Econ 102: Microeconomics Final Exam Review: Dr. Kagundu, Penn State University

EQ Price Increases and EQ Quantity Increases

EQ Price Decreases and EQ Quantity Decreases

EQ Price Decreases and EQ Quantity Increases

EQ Price Increases ad EQ Quantity Decreases

EQ Quantity Increases

EQ Quantity Decreases

EQ Price Decreases

EQ Price Increases

A shortage develops and price will increase

The decision of buyers and sellers that creates the equilibrium.

Prices are indicators of relative scarcity and ration goods to those who will pay the most

Non-price rationing:
(1)Rationing by waiting
(2)Rationing by random assignment/ coupon

Price Ceiling and Price Floor

The maximum price sellers are allowed to charge for a good or service

Buyers

PC is only effective if set below the market price

Surplus

The minimum price buyers are required to pay for a good or service

Sellers

...

When Government places a Price Ceiling on rents. This interferes with the housing market's ability to ration housing.

1. Income (Normal vs. Inferior Goods)
2. Tastes and Preferences
3. Prices of related goods (Complements vs. Substitutes)
4. Number of buyers
5. Expectations

1. Cost and availability of Inputs
2. Technological advances
3. Taxes and subsidies
4. Number of producers
5. Expectations

A quota is quantity restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period.

The difference between the max. price the buyer is willing to pay and what the buyer actually pays (which is the market price)

The difference between the min price a seller is willing to accept and what they actually receive (market price)

1. High levels of economic efficiency
2. Consumer sovereignty
3. Promotion of personal freedom
4. Prevent coercion of buyers & sellers by the existence of 5. competition

Can create a Market Failure

When the market economy leads to too few or too many resources going to a specific economic activity.

A Market Failure prevents the price system from attaining efficiency.

Market Failures caused by externalities and public goods

A consequence of an economic activity that spills over to affect third parties who are not directly involved in the given activity/ transaction.

1. An economic activity imposes a COST on third parties
2. Decreases in Supply, Demand Constant
3. When NegEx exists, market over allocates resources

i.e. Air pollution from Steel mill. - Negative because no one owns the atmosphere

1. Over allocate resources. :. Price is too low and Quantity is too high - Need to decrease supply and keep demand constant which is done by (1) Special taxes and (2) Regulation

1. An economic activity provides BENEFIT to third parties
2. Increase in Demand, Supply constant
3. When PosEx exists, market under-allocates resources

i.e. Inoculations- not only protecting self, but community as well

1. Finance the production of the good (Govt. runs inoculation centers)

2. Provide subsidies (Rebate program for those who get their shots)

3. Regulate (Require all school-aged children to get inoculated)

Using inoculations as an example*

1. Providing a legal system (Govt serves as a reference and settles disputes in the economic arena)

2. Promotes Competition (Forces innovations, makes it fair for consumers, ensures proper allocation of resources)

3. Providing Public Goods

A good that can be used by all people at no additional cost per additional consumer. Each additional consumer does not change the supply of the good/service

A good that is difficult to enforce payment and to exclude the people who do not pay for the good.

A measure of responsiveness in Quantity Demanded to change in price of a good. "How demand changes in response to a change in price."

It is always negative; represents the Law of Demand (Increase in Price= Decrease in Quantity Demanded)

The Percent change in quantity demanded, divided by the percent change in price

[(Change in QD / Initial QD) x 100] /
[(Change in Price/ Initial QD)

Ep= [Q2 - Q1 / .5 ( Q1+Q2)] ÷ [P2 - P1 / .5(P2+P1)]

Price Effect and Quantity Effect

After a price increases, each unit sold sells at a higher price, which raises revenue

After a price increase, fewer units are sold, which lowers revenue. The total effect of a price change depends on the relative magnitudes of the two effects.

|Ep| >1

Price Increase = Total Revenue Decrease
(The Quantity Effect exceeds the Price Effect)

Better to Decrease Price in order to Increase TR

|Ep|= 1

Price Increase = No change in Total Revenue

|Ep|<1

Price Increase = Increase in Total Revenue

Better to increase Price in order to Increase TR

1. Existence of Substitutes
(The more substitutes, the more elastic the demand)

2. Share of Budget
(The smaller the share of the budget, the more inelastic)

3. Time for Adjustments
(More inelastic in the short term; more elastic in long-run)

Exy= Measures the effect of change in one good's price on the quantity demanded of the other good.

Exy=(%change in QD of Good X) / (% change in Price of Y)

Substitutes

Complements

Unrelated

Ei= measures the effect of change in income and one's demand for certain types of goods

Ei = [ (Q2 - Q1) / 1/2(Q2+Q1) / (I2 - I1) / 1/2(I2+I1)

Normal Goods

Inferior Goods

Necessity

Measure of how much the Quantity Supplied changed in response to change in Price

When a 1% increase in price creates a an Increase in QS greater than 1%

When the slightest reduction in price causes the QS to fall to zero

When a 1% increase in price creates a QS increase less than 1%

When the QS remains the same as Price Changes

If the percent of price change is equal to the percent change in QS

Satisfaction/ satisfying power of a good or service. The utility that an individual receives from a good depends on their individual tastes and preferences.

A unit of 'measurement" for utility.
Ex) consumption of a cookie may provide you with 4 utils.

The amount of utility (satisfaction) measured in utils from consuming a good or service.

Bell curve on graph. The total Utility is seen as the highest point on the graph. Uses Utility on the y-axis and # units consumed on x-axis.

The change in total utility due to a one-unit change in the quantity of a good consumed.

Seen as a line on graph. The x-intercept is the highest quantity with the most utils.

Uses Marginal utility on y-axis and quantity consumed on the x-axis.

MU falls as more is consumed.

MU = zero when total utility is at Maximum

MU= (change in total utility) / (change in # of units consumed)

Principle that states as more of any good/service is consumed, its extra benefit declines. (Increases in Total Utility from consumption of a good/service becomes smaller and smaller as more of that good is consumed during a given amount of time.

A choice of a set of goods and services that maximize the utility of each consumer, subject to limited income.

The Consumer Optimum is reached when the MU of the last dollar spent on each good yield the same utility and all income is spent.

But if PriceA falls and PriceB stays the same then: MUA/PA > MUB/PB and consumer will buy more of good A because Price decreased and the MUA increased.

Payment for the use of any resource over and above its opportunity cost. It can be viewed as a payment to resource owners in excess of what would be necessary to call forth that amount of the resource.

Economic Rents allocate resources to their highest valued uses. Those who can most efficiently use the resources offer the highest payment

Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity

If you have a job that pays 50k per year, the lowest salary for you to change jobs would be 50k, anything above 50k would be economic rent

Then the supply curve will slope upward and the supplier's income would be split between economic rent and opportunity cost

Then the supply curve would be perfectly vertical and the supplier's entire income would be comprised of economic rent.
For example, if the supply were a particular plot of land, the supply curve would be perfectly vertical, since there is no way for the landowner to supply additional land

the supply curve would be perfectly horizontal, and the supplier's entire income would be comprised of opportunity cost.

An organization that brings together different factors of production, such as labor, land, capital, and entrepreneurial skill to produce a product or service that it hopes it can be sold for profit.

A firm owned by a single individual. The owner makes all the business decisions and is legally liable for all the firm's debts.

Advantages:
-Faster decision making
-Income/ TR is only taxed once, as personal income
-Easy to start

Disadvantages:
-Unlimited liability
-Limited ability to raise financial capital
-Most end with the death of the owner

A firm with 2 or more owners. Partners are jointly responsible for running the firm. Limited partners and at least one General Partner

Advantages:
-Permits specialization
-Potential for better decision making through sharing idea
-Income is taxed once, as personal income

Disadvantages:
-Slower decision making, due to disagreements
-Unlimited liability for the general partner
-Typically the death of the partner leads to end of firm

A legal concept whereby the personal assets of the owner of a firm can be seized to pay off the firm's debts.

Such as in sole proprietorship, and the general partner in a partnership

A legal entity that may conduct business in its own name just as an individual does; the owners of a corporation, called shareholders, own shares of the firm's profits and enjoy the protection of limited liability.

Advantages:
-Limited liability
-Easier to raise financial capital
-Corporations typically outlive their owner

Disadvantages:
-Double taxation
-Conflicts between the interests of owners and those of managment

A legal concept in which the responsibility, or liability, of the owners of a corporation is limited to the value of the shares in the firm that they own.
These are the limited partners in partnerships, and shareholders of a corporation

71.3%

9.7%

19%

4%

Average of $57,000 per year

13%

Average of $1,390,000 per year

83%

Average of $4,501,000

Portion of a corporation's profits paid to its owners (shareholders).

Total revenues minus total explicit cost.

Total revenues minus total opportunity costs of all inputs used, or the total of all implicit and explicit costs.