ostt owhi c honhi sal r eadyc ommi t t edandi snotr ecov er abl e nat ur almonopol y at y peofmonopol yt hatar i sesbec auseasi ngl efir m cans uppl yagoodors er v i cet o anent i r emar k etatal owercos tt hanc oul dt woormor efi r ms pr i cedi scr i mi nat i on t hebusi nesspr act i ceofs el l i ngt hesamegoodatdi ffer entpr i cest odi ffer entcust omer s ar bi t r age t hepr ocessofbuy i ngagoodi nonemar ketatal owpr i ceands el l i ngi ti nanot her mar k etatahi gherpr i ce per f ectpr i cedi scr i mi nat i on as i t uat i oni nwhi cht hemonopol i s ti sabl et ochar geeachc ust omerpr eci sel yhi swi l l i ngnesst opay per f ectc ompet i t i on amar k ets t r uct ur ei nwhi c hal ar genumberoffir msal lpr oducet hes amepr oduct P=MC=MR Ol i gopol y amar k ets t r uct ur ei nwhi c honl yaf ewsel l er soffersi mi l arori dent i c alpr oduct s f ewb&s si mi l ar / s ame monopol i st i ccompet i t i on amar k ets t r uct ur ei nwhi c hmanyfir mssel lpr oduct st hatar esi mi l arbutnoti dent i c al manybuy er s&sel l er s di ffer ent i at ed( sl i ght l y )pr oduct duopol y

anol i gopol ywi t honl yt wofir ms f r eeent r y as i t uat i onwher efir mscanent ert hemar k etwi t houtr est r i ct i on effic i entsc al e t hequant i t yt hatmi ni mi z esav er aget ot alcos t gamet heor y t hes t udyofhowpeopl ebehav ei nst r at egi csi t uat i ons col l usi on anagr eementamongfi r msi namar k etaboutquant i t i est opr oduceorpr i cest o char ge car t el agr oupoffir msact i ngi nuni s on Nashequi l i br i um as i t uat i oni nwhi checonomi cact or si nt er act i ngwi t honeanot hereachchooset hei r bestst r at egyGI VENt hes t r at egi est hatal lt heot heract or shav echosen

pr i soner s' di l emma

apar t i cul ar" game"bet weent woc apt ur edpr i soner st hati l l us t r at eswhyc ooper at i on i sdi fficul tt omai nt ai nev enwheni ti smut ual l ybenefici al

domi nantst r at egy as t r at egyt hati sbestf orpl ay eri nagamer egar dl es soft hest r at egi esc hosenbyt he ot herpl ay er s der i v eddemand Thedemandf oraf act orofpr oduct i on,whi c hi sder i vedf r om t hefi r m' sdeci si ont o suppl yanot hergood

mar gi nalpr oductofl abor t hei ncr easei nt heamountofout putf r om anaddi t i onaluni tofl abor

v al ueoft hemar gi nalpr oduct t hemar gi nalpr oductofanout putt i mest hepr i ceoft heout put

capi t al t heequi pmentands t r uct ur esusedt opr oduc egoodsandser v i ces

compensat i ngdi ffer ent i al adi ffer encei nwagest hatar i sest ooffsett henonmonet ar ychar act er i s t i csordi ffer entj obs humancapi t al

t heaccumul at i onsi nt hei nv est ment sofpeopl e,suchaseducat i onandont hej ob t r ai ni ng effic i encywages abov eequi l i br i um wagespai dbyfir mst oi ncr easewor k erpr oduct i vi t y budgetconst r ai nt t hel i mi tont heconsumpt i onbundl est hataconsumercanaffor d

i ndi ffer encec ur v e ac ur v et hatshowsconsumpt i onbundl est hatgi v et hecons umert hes amel ev elof s at i sf act i on hi gheri ndi ffer encecur v ei spr ef er r ed!

mar gi nalr at eofsubs t i t ut i on t her at eatwhi c haconsumeri swi l l i ngt ot r adeonegoodf oranot her

per f ects ubst i t ut es t wogoodswi t hst r ai ght l i nei ndi ffer encecur v es

per f ectc ompl ement s t wogoodswi t hr i ght angl ei ndi ffer encec ur v es

i ncomeeffect t hechangei ncons umpt i ont hatr esul t swhenapr i cec hangemov est hec onsumert o ahi gherorl oweri ndi ffer encecur v e

subst i t ut i oneffect t hechangei ncons umpt i ont hatr esul t swhenapr i cec hangemov est hec onsumer al ongagi v eni ndi ffer encec ur v et oapoi ntwi t hanewmar gi nalr at eofsubst i t ut i on

gi ffengood agoodf orwhi chani ncr easei nt hepr i cer ai sest hequant i t ydemanded mor alhaz ar d Whent heactofi nsur i nganev enti ncr easest hel i k el i hoodt hatt heev entwi l lhappen

adv er sesel ect i on

t het endencyf ort hemi xofunobs er v edat t r i but est obecomeundesi r abl ef r om t he s t andpoi ntofanuni f or medpar t y si gnal i ng anact i ont ak enbyani nf or medpar t yt or ev ealpr i v at ei nf or mat i ont oanuni nf or med par t y Scr eeni ng anact i ont ak enbyanuni nf or medpar t yt oi nduc eani nf or medpar t yt or ev eali nf or mat i on pr i cecei l i ngbi ndi ngwhen. . . bel owt heequi l i br i um bi ndi ngpr i cefl oorc auses . . . as ur pl usi nt hemar k etandwas t edr esour ces subsi dy agov er nment ' sr espons et oaposi t i v eext er nal i t y( opposi t eoft ax;t oai deacompany' spr oces sesandk eept hei rpr i cesl owandcompet i t i v e) Gov er nmentcol l ect edt ax es : payr ol l&per sonal / cor por at ei ncome hor i z ont alequi t ypr i nci pl e s t at est hatpeopl ei nt hesameeconomi csi t uat i onshoul dbet r eat edequal l y economi csdeal spr i mar i l ywi t ht heconc eptof scar ci t y

effic i ency r ef er st ohowmuchasoci et ycanpr oducewi t hi t sr esour ces .equal i t yr ef er st ohow ev enl yt hebenefit sf r om usi ngr esour cesar edi s t r i but edamongmember sofsoci et y

ar at i onaldec i si onmak ert ak esact i oni fandonl yi f t hemar gi nalbenefi toft heact i onex ceedst hemar gi nalcostoft heact i on Whensoci et yget st hemosti tcanf r om i t sscar cer esour ces,t hent heout comei s cal l ed effic i ent publ i cpol i ci es maybeabl et oi mpr ov eei t hereconomi ceffici enc yorequal i t y mar k etpowerr ef er st ot he powerofasi ngl eper sonors mal lgr oupt oi nfluencemar k etpr i ces pr oduct i vi t yi sdefinedast he amountofgoodsands er v i cespr oducedf r om eachuni tofl abori nput economi st s ,l i k emat hemat i ci ans ,phys i ci st s ,andbi ol ogi st s al l oft heabov e f act or sofpr oduct i onar e i nput si nt ot hepr oduct i onpr ocess Anypoi ntonacount r y' spr oduct i onpos si bi l i t i esf r ont i err epr esent sac ombi nat i onof t wogoodst hataneconomy canpr oduceusi ngal l av ai l abl er esour cesandt echnol ogy r ef ert ofigur e2i ti spossi bl ef ort hi seconomyt opr oduce 60dr y er sand50washer s t hepr oduct i onpossi bi l i t i esf r ont i eri l l ust r at es t hecombi nat i onsofout putt hataneconomyc anpr oduce r ef ert ot abl e3whi choft hef ol l owi ngr epr esent sar uba' spr oduct i onpos si bi l i t i esf r ont i erwhen100l aborhour sar eav ai l abl e 20r adi osand50cool er s

Ass umet hatAr ubaandI cel andeachhas80l aborhour sav ai l abl e.I feachcount r y di v i desi t st i meequal l ybet weent hepr oduct i onofcool er sandr adi os,t hent het ot al pr oduct i oni s 60cool er sand18r adi os r ef ert ofigur e9max i nehasanabsol ut eadvant agei nt hepr oduct i onof nei t hergoodandacompar at i v eadv ant agei nt hepr oduct i onofpi es apr oduct i onpos si bi l i t i esf r ont i eri sas t r ai ghtl i newhen t her at eoft r adeoffbet weent het wogoodsbei ngpr oducedi sconsi st ent r ef ert ofigur e322whatar eal i ceandbet t y soppor t uni t ycost sof1pi zza al i c e' soppor t uni t ycos tof1pi z zai s2pi t cher sofl emonade,bet t y' si s1pi z za/ 1. 5 pi t cher s r ef ert ofigur e322whi choft hef ol l owi ngpr i ceswoul dr esul ti namut ual l yadvant ageoust r adef oral i ceandbet t y 100pi zzasf or180pi t cher sofl emonade 1mi x erf ormay ai s 1. 6t oast er s oppor t uni t ycostof1mi x erf ormi gueli s 2t oast er s Scar ci t y Demandcannotbes uppor t edduet ol i mi t edr esour ces Pr oduct i onPos si bi l i t i esFr ont i er Agr aphr epr esent i ngpr oduct i ont r adeoffsofaneconomygi v enfi x edr esour ces TheI nvi s i bl eHand Adam Smi t h:Amar k etwi l lr unateffici entl ev el si fbuy er sandsel l er sar ef r eet obuy andsel l Ext er ...