ElasticityCharacteristics of curvesLong Run CostsPerfect CompetitionLong-Run SupplyReview SheetReread chapter 1 (up to pg. 11) as it is a good review. Economics- Study of how scarce resources are allocated among competing uses.When making a decision we only consider the marginal cost of that decision not the sunk costs.We will chose to do something as long as the marginal cost is less than the marginal benefit.Opportunity Cost - measures the best alternative forgone when making choices.Economic reality is not only controlled by economic forces but by social and political forces as well.Macroeconomics-study of economic aggregates such as national production and the price levelMicroeconomics: the study of the behavior of individual consumers and producers operating in the individual markets of the economyProduction Possibilities Frontier- Shows boundary between combination of goods an economy can produce and those it can not.Shape of Curve1. Negative slope- to produce more of one good an economy must produce less of the other good(if it is producing efficiently)2. Curved shape- Opportunity cost of producing more of one good increases as you produce more of it because resources are specialized.-PPF will shift out if there are changes in either technology or available resources.Absolute advantage is when a country produces a good using the minimum quantity of inputs.Comparative Advantage - the ability to be better suited to production of one good than to the production another good. This happens when they can produce a good at the lowest opportunity cost. Due to comparative advantage counties will tend to specialize in the production of goods over which they have comparative advantage. All countries will benefit from trade. Countries will trade even if one country has absolute advantage in all goods.Although the U.S. has benefited greatly from globalization due to increased markets for their products and cheaper prices forall goods, there have been some costs involved including losses in jobs and increased competition for domestic companies.Role of Government- The government plays a role whenever there are market failures (ie the market does not provide the most efficient solution)1. correcting for externalities.2. reducing market power3. proving public goodsThe operations of the economy can be depicted by the circular flow diagram which represents the three sectors of the economy (households, firms and the government) that interact in the goods and factor markets.Businesses can be sole proprietorships, partnership or corporations depending on the amount of control and/or liability they desire.Households are both suppliers in the factor market and demanders in the goods marketThe Government plays both the role of actor (by participating in the economy) and refereed (by setting rules and regulations)Demand curve - shows the quantities of a good a consumer is willing and able to buy at alternative prices given tastes, incomes, related prices and number of buyers.Law of demand- increase in price causes a decrease in quantity demand (movement along the curve)Change in other factors (income, tastes, price of substitutes, price of complements,) causes a change in demand - a shift right or left of the demand curveSupply Curve - a curve which shows the quantities of a good a seller is willing and able to sell at alternative prices at a given cost of production determined by input prices and technology and number of sellers.Law of Supply- Increase in price causes increase in quantity supplied(movement along the supply curve)Change in cost of production alters planned sales at all prices shifting curve to the right or left. Also a change in number of suppliers technology will also shift curve.If there is an increase in supply the amount supplied at all prices is greater the supply curve shifts right.Equilibrium- Equilibrium is when price is set where quantity demanded = quantity supplied.Thus the market will provide the most efficient solution if it is left alone however this is not always the most equitable solution. A change in equilibrium will arise when there is a shift of either the demand or supply curve.If P> Pe - surplusIf p<pe- shortagePrice and Quantity will change if either supply or demand change. If both demand and supply change at the same time, the results are often ambiguous(ie if supply and demand both increase quantity will increase but the change in price is ambiguous)Policies that affect operation of marketsPrice controls- If price is set above equilibrium price such as minimum wage(price floor) this will lead to surplus.If price must be below equilibrium price (price ceiling) such as with rent control this leads to shortages. This will also reduce in reduce quality of the product as well. The more elastic is supply and demand the greater the effect of these price controls.Excise Taxes affect the market but shifting the supply curve and resulting in a higher price for the consumer and a lower price received by the producer. Thus the burden of the tax is generally shared. However the burden is greater consumers the more inelastic demand is relative to supply.ElasticityElasticity of DemandPrice elasticity of demand- measures the responsiveness of the quantity demanded to the price of the goodsEp= %change in demand/%change in price =(change in Q/Qmidpoint)/(change in Price/Pmidpoint) If demand is elastic (ie >1) this means that demand is sensitive to changes in the price - for example cars, restaurants. A price increase will lead to a decrease in revenues.If demand is unit elastic(=1) demand is neither sensitive nor not sensitive to change int its price A price increase doesn't change revenues. If demand is inelastic(ie<1) Demand for the good is not very sensitive to price changes - is necessities, addictive goods- IF price rises revenues will increase.The more elastic is demand the flatter the demand curve is-Have two extremesperfectly inelastic perfectly elastic ex. Demand for insulin perfectly competitive marketElasticity depends on three factors 1. substitutability- the more readily other goods can be substituted the larger is the elasticity of demand 2. proportion of income spent -the higher the proportion of income spent the larger is elasticity3. Time frame for demand- the more time has elapsed the larger is the elasticity of demand(since it takes time to gather information about substitute goods and change tastes) thus the short