Economics Midterm Review 2: October 23rd Class Notes

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Economics Midterm Review 2: October 23rd Class Notes
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2014-10-24 00:11:04
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Economics Midterm 2
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  1. What is deadweight loss?
    In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal.

    The costs to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. 

    Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise. Taxes are also said to create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product will be above the equilibrium market price.
  2. How do you calculate a new demand curve when a dollar is donated when purchasing icecream....?
    THe supply function changes, and is inverted  from Q=5+2P, invert to P= -7/2+1/2

    The supply curve shifts up,  the purchaser pays an extra dollar.  Plus one.

    If it goes down, you subtract
  3. How do you calculate profit?
    Revenue - cost
  4. Profit varies with the level of output because
    both revenue and cost vary with out put
  5. What are the two key decisions to maximize profit?
    • 1. Output decision: What is the output level that maximizes profit or minimizes loss?
    • 2.Shutdown decision:  Is it more profitable to produce, or to shut down?
  6. Output decision... The extra income from ________.
    The extra income from selling one more unit of output must be equal to the extra cost from making that unit of output.
  7. The change in total revenue/ the change in quantity
    Marginal Revenue
  8. The change in total cost/ the change in quantity
    Marginal Cost
  9. If marginal revenue is greater than marginal cost... should I produce more?
    Yes, because the profit is increased
  10. If I produce more, and marginal revenue is equal to marginal cost... should I produce more?
    No, because profit stays the same
  11. Profit is maximized when
    marginal revenue - marginal cost = 0
  12. Output decision, shows where marginal revenue - marginal cost = 0 

    Profits are maximized here...  at pie and Q.
  13. What does Pie mean?
    profit
  14. What is TR?
    Total revenue
  15. WHat is TC?
    Total cost
  16. What is Q?
    Quantity
  17. What is MR?
    Marginal Revenue
  18. What does a triangle signify? (delta)?
    Change
  19. Marginal Revenue - Marginal Cost =
    Marginal Profit or MPie
  20. what is q*
    the amount of output that will maximize profit
  21. What is VC?
    Variable cost (i.e. labour, computers, whatever you can buy in the short run)
  22. What is FC?
    Fixed cost (i.e. the cost of machinery, etc)
  23. f
  24. The decision if you should produce or not rests on...
    the variable and fixed cost.  Break down the profit equation, revenue-costs to revenue-fixed costs-variable costs

    • For example...
    • Q            P          TR     W    VC         FC         PiePRo PieDONT
    • 1            5            5       2     2          10         -7          -10

    Should I produce this?  Yes, because you lose money.  IF you produce you only lose 7, but if you don't you lose 10.
  25. When do you stop producing?
    When the PieProduced is a bigger loss than PieNotProduced

    Or.. when the price is lower than the wage.

    You should not produce if the revenue can not cover the variable cost of producing those units.   You should produce if the total revenue is able to cover the entire variable cost and still cover some of the fixed costs.  It can be more harmful if you don't produce in some cases.
  26. In the short run, as long as revenue covers variable
    costs and some fixed cost...
    no shutdown occurs.
  27. What is PV? FV?
    Present Value; Future Value
  28. Money in the future is work ____ than today.
    less
  29. What are the main market structures?
    • Perfect competition
    • Monopoly
    • Oligopoly
    • Monopolistic Competition
  30. What is market structure?
    n economics, market structure is the number of firms producing identical products which are homogeneous.

    • Number of firms in the market
    • ease with which firms can enter and leave the market
    • ability of firms to differentiate their products from those of their rivals
  31. Describe characteristics of perfect competition
    • Characteristic# 1. Large Number of Buyers and Sellers
    • ◦If the sellers in a market are small in size and numerous, no single firm can raise or lower the market price.

    •  Characteristic # 2. Identical Products
    • ◦Buyers perceive firms sell identical or homogeneous products. Fuji apples are identical, all farmers charge the same price.

     Characteristic # 3. Full Information

    ◦Buyers know the prices charged by all firms and that products are identical. No single firm can unilaterally raise its price above the market equilibrium price.

    •  Characteristic # 4. Negligible Transaction Costs
    • ◦Buyers and sellers do not have to spend much time and money finding each other or hiring lawyers to write contracts to make a trade.
    • ◦Perfectly competitive markets have very low transaction costs.

    •  Characteristic # 5. Free Entry and Exit
    • ◦The ability of firms to enter and exit a market freely in the long run leads to a large number of firms in a market and promotes price taking.
  32. What does perfect competition mean?
    In economic theory, perfect competition (sometimes called purecompetition) describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets.
  33. Define Monopoly
    A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition,monopoly is characterized by an absence of competition, which often results in high prices and inferior products.
  34. Define Oligopoly
    DEFINITION of 'Oligopoly' A situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.
  35. What is a monopolistic competition?
    Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes.
  36. What market competitions are price setters?
    Monopoly, oligopoly, monopolistic
  37. What market conditions are price takers?
    perfect competition.  If there are too many suppliers, and you try to sell at a higher price, no one will buy it...
  38. Perfect Competition: Explain... Free entry and exit
    The ability of firms to enter and exit a market freely in the long run leads to a large number of firms in a market and promotes price taking.
  39. Perfect competition in the short run - output decision. 

    THe blue line is flat at 8 which is the price.  The supplier (red) will produce 284 units of output at pice e to maximize profits.  THe profits will be the difference between how much they can get (8) and the cost (284)... THe average cost is total cost/quantity.  

    YELLOW is the profit function. 

    Marginal revenue =  equal to price.   6.5 is profit per unit.



    Because a competitive firm is a price taker....

    Total Revenue = Price x Quantity  - Total Cost(Q)

    • Q    P   TR   MR
    • 1     3    3   
    • 2     3    6    6-3=3
    • 3     3    9    9-6=3
  40. Perfect competition is the only market structure where...
    Marginal revenue =  equal to price.

    BECAUSE  perfect condition is a price taker.
  41. Perfect competition - Shutdown decision

    AVC = purple, average variable cost... It's the variable cost per unit of output.   If the price is above the average cost (green), you make a profit, because the average cost per unit is less than the revenue that you receive.   So therefore price needs to be above 6.  If price is between 6 and 5, you make a short run loss (coloured orange).  If price is LESS than 5, shut down.

    Any point on the MC curve (red), is going to be the supply function for this supplier.

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