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What are the 5 behaviour assumptions of perfect competition?
- 1. Homogenous products
- 2. No barriers to entry into the market
- 3. Many buyers and sellers
- 4. Perfect info amongst buyers and sellers (everyone knows all going on in market)
- 5. No externalities in production or consumption (no outside interference)
IMPLICATION: agents are price takers
What is opportunity cost?
- Value of best alternative opportunity
- Not always cash cost
What is Marginality?
- Change in one thing resulting from the change of something else
What is Elasticity?
% change of something resulting from 1% change in something else
Is it optimal for a producer to produce at the technical maximum?
No, it is optimal to produce where MVP = MFC. Increase production until the last unit is equal to the extra cost of that unit.
What is the Law of Diminishing Returns?
As variable input increases, given some set of fixed input, eventually MPP decreases. Does not mean that physical output (Y) decreases, only change in Y.
How do you calculate MPP?
deltaY/deltaN = dY/dN
- Y = 1 + 2N - 3N2
- dY/dN = 0 + 2 - (2 x 3)N = 2-6N
What is the equation of max profit?
- (P x Y) is revenue
- (wx + b) is cost
What is the MR = MC model?
- Increase yield level (Y) as long as extra revenue (MR) from last unit of output > the extra cost (MC)
- Y* is optimal output yield
What is Q (market level supply) influenced by?
- Input prices, W
- Prices of related commodities
How do TPP, MPP, and APP relate (think graphincally)?
- Where MPP and APP are maximized, TPP begins to increase at a decrease rate (point of inflection).
- When MPP = 0, TPP is maximized.
How do you calculate MVP?
MPP x P
When elasticity is >1, it is (a).... <1, it is (b).... =1, it is (c)
- (a) elastic
- (b) inelastic
- (c) unit elastic
What is producer surplus (graphically)?
The area above the market supply curve and horizontal price line.
What are some factors that affect producer welfare?
- Market volatilities
- Policies and regulations
What is the producer problem?
What is the consumer profit?
What are the 3 assumptions of consumer preferences?
- Completeness of preferences: prefers one product over the other or neither
- Transitivity: if preference for q1 > q2, and q2 > q3, than q1 must be > q3
- Non-satiation: as good increases, utility increases
What is the equation for elasticity?
What are the 3 kinds of goods?
- 1. Inferior: D decreases as I increases, EI < 0
- 2. Normal: D increases/decreases as I increases/decreases, EI > 0
- 3. Luxury: D increases as I increases, EI >1
What is consumer surplus (graphically)?
Area below the demand function and above the horizontal price line
Define consumer surplus.
Amount consumers benefit from purchasing a product at price P that is less than their willingness to pay
Define producer surplus.
Amount producers benefit by selling a product at market price P that is higher than their willingness to supply to the market.
Define dead weight loss (DWL).
Loss of economic efficiency as market equilibrium for a good is met.
In regards to tax, what is total benefit?
Total benefit = Total Welfare + Taxpayer Benefit
What is the cross price elasticity value of substitutes?
E > 0
What is the cross price elasticity value of complements?
E < 0
What is the cross-price elasticity of supply of a product?
How much the supply of good A will change if the price of good B changes.
% change in supply of good A/% change in price of good B
What is the cross-price elasticity of demand of a product?
How much the demand of good A will change if the price of good B changes.
% change in demand of good A/% change in price of good B