Micro Final Exam Review Economics looks at what how and for whom PPC is bowed outward because resources are specialized Price elasticity o E 1 Elastic consumers change behavior based on price o E 1 Inelastic consumers do NOT really change behavior due to price o E 1 Unitary elasticity A larger percentage increase in price resulting in small percentage reduction in quantity demanded relatively inelastic The more substitutes available the more elastic The availability of substitutes is the most important factor in determining elasticity Ex If E 0 52 and the firm raises price what happened to total revenue o Total revenue increases The total spending on a good will decrease if o Demand is elastic and price increases o Demand is inelastic and price decreases If there s positive income elasticity consumers buy more when their income rises A normal good is a good that consumers buy more of when income rises An inferior good is a good that consumers buy less of when income rises ex People making millions of dollars aren t eating ramen anymore As a product industry becomes more specific the availability of substitutes and thus elasticity increases ex If you re looking for a pizza restaurant there are a variety of different places you can go to more substitutes look for the cheapest one and therefore your demand is elastic As a product class broadens the availability of substitutes decreases and demand becomes more inelastic Accounting profit total revenue total out of pocket costs Economic profit total revenue total out of pocket costs opportunity cost Accounting profit is always higher The short run is a time period in which existing firms in the market do not Zero economic profit is referred to as the normal profit rate have sufficient time to increase size or capacity In the short run at least one input must be fixed In the short run average fixed cost is high at small output rates In the short run marginal cost will be high at large output rates due to the law of diminishing returns In the short run marginal cost initially falls due to increasing marginal returns and learning by doing and then rises due to the law of diminishing returns The minimum points of AVC and ATC is where MC intersects The relationship between marginal cost and average total cost is like the relationship between semester and cumulative GPA the average chases the margin When marginal cost is less than average cost marginal cost must be rising falling or constant The SR ATC curve tends to be U shaped because at small output rates AFC will be high while at large output rates MC will be high as the result of the law of diminishing returns The long run is a time period in which existing firms in the market HAVE sufficient time alter plant size and capacity In the long run ALL inputs are variable none are fixed AFC 0 In the long run average total cost equals average variable costs because all inputs are variable The long run average total cost curve is U shaped because if increasing returns to scale at low production and decreasing returns to scale at high production Economies of scale increasing returns to scale means the benefit to the firm is becoming larger and the average total cost is falling which is GOOD this is represented by the downward sloping portion of the long run average total cost curve Diseconomies of scale decreasing returns to scale means that the benefit is negative and the average total cost is rising this is shown by the upward sloping porting of the long run average total cost curve Summary of cost curves o Short run must have at least ONE fixed cost diminishing returns determines the shape of the cost curve o Long run all costs are variable economies of scale determine the shape of the cost curve When cost curves shift up supply curves shift left When cost curves shift down supply curves shift right Cost curves deal with the cost of products for the producers the firm A price CEILING puts and UPPER limit on price and generate a SHORTAGE and deadweight loss price o On a price ceiling graph the ceiling is drawn BELOW the equilibrium o Ex rent control lower rent prices and lower quality housing o If price ceiling was ever set above equilibrium price then equilibrium price would just become the market price o When a shortage is present due to price ceiling non price factors such as discrimination or waiting in line play a greater role in allocation A price FLOOR puts a LOWER limit on price and generate a SURPLUS and a dead weight loss this is when price cannot fall below the set price of the floor such as in minimum wage o In a price floor graph the floor is set ABOVE the equilibrium price Both ceilings and floors lead to reduction in quantity traded DWL The imposition of taxes causes a shift in the entire curve supply curve when on sellers and demand curve when on buyers The burden of tax is determined by the Elasticities of supply and demand The most INELASTIC group bears the biggest burden According to the laffer curve when marginal tax rates are high a reduction in tax rates may increase tax revenues when marginal tax rates are high an increase in tax rates may decrease tax revenues The benefit of a government subsidy is determined primarily on the Elasticities of demand and supply Ignoring the secondary effects the most inelastic group receives the biggest benefit from subsidies Taxes and subsidies distort incentives and create secondary effects which are sometimes undesirable 7 questions come from potential shortcomings of the market The market may produce inefficient outcome due to a lack of competition poor information public goods and externalities A lack of competition can lead to a restricted supply which will lower the quantity available and raise the price Public goods are non rival in consumption joint consumption and are non excludable this give individuals the strong incentive to free ride which leads to underproduction due to the fact that it is hard to generate funds for publics goods With external COSTS there are too many units being produced in the market and the price is too low in an efficient economy the production would be lower and the price would be higher With external BENEFITS too few units are produced and price is too low in and efficient economy there would be more units produced and the price would be higher When consumption of a good generates an external benefit the market demand curve will understate the total benefits derived from consumption and as a result
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