opportunity cost what you give up to do an activity explicit cost implicit cost Explicit cost out of pocket cost Implicit cost cost of time and energy cost benefit analysis MC MB If B x C x will continue activity If B x C x will not continue MB MC marginal benefit and marginal cost the extra Cost Benefit Do an activity if and only if the benefit is greater than or equal to the cost scarcity limited resources scarce People have unlimited wants but there are only limited resources tradeoffs Absolute Advantage being able to perform a task in fewer hours than someone else Comparative Advantage being able to perform a task at a lower opportunity cost than someone else Ex outsourcing service work performed overseas for cheaper Production Possibility Curve PPC shows scarcity and choice opportunity cost always downward sloping Only compares 2 products Scarcity trade offs law of increasing opportunity cost Law of Increasing opportunity cost using the resources that have the lowest opportunity cost first low hanging fruit Law of Demand Illustrates the quantity buyers would purchase at each possible point when price of good increases quantity demanded decreases people willing to buy more at low price Excess Demand shortage when the supply is less than the demand demand curve a graph showing the quantity of a good that buyers wish to buy at each price Negative slope Buyers want to benefit from the good Law of Supply Illustrated the quantity of a good that sellers wish to sell at each price when price of good increases quantity supply also increases sellers want to sell more at higher prices Excess Supply surplus when the price is higher than the demand Supply curve a graph or schedule showing the quantity of a good that sellers wish to sell at each price Positive slope Sellers want to make a profit Price Elasticity of Demand how much the buyers buy at a certain price Elasticity measured in percentages percentage change in quantity percentage change in demand change in Q change in Price Ex If price of gatorade increases by 25 the quantity demanded will decrease by 50 because there are a lot of substitutes for gatorade E 50 25 2 Inelastic always negative because the demand curve is negative E 1 elastic E 1 inelastic E 1 unit elastic The more vertical the demand line the less elastic it is inelastic demand curve for natural gas The amount that buyers buy does not really depend on the price because consumers have such a high demand for that item The supply curve is usually inelastic not straight it is a curved line Price elasticity is different at each point E P Q 1 slope slope is the same for the demand curve P Q decreases as price goes down and quantity goes up E change in Quantity change in price Elastic Substitutes If Inelastic don t care about price Price Elasticity is always negative The more vertical the slope the more inelastic Price and quantity have inverse relationship Ex Price goes up quantity goes down If price goes down quantity goes up Perfectly Inelastic slope is zero perfectly vertical line Perfectly Elastic horizontal line Revenue P Q Perfectly competitive market price takers firms decide how much to sell at the given price NO market power Price MR Profit Revenue Cost OR Profit P ATC x Q Monopoly Has market power Can decide how quantity to produce and price Find price on Demand curve produce less and charge more Economic Profit Revenue Cost both implicit explicit In the long run economic profit ALWAYS equals 0 because market is so competitive Ch 5 Utility the satisfaction people derive from consumption cannot be compared between people Cost benefit if the cost of doing activity is greater than benefit you stop doing it Law of Diminishing Marginal Utility tendency for additional utility gained from consuming an additional unit of good to decrease as consumption increases beyond some point Marginal utility can increase at low levels of consumption Eventually marginal utility declines as you continue consuming Rational Spending Rule spending should be allocated across goods so that the marginal utility per dollar is the same for each good Important Formulas TC FC VC ATC TC Q AVC VC Q MC change in TC change in Q P MR MB If P ATC profit if P ATC loss if P AVC should shut down Profit P ATC x Q OR profit Revenue Cost Revenue P x Q Sellers cannot determine the price to sell a product they can only decide how much to produce at the market price accounting profit total revenue explicit costs explicit costs are payments firms make to purchase resources and products Economic profit the difference between total revenue and the sum of its explicit and implicit cost Economic profit in the long run is always zero in a perfectly competitive industry P MC ATC Consumer surplus is the triangle above the equilibrium point and producer surplus is below it To find their units just use the formula to find the area of a triangle 1 2 base height External cost a cost of an activity that falls on people other than those who pursue the activity also called a negative externality ex when people text and drive puts you in harms way living near a hospital lots of noise and traffic Smoking horrible for you and the people around you Externality an external cost or external benefit of an activity Negative Externality Positive externality also called a positive externality External Benefit a benefit of an activity received by people other than those who pursue the activity your neighbor plants beautiful flowers you can enjoy looking at them and the smell of them good wifi signal Demand curve marginal benefit Supply curve marginal cost You maximize profit when MC MR or MC MB Perfectly Competitive Market markets in which individual firms have no influence over the market prices of the products they sell A lot of sellers and buyers Easy entry and exit Price Taker No market power can only decide how much to produce at that price Demand Curve is horizontal P MR