Study guide Micro Final Exam PDF

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Cumulative notes for finals exam...

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Econ 2

Monika Thomas

Study guide for Final Exam Introductory Concepts: 

Different types of economic systems (free market economy – Adam Smith, centrally controlled or command economies, mixed economy)

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Concept of scarcity and resulting need for making choices

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Basic economic questions

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Four criteria to judge the outcomes of any economic policy

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Positive and Normative economics

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Circular flow diagram

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Principle of opportunity cost definition: the value of the next best alternative that we have to give up ex: opportunity cost of going to college (= the sum of: cost of books, tuition, fees and salary of job that you cannot receive now)

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Production Possibilities Frontier (PPF) shows all possible combinations of output from fixed amount of resources and their efficient use. Know how to identify efficient, inefficient and unattainable points identify opportunity cost on the graph: linear PPF: opportunity cost stays constant as more of good is produced,

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bowed out PPF: give up more and more of 1 good as we produce more of the other good = increasing marginal opportunity cost. Some resources are better suited for the production of one of the goods (= specialized resources) 

Economic growth: caused by changes in resources, technological progress in one or both industries. (Know graphs) – PPF shifts outward

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Comparative Advantage and Absolute Advantage: Definition, examples Calculate the lowest opportunity cost and determine who has the comparative advantage

Demand and Supply 

Demand curve: what causes a movement along the demand curve (change in P causes a change in Qd) and which factors will shift the entire demand curve

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Normal good versus inferior good: how does a change in income affect the Demand for these two goods?

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Complements versus substitutes

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Law of Demand: definition, and Income and substitution effect

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Supply curve: what causes a movement along the supply curve (change in P causes a change in Qs) and which factors will shift the supply curve

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Law of supply

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Equilibrium Price and Quantity: how is it determined? What happens when the price is set below the equilibrium price? What will happen in the market when the price is set above the equilibrium price?

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Effect of taxation (know the graph, and how it affects efficiency): how much of the tax will consumers pay? How much will producers pay? What is tax incidence?

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Consumer surplus, producer surplus: graphical analysis, and how to calculate it. Total economic surplus (maximized in the free market equilibrium)

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CS = WTP – P PS = P – WTA 

Negative externalities: definition, example, graphical analysis (include social cost into the production process)

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Effect of Price Controls: Price ceiling and price floor (graph and analysis) Applications: rent control and minimum wage: dead weight loss is created, along with shortage (price ceiling) and surplus (price floor). What are the pros and cons of price controls?

Elasticity 

definition, and determinants of elasticity. How do you calculate Price elasticity of demand, income elasticity, and cross price elasticity?

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When is elasticity of demand inelastic, elastic , unitelastic?

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How does elasticity relate to revenue? If demand is elastic and the price decreases – will revenue increase or decrease? What if demand is inelastic?

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Applications of elasticity (see class notes)

Utility 

Definition of Marginal Utility

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Law of Diminishing Returns (graphs: total utility and marginal utility)

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Finding the optimal consumption bundle (using fixed budget and equimarginal rule)

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Income and Substitution Effect of a change in Price Ex: if Price falls: income and substitution effect are positive (for a normal good), income effect is negative and substitution effect is positive (for an inferior good)

Behavioral Economics 

Are consumers rational when making their consumption choices? Advertisement (celebrity endorsement) Endowment effect

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Failure to ignore sunk cost Unrealistic expectations abut future behavior Fairness Imperfect Information (ex: lemon’s problem, insurance) Network externalities

Costs and Production (Ch 7) 

Costs in SR Implicit costs (opportunity cost) and explicit cost (accounting cost) Economic profit versus accounting profit: difference Total cost = FC + VC ATC = AFC + AVC Know how to calculate these costs (worksheet activity) Graphs of cost curves Why are ATC , AVC, and MC curves U-shaped? Explain why MC-curve intersects ATC and AVC at minimum point Relationship between MC and MPL Relationship between AVC and APL

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Costs in the LR: Difference between SR and LR costs All costs are variable in the LR (no FC, no diminishing returns in LR) Economies of scale, minimum efficient scale, constant returns to scale, diseconomies of scale (graph)

Perfect Competition 

What are the conditions for a perfectly competitive market What is a price taker? Explain (and graph)

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Difference between firm specific D-curve and Market D-curve Why is P=MR=D (in perfect competition)?

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Economic profit: how to calculate it

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Definition: MR

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How to maximize profit in perfectly competitive market? (MR=MC) 

Break-even point

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Shut-down point (graphs) When will a firm shut down?

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Does a firm continue to produce with zero-economic-profit? Does economic profit remain in perfect competition? (Explain the effect of free entry and free exit of firms)

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What is the supply curve in the SR?

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What is the difference of the supply curve in the LR?

Monopoly 

Characteristics of monopoly: Sole seller, unique product, barriers to entry, price maker

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Reasons why monopolies arise: natural monopoly (ATC keeps falling), control of key resource, government created monopolies (patent, copyright)

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Profit maximizing output decision: MR = MC

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Graph for monopolist: D-curve is downward sloping and MR is below D-curve

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Calculate profit for monopolist

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Welfare cost of monopoly: reduced consumer surplus, dead weight loss

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Comparison of perfectly competitive firm and monopolist (know the optimal output decision on the graph for both. Price of monopolist will be higher, and output produced will be lower when compared to perfect competition).

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Price discrimination: definition, examples we covered in class

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Public policy towards monopolies: anti trust laws, FTC Horizontal mergers, vertical mergers

Monopolistic Competition Characteristics of monopolistic competition: many sellers, differentiated products, no barriers to entry 

Graph for monopolistic competitive firm in the short run: positive economic profit (P>ATC), D-curve more inelastic

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Graph for the monopolistic competitive firm in the long run (firms enter and compete profits away): Economic profit = 0 (P=ATC), D-curve more elastic, firm does not produce at minimum ATC and has excess capacity (= inefficiency)

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Compare monopolistic competitive firm with perfect competitive firm (Graphs)

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Role of advertisement

Oligopoly 

Characteristics of oligopoly: few sellers, differentiated or identical products, some barriers to entry

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Decision of one firm affects pricing and production decision of the other firm(s)

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Profits depend on interaction with other firms

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Game theory for analysis: Pay-off matrix (shows profit for each firm): does the firm have a dominant strategy? Definition of dominant strategy Nash equilibrium: definition, how to find it Non-cooperative equilibrium

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Prisoner’s dilemma: definition, examples

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Repeated Games: signaling, price matching (example in class)

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Cartels: ex OPEC (incentive for members to cheat)

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Sequential Games: deterring entry (examples in class): use decision tree for analysis

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Bargaining (use decision tree for business planning)

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