Microeconomics – Test 2 – Dickey

MU(a) MU(b)
----- = -----
P(a) P(b)

(the consumer will maximize utility by making sure the last dollar spent on each good yields an equal amount of marginal utility)

p. 402

the basic economic principle that as the consumption of a product increases, the marginal utility derived from consuming more of it will eventually decline

(the more of a good you consume, the less valuable it becomes to you)

p. 400

a number that indicates how responsive consumers are to a change in a product's price.
if the number's absolute value is greater than 1, the demand is elastic

if the number's absolute value is between 0 and 1, the demand is inelastic.

p. 405

%ΔQ
------
%ΔP

or

{(Qo - Q1)(Qo + Q1)}
----------------------
{(Po - P1)(Po + P1)}

p. 405-06

1. Availability of Substitutes
2. product's share of the consumer's total budget

1: if there are substitute products for the good, people will be very responsive to changes in price because they can easily switch to different prices. This would be elastic demand. If there are few substitute products, the demand is inelastic

2: if the product is very cheap in comparison to the consumer's budget, they will not care whether the price doubles or not because it will still be cheap

p. 409-10

when demand is elastic, price and total revenue will move in opposite directions (price increase = decreased revenue)

when demand is inelastic, price and total revenue will move in the same direction
(price increase = increased revenue)

p. 411

income effect: when consumer's income increases due to a change in price in a product. This increase in income causes increased consumer spending

substitution effect: when consumers substitute cheaper products for more expensive goods after a price change

p. 403

explicit: when the firm pays for resources (labor, materials, etc)

implicit: opportunity costs associated with the firm's use of its resources.

p. 421

individuals who bear the risk of their own business ventures. If their business fails, they lose money; if it succeeds, they make money

residual claimants are important because they strive for absolute efficiency due to their own wealth being on the line.

p. 417

as more and more units of a variable resource are used with a fixed amount of other resources, output will eventually increase by smaller and smaller amounts

(ex: if workers are variable resources and warehouse is fixed resource, then the warehouse will eventually become less efficient if too many workers are in the building)

p. 425

LR (in production): a time priod long enough to allow the firm to vary all of its factors of production

SR: a time period so short that a firm is unable to vary some of its factors of production (firm's plant size typically can't be altered in SR)

p. 422

ATC will be high for both an underutilized plant (not using all of resources) and an overutilized plant (over-producing for the number of resources available)

p. 424

ATC = TC/# of units produced

ATC = AVC + AFC

decreasing cost industries in the LR are seen when the business's growth allows them to buy resources that have better technology (allowing them to produce the resources more cheaply)

p. 452

AFC = total fixed costs (costs that don't vary with output) divided by the number of units produced. - declines as output increases

AVC = total variable costs (costs that rise with output) divided by the number of units produced.

ATC = total cost divided by the number of units produced (per-unit cost)

p. 423

ATC can be affected by changes in AFC or AVC. When there are very few units of output, AFC will be very high which will also cause ATC to be high.

if MC changes, this will shift ATC in whichever direction MC has changed

price taker market:
1. identical products
2. large # of firms
3. each firm has very little market share (no large firms)
4. no barriers to entry (or exit)

price seeker:
1. differentiated products
2. large # of firms
3. no large firms
4. little/no barriers to entry

p. 441-42

price takers:
their MR will never change due to price because they have identical products

price seekers:
must take into account the elasticity of the demand for their products when setting prices (in order to maximize profit)

in a price taker market, MR=d=p

in price seeker market, MR slopes slightly below the downward sloping demand. Price is determined by where MR=MC (and the d curve)

MC=MR

In the LR, economic profit for a price taker market will be $0
this is due to the low barriers to entry.

When firms are making profits, new firms will try to get into the market to also make profit which will increase supply/lower price/reduce profit.

There can be 3 LR conditions on the supply curve

1. constant cost industry (supply curve remains horizontal)

2. increasing cost industry (supply curve slopes upward) [most common]

3. decreasing cost industry (supply curve slopes downard) [very rare]

p. 451-52

economic profit = difference between the firm's total revenues and the total costs (including implicit/opportunity costs)

zero economic profits = normal profit rate: providing just the competitive rate of return on the capital
an above normal profit will draw more entry into the market, whereas a below normal profit will lead to an exit of investors and capital

p. 421

constant cost industry = industry for which resource costs never change due to the demand for resources for that industry's are minuscule compared to the over all demand for those resources.

p. 451

more firms will rush in to take some of the profit, causing supply in the overall market for the product to increase, causing price to decrease, causing economic profit to fall back to zero.

because they are both contestable markets (low/no barriers to entry)

zero economic profit will be sustained (if they are making profit, more firms will enter the market; if they are making losses, more firms will leave the market)

The MC curve above the AVC curve is the supply curve for the firms in contestable markets.

when AVC are less than price

no/low barriers to entry

entrepreneurial success depends on how good they are at judging a market/making decisions on how to succeed

"the crucial entrepreneurial element of making uncertain decisions regarding uses of current or new resources to satisfy future preferences."

p. 468

price seeker markets give the consumer differentiated choices for the products on the market.

allocative efficiency: p = Mc
productive efficiency: p = ATC (at its min)

because d is downward sloping, MR is less than price charged for the product
this means that MR = MC AND p = MC cannot occur at the same time.

This means (in order to make maximum profits) firms must give up allocative efficiency and charge a higher price to consumers than a price taker market would charge.

p. 464

price discrimination involves selling products at the highest price each individual consumer is willing to pay (cutting out consumer surplus). this benefits the business's profits.

competition, entrepreneurship/innovation, and business failures.