Microeconomics Final Exam Study Guide A Study Guide For People Who Speak English Not Economics This Guide Has Graphs Like There is No Tomorrow Created In Photoshop for Accuracy Every Thing You Need to Know to ACE that Exam Every Topic In the Class Covered in DETAIL but Still in English for us NORMAL Humans that Don t Speak Economics Every Single Clicker Question With The Answers of Course Now Lets get started not with the easy stuff you already know lets dive into things with the big things you will need to know for the exam Lets get started on Chapter 8 Costs and the Supply of Goods Short Run and Long Run Time Periods Categories of Costs The Short Run The Long Run A period of time in which at least one input is fixed In the short run the firm is STUCK with SOMETHING as in one of its resources is CAN NOT change For example you cant change the size of a building or the size of a factory The short run could be a few days or a few years There is no set time limit A period of time in which all inputs are variable i e none of the inputs are fixed In the long run EVERYTHING is variable and nothing is fixed The long run is more theoretical most firms just go through short run after short run The 4 Types of Costs Fixed Fixed costs don t vary with quantity Variable Variable costs vary with quantity Average Average costs are per unit costs Marginal Marginal costs is the change in total cost Fixed If you are a factory whether you make 10 units or 10 000 units you still have to pay the same for rent Examples of Fixed and Variable Costs of the building you make products in Variable If you are a factory and you make more of a product you have to pay more for more electricity Lets say that we were to plan a birthday party What things do we need Fancy Formulas TC TFC TVC ATC TC Quantity ATC AFC AVC AFC TFC Quantity AVC TVC Quantity Marginal Cost Change in TC Output and costs in the Short Run The ability of a firm to produce is intimately tied to its costs The Big Graph You Need to Know ATC Average Total Cost AVC Average Variable Cost MC Marginal Cost Why does the MC first fall and then rise rapidly MC initially falls at the start because Increasing Marginal Returns Each additional input adds more to total output than the previous input BeveragesVariable depends on how many people comeFoodVariable depends on how many people comeCakeFixed you will almost always need 1 cakeDecorationsFixed no matter how many people come you don t need moreEntertainmentFixed no matter how many people come you don t need moreMusicFixed no matter how many people come you dont need moreTotal Cost TCTotal Fixed Cost TFCTotal Variable Cost TVCAverage Total Cost ATCAverage Fixed Cost AFCAverage Variable Cost AVC If I have an assembly line if I add more workers then I can make more product faster I get increasing return for each worker I add this is called increasing Marginal Returns Workers gain experience and work more efficiently and increase output and lower costs MC Then rises because of Diminishing marginal returns eventually each additional input adds less to total output than the previous input Add more workers on an assembly line but there began to be so many that there is a point where they don t fit one the line and total output actually stops increasing because they cant effectively do their jobs because they run out of room they are too crammed and they are bumping into each other The average chases the margin Put Into Plain English Lets say a junior tells professor Calhoun they need a B in this class or else their grades will fall so low that they If the margin is greater than the average it pulls the average up If the margin is less than the average it pulls the average down Whats the relationship between MC and ATC can t stay in the university Their average grade is low because of their previous bad grades Output and Costs in the Long Run Graph of LR Costs Why does the LRATC have a U shape to it In order to produce larger quantities the firm will need to get bigger That is they will need to increase their capital if they want to make more stuff they need to purchase more resources equipment buildings etc These are typically expensive so capital costs become large which drives up LRATC as you produce more you can do with what you have resource wise for a bit but as you produce more and more you need resources and buying them drives the curve upward Economies and Diseconomies of Scale Economies of scale is the benefit to the firm form becoming larger Economies of scale means the benefit is getting bigger ATC is falling Also referred to as Increasing Returns to Scale Diseconomies of scale means the benefit is negative ATC is rising Also referred to as Decreasing Returns to Scale Graph of Economies and Diseconomies of Scale What Factors Cause Cost Curves to Shift Up and Down You do not Have to Memorize These Higher Cost Curves Shift Up Lower Cost Curves Shift Down resources become more expensive higher taxes 1 2 3 More or stricter regulations 4 older technology 1 2 3 4 resources become less expensive lower taxes less regulation newer technology The Economic Way of thinking about Costs Continue to engage in activity as long as the expected marginal benefit is greater than the expected marginal cost Some costs need to be ignored If you are waiting in line at a supermarket for awhile and then you see another faster line You move because you want to get in the faster line And you forget about the time you spent in the longer line This is a sunk cost and it cannot be ignored or recovered Therefore the sunk cost should be ignored but not forgotten This way you don t waste your time in long lines again 2 3 4 Some Clicker Questions The short run is a time period such that 1 The existing firms in the market do not have sufficient time to change the amounts of any of the inputs that they employ The existing firms in the market do not have sufficient time to either increase of decrease their current rate of output The existing firms in the market do not have sufficient time to increase the size of their existing plant of build a new factory New firms may build plants and enter the industry The long run is a period of 1 2 3 4 At least one year Sufficient length to allow a firm to expand output by hiring additional workers Sufficient length to allow a firm to alter its plant size and capacity and all of there factors of production Sufficient length to allow a firm to transform economic losses into economic profits by
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