Chapter 6: Consumer Theory (Some of this was on Exam 1)

Budget constraint o Budget Line
 P
X
/P
Y
= Relative price of X; opportunity cost of one more unit of X; absolute value of slope of budget line
 Changes in Income

Preferences
 Changes in Price o Rational o More is better

Goal  Maximize Utility o Law of Diminishing MU

Consumer equilibrium o Finding it using MU approach
 MU/P o Changes in Income
 Inferior/ Normal goods o Changes in Price
 Consumer Demand Curve

Income and Substitution effects of Price change o Normal Good o Inferior Good o Giffen Good (theoretical)

Individual to market demand

Irrational Preferences and Behavioral Economics
Chapter 7: Production and Cost

Accounting (Explicit) costs vs. Economic (Implicit) costs

Law of diminishing Marginal Returns

SR vs. LR o Fixed and variable costs

Cost curves o MC o AVC o ATC

LRATC o Economies of scale o Diseconomies of scale o Constant returns to scale

Chapter 8: Profit-maximization

Calculate profit: π = TR - TC

Accounting π vs. Economic π

Goal of firm

Demand and cost constraints

How to choose profit-maximizing output o TR TC approach: Calc 𝜋 = 𝑇𝑅 − 𝑇𝐶 at each output level and compare o MR MC approach: Choose q where MR=MC

Shut-down rule o TR < TVC  Shut down
Chapter 9: Perfect Competition (Supplemental handouts available)

Characteristics

Goal of perfectly competitive firm

How to choose output

Shut-down rule o P < AVC  Shut down

SR vs. LR o SR: # firms is fixed o LR: # can change o EQM in SR o EQM in LR


Profit/Loss and entry/exit
Different cost industries
Chapter 10: Monopoly (Supplemental handouts available)

Characteristics

Barriers to entry o Natural o Legal o Network Externalities

Goal of monopolistic firm

How to choose output

SR vs. LR

Monopoly vs. Perfect Competition o Generally P M >P* and Q M <Q*

Government involvement o Regulation o Rent-seeking behavior

Price Discrimination o Conditions o Perfect Price Discrimination o Choosing Multiple Prices o In Everyday Life

Chapter 14: Economic Efficiency

Economic efficiency

Pareto improvements

Efficient quantity

Measuring market gains (Consumer and Producer Surplus)

Inefficient markets and Deadweight Loss o Price ceiling & Price floor o Significant market power (i.e. monopoly) o Excise taxes
Chapter 15: Government’s Role in Economic Efficiency

Market Failures and solutions o Monopoly
 Anti-trust Law
 Regulation (natural monopoly)

Marginal Cost Pricing

Average Cost Pricing o Externalities
 Positive Externality

Marginal Social Benefit

Subsidy
 Negative Externality

Marginal Social Cost

Pigovian Tax

Tradable Pollution Permits
 Coase Theorem

Private market can solve externality problem if side payments can be made without cost o Public Goods
 Characteristics

Nonrival

Non-excludable
 Free-rider Problem
 Government Provision
 Tragedy of the Commons (overuse of common resources) o Asymmetric Information
 Adverse selection (quality)

A good reputation can help
 Moral Hazard (future behavior)

Higher rates for riskier behavior
 Principal-Agent Problem

Incentives for agent to act in accordance with principal’s wishes o Government Policies
 Sometimes policies can be the cause of economic inefficiency