TODO: Graphs!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Uncategorized

• comparative advantage: the one who has smaller opportunity cost of one product
• returns to scale: refers to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).
• Demand curves for private goods are added horizontally; whereas those for public goods are added vertically.
• cross-price elasticity = %d(quantity demanded of X) / %d(price of Y).
• < 0, compliments; > 0, substitutes.
• Defining characteristic of a capitalistic economy: private ownership & protection of property rights.
• progressive tax: more tax on richer, redistribute income; regressive: more tax on poor.
• Opportunity cost of STH = direct price of STH + implicit cost
• The substitution effect is when the price of one good rises, and the consumer buys more of the cheaper good.
• The income effect is when the consumer cuts back on all goods, not simply the good that has become more expensive.
• estate and gift taxes: if these taxes are high, they help achieve greater income equality.

Efficiency

• efficiency in production: MP_k / r = MP_l / w (MP = marginal product).
• distributive efficiency (maximizing utility): Price_1 / Price_2 = MU_1 / MU_2 (MU = marginal utility)
• MU_1 / MU_2 -> marginal rate of substitution (MRS)
• formal condition: MRS are equal for every consumer.
• allocative efficiency: P = MC (long run perfect competition).
• productive efficiency: P = minATC

Laws

• law of diminishing marginal utility (short run): decreasing satisfaction gained from additional units of a good consumed in a given period.
• law of demand; law of supply.
• marginal cost will increase as the production expands (supply)
• law of diminishing marginal product (consider the MP curve): first increase at increasing rate, then increase at decreasing rate, then decrease.

Demand and Supply

Reasons behind shift of demand curve:
TRIBE: Taste of consumers; prices of Related goods (substitutes and complements); Income of buyers; number of Buyers; Expectations for the future.

Reasons behind rightward shift of supply curve: anything that leads to more units of the good being produced at any given price.

• decrease in input costs; improv. in tech.; expectations of lower prices in the future; increase in sellers;
• decrease in the price of a "substitue in production" (milk & cheese)
• increase in the price of a "joint product" (leather & beef)
  

* if demand and supply shift together, one of eq. price & eq. quantity will be certain, the other depends (sometimes indeterminant)

Price Ceiling:

• to have effect, must below eq. price
• may cause (1) queuing cost; (2) black market.

Price Floor:

• to have effect, must above eq. price
• Example: minimum rage; some workers benefit, others are hurt

Costs, Production, Supply

• Values of a large-size firm: (1) hire more experts (2) spread over fixed costs over large outputs (3) economies of scale
• Excess capacity exists whenever firms/markets don't operate at socially optimal level (P = MC).
• PPF
• If resources are substitutable, PPF would be a straight line.
• Straght PPF implies no specialization; Curved PPF implies specialization.

Perfect Competition

• In LR: P = MR = MC = min ATC; zero profits.
• In SR: only P = MR.
• When P > AVC, continue production. When MR > MC, increase production.
• MC curve is actually the firm's supply curve (representing at each price the quantity the firm is willing to supply).
• In SR: Since P = MC and if P < AVC then firm will shut down, in SR the supply curve is actually the MC curve above the AVC.
• In LR: the supply curve is actually the MC curve above the ATC.
• Demand increase -> firms enter -> supply increase -> price returns to original, quantity supplied by industry increases; whereas quantity supplied by individual firm remains the same
• Reasons that ATC is U-shaped: spreading total fixed cost over a larger output + eventually diminishing returns.

Monopoly

• monopoly pricing power (control over prices; market power): P > MC; pricing strategy: P > MR.
• break even = zero profits = fair return price.
• socially optimal price = P = MC.
• shut-down (short-run): P < AVC. exit (long run): P < ATC.
• Reasons that price discrimination occurs:
1. control over prices
2. seperated buyers of differing price elasticities
3. can prevent re-saling among buyers
• comparison between monoplies

Monopolistic Competition

• Mono. Comp. in LR; LR normal profit.
• economic profit in SR.

Oligopoly

• Cartel model: all the firms in the industry act in unison to set a monopoly price; e.g. OPEC.

Resource Markets with Applications to Labor

• MFC (marginal factor cost; supply S = MFC when in perfect competition) = MRC (marginal revenue cost)
• MRP (marginal revenue product; demand D = MRP = MP marginal product times P price) = MRC is an analogy to MR = MC. If MRP > MRC, continue to hire additional units of labor.
• wage elasticity of demand (= %d(quantity demanded of labor) / %d(wage rate))
1. The higher the price elasticity of demand for the product, the higher the wage elasticity of demand.
2. The higher the proportion of labor costs relative to total costs of production, the higher will be the wage elasticity of demand.
3. The greater the number of substitute resources available and the degree to which they are substitutable, the higher will be the wage elasticity of demand.
• perfectly competitive resource (labor) market
• wage rate constant
• imperfectly competitive resource (labor) market (monopsony)
• compared to perfect market, wage rate and units of labor are both lowered
• cost minimization: MPP_L / MRC_L = MPP_K / MRC_K (L = labor; K = capital), or MPP_L / P_L = MPP_K / P_K in perfect competition.
• profit maximization: MRP_L / MRC_L = MRP_K / MRC_K = 1, or MRP_L / P_L = MRP_K / P_K = 1 in perfect competition.
• If price of product increase, only demand for such labor increase.

Profit, Price

• accounting profit: does not count opportunity cost (implicit cost); economic profit: counts.
• i.e. economic profit = accounting profit - opportunity cost
• All types of market maximize profits by producing where MR = MC.
• All types of market maximize revenue by producing at MR = 0.

Public Goods, Externality

• public goods: nonrival in consumption, nonexcludability
• MSC = MEC + MPC.
• Positive externalities will improve efficiency when MC < MB.
• Pos Ext: producer produces more than socially efficient level
• Graph

Created Date: Apr 03, 2011 9:48:27
Last Modified: May 10, 2011 18:35:03