Microeconomics Final OSU

is the study of how best to allocate scarce resources among competing uses.

is the lack of enough resources to satisfy all desired uses of those resources

to produce with our limited resources.

to produce the goods and services we select.

goods and services are produced; that is, who should get them.

People make decisions with some desired outcome in mind

change in costs between products added

Focuses on facts and cause-and-effect relationships (WHAT IS)

Looks at the desirability of certain aspects of the economy (WHAT SHOULD BE)

Land, Labor, Capital, Entrepreneurial ability

All natural resources such as crude oil, water, air, and minerals

Refers to the skills and abilities to produce goods and services

Final goods produced for use in production of other goods

Assembling of resources to produce new or improved products and technologies

The alternative combination of final goods and services that could be produced in a given period of time with all available resources and technology

-Full employment All available resources are being used
-Full production
-Fixed resources Quantity and quality are fixed
-Fixed technology State of technology is constant
-Two goods Only two items being produced (Pizza vs. robots)

Resources do not transfer perfectly from the production of one good to another. Sacrifice ever-increasing quantities of other goods

Where marginal benefit (MB) equals marginal cost (MC)

Increase in production of goods and services. More resources, better quality, technological advances. Shifts curve OUTWARD allowing more to be attainable.

Interaction between buyers and sellers. Exists wherever exchanges takes place. Can be: Local, National, International

There must be a buyer and seller in every market transaction

is the supply side of the market

is on the demand side of the market

The most desired goods or services that are forgone in order to obtain something else

Table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period. Ceteris Paribus.

Curve that shows the demand schedule

An expression of consumer buying intentions

Other things equal, as price falls, the quantity demanded rises and as price rises, quantity demanded falls

Sum of individual demands

Tastes, Income, Other goods, Expectations, Number of buyers

When income increases, demand for normal goods increases

When income increases the demand for inferior goods falls

Substitute for each other. Price of good X increases, demand of good Y increases

Frequently consumed in combination. Price of good X increases, demand for good Y falls

Movements along a demand curve, in response to price change

Shifts of demand curve in response to taste, income, etc.

is the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus.

Resource price, technology, #ofsellers, taxes, producer expect.

Price at which the quantity of a good in a given time period equals the quantity supplied

Use of market prices and sales to signal desired outputs

Producing goods in least costly way

Producing right mix of goods

Maximum legal price a seller may charge for a product or service. Set below equilibrium price.

Minimum price fixed by government. Set below market price.

Measures buyers responsiveness to price changes

Sensitive to price changes and large change in quantity

Insensitive to price changes. Small change in quantity.

Ed = % change in Quantity demanded of X / % change in Price of X. USE MIDPOINT FORMULA (Change in quantity/sum of quantities over 2 + Change in price/sum of prices over 2

Ed > 1 = Elastic, Ed = 1 = Unit elastic, Ed < 1 = inelastic

Price x Quantity = TR

Substitutability, Proportion of income, Luxuries vs. Necessities, Time

Measures sellers' responsiveness to price change

Market period, short run, and long run

Measures responsiveness of sales to change in price of another good

Charge different prices based on elasticities

Market fails to produce the right amount of product. Over-allocated or under-allocated

Impossible to charge customers what they are willing to pay for the product. Some can enjoy benefits without paying

Occurs when a firm does not pay the full cost of producing its output. External costs are not reflected in supply

Demand curve must reflect the willingness to pay. Supply curve must reflect all costs of production.

Difference between actual price a producer receives and the minimum price they would accept. Extra benefit for receiving higher price.

Offered for sale, excludable, rivalry

Provided by government, free, non-excludable, free-rider problem

Cost Resources diverted from private good production Benefit Extra satisfaction from output of more public goods

Taxes individuals and businesses. Takes money and spends on production of public goods.

Because of positive externalities, government provides. Ex. Education, streets, libraries

Cost of benefit of accruing to third party, external to the transaction. "Spills over to."

Correct negative externalities through direct controls or specific taxes. Correct positive externalities through subsidies and government provision.

Payment that must be made to obtain and retain the services of a resource

Monetary payments

Value of next best use, self-owned resource, includes normal profit

Revenue - explicit costs

Accounting profit - implicit costs or TR - (Explicit costs + Implicit costs)

Resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship

Some variable inputs, fixed plant

All inputs are variable, variable plant, firms enter and exit

Total quantity

Extra output or added product associated with adding a unit

Output per unit of labor

Assumes resources are equal, technology is fixed. Variable resources are added to fixed resources. At some point, marginal product will fall.

Where MP exceeds AP, AP rises, and vice versa. MP intersects AP where average product is at maximum.

Most desirable rate of output is the one that maximizes total profit

Costs do not vary with output Ex. Rent

Costs vary with output. Ex. Fuel, power, labor

Sum of TFC and TVC

AFC = TFC/Q

AVC = TVC/Q

ATC = TC/Q

MC = ΔTC/ΔQ

Where MC is less than AC, AC declines. Where exceeds, rises. MC intersects AC where average cost is at a minimum.

Choose your plant size, Minimize ATC, Different ATC curves (short run), Long run ATC (envelope of short run ATC)

Reductions in minimum AC that come about through increases in size of plant/equipment.

Occur when an increase in plant size results in reducing operating efficiency

Smallest level of output at which a firm can minimize long run average costs

Number and relative size of firms in an industry

Market in which no buyer or seller has market power.

Many firms, Identical products, Low entry barrier, Price takers Firms cannot change market price

Firm that produces the entire market supply of a particular goods

Always sloping downward. In perfectly competitive firm, always horizontal.

Selection of the short-run rate of output

Two approaches. 1. Total revenue - total cost approach 2. Marginal revenue - Marginal cost approach

change in the total revenue that results from a one-unit increase in quantity sold

That's it.

A firm should produce at a rate of output where MR = MC

Price > MC = increase output, Price = MC = Maintain output, Price < MC = Decrease output

A firm should shut down only if losses from continuing production exceed fixed costs

Rate of output = minimum AVC

Where price exceeds average variable cost, the profit maximizing rule minimizes losses

Firms can expand or contract. Firms enter and exit industry.

Easy entry and exit, Identical costs, Constant-cost industry (Entry and exit do not affect resource prices)

Eliminates profits (Firms enter, supply increases, price falls) Exit eliminates losses (Firms exit, supply decreases, price rises)

Industry expansion or contraction does not affect resource costs

Firms ATC curve shifts up as industry expands and down as contracts

Firms experience lower costs as their industry expands

Productive efficiency (Where P = min. ATC), Allocative efficiency (Where P = MC)

Changes in consumer tastes, resource supplies, technology

Decreasing costs by innovation. New product development

Creation of new products and methods destroys old products and methods

Single seller, no close substitutes, price maker, blocked entry, non-price competition

Natural gas, electric, water. Near monopolies are intel, wham-o

Keeps firms from entering industry. Legal barriers such as patents and licenses. Ownership of essential resources, pricing.

Demand curve is the market demand curve. Marginal revenue is less than price. Marginal revenue < Price. Monopolist is price maker.

Not highest price. Total profit. Possibility of losses.

1. Antitrust laws Break up the firm 2. Regulate it Government determines price and quantity 3. Ignore it Let time and markets get rid of monopoly

Charging different buyers different prices

Monopoly power, market segregation, no resale

Socially optimal price. Natural monopolies.

De Beers once controlled about 80% of the worlds diamond market. Monopoly eroded over time. New focus on increasing demand rather than controlling supply.

Relatively large number of sellers with differentiated products. Easy entry and exit. Advertising.

Demand is highly elastic. Short run profit or loss. Long run normal profit. Inefficient. Product variety.

Firm constantly manages price, product, and advertising. Consumer benefits by greater array of choices and better products.

A few large producers. Homogeneous or differentiated products. Limited control over price. Mutual interdependence. Entry barriers.

Oligopolies display strategic pricing behavior. Incentive to cheat.

An oligopoly with only two members. Simplest type of oligopoly.

Study of how people behave in strategic situations. PRISONERS DILEMMA

1. Kinked Demand Curve Uncertainty about rivals reactions 2. Collusive pricing Cartels formally agree to prices. Illegal in U.S. 3. Price leadership Dominant firm initiates price charges, other firms follow. Use limit to block entry of new firms.

Prevalent to compete with product development and advertising. POS EFF. Low cost way of providing information to consumers. Enhances competition. NEG EFF. Can be manipulative, contains misleading claims that confuse consumers. Consumers pay high prices.

That's all.