Today we will..
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Begin our review of the entire MICRO economics course
– any notes you take from the power point (in your own
handwriting) may be used on the test to be given next
week.
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Wednesday – Multiple choice portion (60 questions) – counts
as 2/3rds of the score
Friday – Free Response portion (3 questions – one long and
two short) – counts as 1/3 of the score
Begin watching the videos assigned (partner quiz on
January 21st or 22nd) and studying our vocabulary
terminology (quiz on January 19th or 20th)
Microeconomics Review
Fall 2015
Circular Flow
Basic Economic Concepts to Know:
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Production Possibilities
Curve- law of increasing
costs (not perfect
substitutes, show
opportunity costs
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Production Possibilities
Curve – Constant Cost –
perfect substitutes for
each other
PPC Shifters and Points of Interest
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Shifters:
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Technology (usually outward)
Resources (could be either direction)
Remember the whole curve does NOT
always shift (capital v. consumer goods
Outward shift is economic growth
Trade allows consumption outside the
PPC
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Points of Interest
Opportunity Costs, Trade Offs and scarcity
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Scarcity
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Trade offs
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Demands that choices
be made
Too many wants and
not enough resources
Basic economic
problem
All that is given up
Opportunity Costs
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Next best alternative
On the PPC
Comparative Advantage
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In table format
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OOO (output question) –
think about “units” of
goods
IOU (input question) – how
much time is used to
produce?
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In graph format
Comparative v. absolute advantage
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Comparative Advantage
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Lower opportunity cost of
the item
Math involved
Only one comparative
advantage per country
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Absolute Advantage
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More efficient use of
resources
Produce more using same
amount of resources
Utility
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Marginal Utility
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Extra satisfaction
earned from
purchasing or
consuming one
more good
Law of
Diminishing
Marginal Utility
MU/$ of good A=
MU/$ of good B
Total Utility
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Increases until
MR equals 0
Economic Systems
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Market System
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Command System
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Government makes
decisions
Traditional System
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Private ownership of
property
Contract rights
Price as an incentive
Habits and customs
Mixed System
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Market and Command
Regulations, etc.
Supply and Demand
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Demand shifters
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“T” – tastes and
preferences
“R” – related goods (think
about substitutes and
complements)
“I” – income (normal and
inferior goods)
“B” – number of buyers
“E” – expectations for the
future
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Supply Shifters
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“R” – resource costs
“O” – opportunity costs
(could I produce something
else)
“T” – technology
“T” – taxes and subsidies
(taxes-left; subsidies – right)
“E” – expectations for
future
“N” – number of sellers
Right is INCREASE; Left is DECREASE
Change in Quantity – due
price and only PRICE
Change in…… due to factors
other than price
Shortages and Surpluses
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Price charged is below
equilibrium price
Fix by raising the price
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Price charged is above the
equilibrium price
Fix by lowering the price
Government interference
Price floors
Price Ceilings
Consumer Surplus, Producer Surplus and
Deadweight Loss
Elasticity of Demand and Supply
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Determinants of Demand
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Availability of substitutes
Market structure (how
much competition)
Proportion of income spent
on the good
Time to adjust to changes
in price
Necessity or luxury item
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Determinants of Supply
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Product type
Timing
Production Capacity
Input substitution
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Flexibility and mobility
Price Elasticity of Supply
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If the price of a coffee
increases 10%, and the
supply increases 20%, the
PES is 2
If the price of bananas
decreases 12% and the
quantity supplied falls 2%,
then PES =.16
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Inelastic Supply
 PES< 1
 Increase in price leads to
a small change in supply
Elastic Supply
 PES>1
 Increase in price leads to
a bigger % increase in
supply
Graphs to know
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Inelastic Supply
Elastic Supply
Elasticity of Demand Graphs
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Relatively Inelastic
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Perfectly Inelastic
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Perfect Elastic
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Perfectly Elastic
Elasticity and Total Revenue Test
Types of elasticity
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Cross Price Elasticity
<0 (complements); >0 (substitutes)
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Income Elasticity
<0 (inferior); >0 (normal)
Costs of Production
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Variable Cost
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Fixed Cost
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Does not change with the
amount of output
Total Cost
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Changes with the amount
of output
Increase, then decrease
production
Fixed plus variable
Average
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Divide cost by quantity
Things to remember about cost curves
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Marginal Cost (MC)
crosses the AVC and ATC
at the minimum points
MC>MR – decrease the
level of production
MR=MC
Shut down rule – price
below AVC
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Economies of Scale
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Long run ATC made up
several short run ATC
Remember this is part of all
the structures – your ATC
curve is your LRATC
Increasing Returns to
Scale= downward sloping
LRATC
Perfect Competition
Three Outcomes – things to think about – usually side by side graphs
(1)Where is the ATC curve in relation to Price?
(2)Go in a straight line from price to ATC for profit or loss
(3)Short Run Supply curve is MC from AVC and long run is from ATC
Perfect competition
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Mr. DARP = MC (Marginal Revenue=Demand=Average
Revenue= Price=Marginal Cost)
Demand increases quantity in short run will increase but Long
run return
Characteristics of:
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Free entry and/or exit from (loss firms leave; profit firms enter)
Know the side by side graphs (industry is basic supply and demand)
Price Takers
Identical products
Cannot change price ever (this is important)
Perfect Information for all involved (buyers and sellers)
Long Run: P=AR=MR=ATC (tangent)
Role of taxes and subsidies
Monopolistic competition
Things to
remember:
Excess Capacity
Price >MC
P=ATC
AR= Price
Long run:
MR=MC
P=ATC
MC v. PC
NOTICE:
(1) both ATC curves are
tangent to the price but
(2) Monopolistic
Competition price is
greater than MC
(3) In PC, MC equals the
Price
(4) BIG difference – please
remember this part.
Oligopoly
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Cartel – monopoly
prices created
Game Theory
Mergers – reduce the
ATC for both firms
Monopoly
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Monopoly Price
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Fair Return Price
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MR=MC and up to
demand
More than PC
Minimum ATC cross
Demand
Break Even Point
Socially Optimal Price
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MC=Demand
Subsidies required to
break even
Monopolies
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Revenue Maximization
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Profit Maximization
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Elastic portion of the demand
curve
Power of the firm
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Characteristics
Barriers to entry
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Price Discrimination
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MR = 0
If MR is negative, decrease
production to increase profits
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Reason for MR below D
Consumer Surplus will help
define it
Charge different prices in order
to make more money
Know demand elasticities
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Under allocation of resources
Higher prices than Perfect
Competition
MR< Price
Per unit tax shared by both
consumers and producers
Under produces and charges
higher price
Factor Economics
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Demand for inputs
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MR for factor markets
= ΔTR / ΔQ
Additional revenue a firm earns
with a new unit of resource
(usually worker)
MRC = Marginal Revenue Cost
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MC for factor markets
= ΔTC / ΔQ
If MRP > MRC
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Increase Production
If MRP = MRC
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MRP = Marginal Revenue
Product
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Labor
Resources
Derived Demand drives the
resource demand curve
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Max profits
Stop (ideal) Production
If MRP < MRC
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Decrease production
Factor Economics
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Marginal Productivity / Least Cost
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MPA / PA = MPB / PB
Firms produce at a level where all costs are minimized
This is the part where math is involved – you need to
determine the “per unit cost” with division
Derived Demand
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Demand for products creates or affects the demand for
resources such as labor
Resource Market Place
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Derived Demand – resource market for labor that
produces the good or service
Resource Market
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The cost of a resource
should be less than the
marginal product
Hire labor until the
Marginal Product of
Labor is less than the
price
Diminishing Marginal
Product
Increase Price in PC,
MRP will increase
Market Failures and Government
Involvement
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Public Goods
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Non rivals
Non excludable
Lighthouses
Externalities
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Positive – bird feeders,
vaccinations
Negative – pollution,
MSC>MSB; increase optimal
quantity of the good
Negative Externalities
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Supply Failure
Suppliers do not
have to pay the full
value
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Externality
Cost
Social Cost
P
Private
Cost
Will supply more b/c costs P2
paid by others
Costs affect supply
Taxes raise price to
public equilibrium
P1
Private
Value
Q2
Q1
Q
Positive Externalities
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Demand Failure
Public not willing to pay
full value
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Benefits or subsidies needed to
induce suppliers to supply at
lower price levels
Benefits affect demand
Subsidies absorb costs
creating public
equilibrium
External Benefit
Private Cost
P
Public
Cost
P1
P2
Private
Value
Q1
Q2
Q
Market Failures
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Lorenz curve – shows
inequalities in income
distribution
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Taxes
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Progressive – as income
increases, proportional of
tax increases – reduces
inequalities
Regressive – as income
increases, amount of tax
decreases (sales tax)
Proportional – flat tax
(same percentage for all
income brackets)
Market Failures
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Per unit tax v. Lump Sum
tax (who pays depends on
elasticity)
Next slide shows the
difference with relation to
elasticity
Taxes and the government
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Tax Incidence –
who pays the
tax burden
Can you?
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Draw and explain the cost curves and relationships for
perfect competition and monopolistic competition
Draw and explain the cost curves and relationships for a
monopolistic producer (only one)?
Game Theory – determine and read the matrix
Marginal Utility, Total Utility and Marginal Utility per dollar
Determine the costs for a firm in perfect competition
Test time
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Next class – the multiple choice section of the test – 60
questions to be answered within the class period – this part
will count as 2/3rds of the total grade
Second class – the free response portion of the test – you will
have the entire class to do the questions, but bring something
to keep you quiet just in case you finish early. This will count
as 1/3 of the grade
Grades:
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74-90 points will receive a 5 or 95 (two times)-no retake
60-73 points will receive a 4 or 85 (two times)- no retake
48-59 points will receive a 3 or 75 (two times) – no retake
37-47 points will receive a 2 or 65 (two times) – may do retest by
January 28 – two review sessions required
0-36 points will receive a 1 or 55 (two times) –may do retest by
January 28 – two review sessions required