Reid’s Econ Study Guide (Based off of Half Hour Exams) - Exam 1 o Economists assume that individuals are rational and respond to incentives o An increase in the price of a product that producers sell instead of milk would cause a decrease in the supply of milk o If an increase in income leads to a decrease in the demand for popcorn, then popcorn is an inferior good o The principle of opportunity cost is that the economic cost of using a factor of production is the alternative use of that factor that is given up o If the iPhone and Galaxy are considered substitutes, then, other things equal, an increase in the price of the iPhone increase the demand for the Galaxy o In 2004, hurricanes destroyed a large portion of Florida’s orange and grapefruit crops. In the market for citrus fruit the supply curve shifted to the left resulting in an increase in the equilibrium price o- Exam 2 o To affect the market outcome, a price ceiling must be set below the equilibrium price o Finding equilibrium price and quantity  Set the two equations equal to each other and solve for one variable, then plugging it back in to find the other variable o “I was all ready to pay $300 for a new leather jacket , but I had ended up paying $180 for it somewhere else” Describes the concept of consumer surplus o Imposing a rent ceiling results in an increase in the quantity demanded of apartments, there is a reduction in the quantity supplied of apartments, and the marginal benefit of the last apartment rented is greater than the marginal cost of supplying it o Supposing the demand curve for a product is vertical and the supply curve is upward sloping, if a unit tax is imposed in the market for this product, buyers bear the entire burden of the tax o The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called consumer surplus o Economic efficiency is defined as a market outcome in which the marginal benefit to consumers off the last unit produced is equal to the marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum o- Exam 3 o If someone is willing to pay a certain price for something, but not any more than that, their price elasticity of demand is perfectly elastic o If the price elasticity of demand is -3, that means a 1 percent increase in the price of a good causes quantity demanded to decrease by 3 percent o When there are very few close substitutes of a good, demand tends to be relatively inelastic o If a firm wanted to know whether the demand for its product was elastic, unit-elastic, or inelastic, the firm could change price a little bit and observe what happens to total revenue o A vacation home in the Swiss Alps is likely to have a very high income elasticity of demand o The price elasticity of supply is equal to the percentage change is quantity supplied divided by the percentage change in price o- Exam 4 o Review from earlier o o- Exam 5 o A product is considered to be nonexcludable if you cannot keep those who did not pay for the item from enjoying its benefits o Marginal cost is equal to the change is total cost divided by the change in output o If diminishing marginal returns have already set in for Golden Lark Woodworks, and the marginal product of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter is less than 8 chairs o o A characteristic of the long run is all inputs can be varied o- Exam 6 o A perfectly competitive industry achieves allocative efficiency because goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it o If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is $25 o If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should increase its output o Both buyers and sellers are price takers in a perfectly competitive market because each buyer and seller is too small relative to others to independently affect the market price o When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell nothing at all; the firm will shut down o If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then new firms are attracted to the industry o Perfectly competitive market structure has a very large number of firms that are small compared to the market, all firms sell identical products, and there are no restrictions to entry by new firms o- Exam 7 o Characteristics common monopolistic competition and perfect competition are low barriers to entry, firms act to maximize profit, the market demand curve is downward-sloping o The profit-maximizing rule for a monopolistically competitive firm is to produce a quantity such that marginal revenue equals marginal cost o An oligopolistic firm differs from a perfect competitor in that there are no barriers to entry in perfect competition but there are many barriers in oligopoly o A monopolistically competitive firm that is earning profits will, in the long run, experience a decrease in demand for its product, demand for the firm’s product becomes more elastic, and new rivals entering the market o A Nash equilibrium is reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group o The larger the number of firms in an industry the more intense the rivalry among firms o If a firm has excess capacity, it means that the firm is not producing its minimum efficient scale of