Review Sheet Test 3 I First subtopic A Chapter 7 B Fundamentals of Consumer Choice 1 Limited income necessitates choice a due to scarcity buy more one good therefore less of an other 2 Consumers make decisions purposefully a if cost is the same will choose most beneficial and if benefits are the same will choose the one costs less 3 One good can be substituted for another a utility satisfaction from many different alternatives b no single good is so precious that some of it will not be given up for a large enough quantity of other goods even unrelated goods can be substituted for one another 1 ex high H2O prices in Cali started increase in cactus farms 4 Consumer must make decisions without perfect informa tion but knowledge and past experience will help a as stated earlier information is costly to acquire b time and effort spent acquire information is directly re lated to the value derived from the good 5 The law of diminishing marginal utility applies As the rates of consumption increases the marginal utility gained from consuming additional units of a good will decline a the additional utility from consuming successive units of a good will eventually decline as the rate of cun sumption continues to increase law of diminishing marginal utility basically the reason behind the down slope of demand curve 1 ex the kid that ate the stupid amount of bananas his 1 10 score by 6 Simply at any given price consumers will pur the 12th banana was in negative numbers wanting to vomit etc chase all units of a good in which their maxi mum willingness to pay marginal benefit is greater than the price C Price Elasticity of Demand change in qty de manded change in price a price elasticity of demand measure the sensitivity of the b change New Old New Old 2 qty demanded relative to change in prices RELATIONSHIP GOING TO ALWAYS BE NEGATIVE 1 IGNORE THE NEGATIVE SIGN BECAUSE ITS AN INVERSE 2 ELASTIC GOODS have elasticity of 1 which means that the change in qty is larger than change in price ba sically the qty demanded is VERY responsive to price changes 3 INELASTIC GOODS have elasticity of 1 which means that the qty demanded is not very responsive to price changes 4 examples end of guide 5 Total Expenditures Revenue and Elasticity a Total Revenue price quantity b TR p q 6 7 If we RAISE THE PRICE OF GOOD WHEN DEMAND IS a ELASTIC 1 Revenue goes DOWN b INELASTIC 1 Revenue goes UP 8 EFFECTS OF PRICE ELASTICITY OF DEMAND a availability of substitutes 1 lots of subs elastic have lots of choices gonna chose cheapest 2 no subsititutes inelastic no other goods no choice but to pay the b the amount of the consumers income spent on the good overpriced 1 goods that DONT take up much of budget like bubble gum or something minute will tend 2 be INELASTIC b c so little income spent anyways you dont care if bubble gum is 1 26 instead of 1 20 only 6 cents 2 goods that DO take up large percent of income tend to be ELAS TIC buy a house going to look for the best deal big different b w 250 000 and 350 000 c time horizon 1 price elasticity of the product will INCREASE as consumers have more time to adjust to change in price LONGER TIME HORIZON MORE ELASTIC direct relationship b w size of elasticity and the length of adjustment period called SECOND LAW OF DE MAND d INCOME ELASTICITY chnge in qty demanded chnge in income 1 POSITIVE NORMAL GOOD MORE INCOME CONSUME MORE a b LESS b w 0 1 NECESSITY GOOD GREATER THAN 1 LUXARY GOOD 2 NEGATIVE INFERIOR GOOD MORE INCOME CONSUME e f 9 10 11 12 II Chapter 8 cost and the supply of goods A Organization of Business Firms 1 3 Types a 1 proprietorship owned by ONE individual posses right to firms profits but also finically accountable b 2 partnership firm owned by TWO individuals who posses rights to firm and are accountable for finances c 3 corporation firm owned by SHAREHOLDERS posses right to firms profit but limited in liability of fi nances to their amount of investment d STUFF 2 KNOW 3 4 business are PROPRIETOR SHIPS BUT only 4 of all business revenue whereas 1 5 are CORPORATIONS and account for 84 of all business revenue 2 Costs a TOTAL IMPLICIT EXPLICIT b explicit things you can write a check for c implicit opportunity costs assoc with firms use of re sources 1 for example if you owned your own office building in downtown tallahassee and you had a small business an implicit cost could be the money your firm could make if you rented out the property d When economist says earning zero economic profit means that the firm are recieving the exact normal profit rate they are earning neither more nor less than they could elsewhere 3 SHORT VERSUS LONG RUN a short time period so SHORT that firm is UNABLE to b long a time period long enough to ALLOW the firm to alter its present plant size alter ALL other factors of production 4 MUST SEE CHART ON PAGE 179 FOR CALCULA TIONS OF DIFFERENT COSTS ATC TVC ETC ETC ETC a I WILL DO AN EXAMPLE END OF GUIDE 5 Law of Diminishing Return increasing one factor of pro duction while holding other constant will yield DE CREASING amounts of additional outputs a SEEE PAGE 184 EXHIBIT 6 1 AFC always decreasing 2 MC instersects AVC and ATC their minimum think of MC as 3 ATC is U shaped the GPA of this semester and ATC and your cumulative GPA 6 This Law of Diminishing Return explains why marginal and avg total costs will rise when diminishing marginal re turns are present successively larger amts of the variable will be required to increase output by one more unit this happens marginal cost WILL RISE As output is expanded if MC is more than ATC then ATC must be increasing 7 Long Run ATC LRATC reflects the costs of production for plants of various sizes if economies of scale are present LRATC will DECLINE when constant returns to scale are experienced LRATC will be CONSTANT when diseconomies of scale are present LRATC will RISE 8 economies of scale reductions in the firms per unit costs associated with the use of large plants to produce large vol ume of output economies of scale are LONG RUN CON CEPTS relate to production with all factors VARIABLE where as inc and diminishing returns are SHORT RUN applicable when at least 1 of 5 factors of production are FIXED 9 COST CURVE SHIFTERS same as CH 3 self explanatory a resource prices b taxes c regulation d techonology 10 Example Lets say your a farmer and cost of fertilizer goes up how does this effect AFC AVC MC and ATC a AFC stays the same fixed b and AVC MC and ATC all go UP c SUNK COST costs already occurred
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