Reid’s Econ Study Guide(Based off of Half Hour Exams)- Exam 1o Economists assume that individuals are rational and respond to incentiveso An increase in the price of a product that producers sell instead of milk would cause a decrease in the supply of milko If an increase in income leads to a decrease in the demand for popcorn, then popcorn is an inferior goodo 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 upo 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 Galaxyo In 2004, hurricanes destroyed a large portion of Florida’s orange and grapefruit crops. In themarket for citrus fruit the supply curve shifted to the left resulting in an increase in the equilibrium priceo- Exam 2o To affect the market outcome, a price ceiling must be set below the equilibrium priceo 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 variableo “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 surpluso 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 ito 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 taxo 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 surpluso 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 maximumo- Exam 3o If someone is willing to pay a certain price for something, but not any more than that, their price elasticity of demand is perfectly elastico 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 percento When there are very few close substitutes of a good, demand tends to be relatively inelastico 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 revenueo A vacation home in the Swiss Alps is likely to have a very high income elasticity of demando The price elasticity of supply is equal to the percentage change is quantity supplied divided by the percentage change in priceo- Exam 4o Review from earlieroo- Exam 5o A product is considered to be nonexcludable if you cannot keep those who did not pay for the item from enjoying its benefitso Marginal cost is equal to the change is total cost divided by the change in outputo 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 chairsoo A characteristic of the long run is all inputs can be variedo- Exam 6o 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 ito If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is $25o If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should increase its outputo 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 priceo 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 downo 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 industryo 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 firmso- Exam 7o Characteristics common monopolistic competition and perfect competition are low barriers to entry, firms act to maximize profit, the market demand curve is downward-slopingo The profit-maximizing rule for a monopolistically competitive firm is to produce a quantity such that marginal revenue equals marginal costo 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 oligopolyo 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 marketo 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 groupo The larger the number of firms in an industry the more intense the rivalry among firmso If a firm has excess capacity, it means that the firm is not producing its minimum efficient scale of