Microeconomics Final Exam Cheat Sheet

Positive economics: An economic statement that is based on upon facts or a theory Normative economics: An economic statement that is based upon opinion (Subjective) Economic system: A particular set of institutional arrangement and a coordinating mechanism that addresses the economizing problem. Market: A coordinating mechanism by which buyers (demand) interact with sellers (supply) and where an exchange of goods, services or resources occurs for a specific price (Local, regional, national or international markets (based on geography)) Law of demand: Buyers will purchase more of a good at a lower price than at a higher price other factors constant. The factors of Demand: A change in buyer taste or preferences Complementary Goods: Goods that go together Substitute Goods: products that can be replaced if a price goes up or down (ex: brands, gasoline) Price expectations: Goes up or down in the near future Income Expectations: Income will be going up or down (near future) Law of supply: Firms (sellers) will produce and offer for sale more of a product at a higher price than at a lower price other factors help constantly Quantity of supply: a change in resource supply, technology, taxes, price expectations, and change in number of firms Market equilibrium: A specific price where quantity demanded = quantity supply or where the market is cleared (no surplus or shortage) Price Ceiling: the government establishes a maximum price for a product which is below the current equilibrium or market price (TOO HIGH) Price Floor: “price support” the government establishes a minimum price for a product which is above the current equilibrium or market price (TOO LOW) Price elasticity of demand: measures buyer’s responsiveness to change in price Cross elasticity: measures how responsive sales of one product (X) are relative to a change in the price of another product (Y) Relevant Product market: a market in which good compete directly against each other (substitute goods) Income Elasticity: Measures how sensitive the sales of a product are relative to changes in disposable income Economic cost: as the payment that must be to obtain and retain the services of a resource Explicit Cost: are the monetary payments it makes to those from whom it must purchase resources that it does not own. Implicit Cost: are the opportunity cost of using the resources that it already owns to make the firm’s own products rather than selling those resources to outsiders for cash. Accounting Profit: the profit number that accountants calculate by subtracting the total explicit cost from the total sales revenue Economic Profit: is the result of subtracting all of your economic costs---both explicit costs and implicit costs form revenue Short run: is a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant’s current capacity is used. (FIXED PLANT) Total Product (TP): is the total quantity, or total output, of a particular good or services produced Marginal Product (MP): is the extra output or added product associated with adding a unit of a variable resource, in this case LABOR, to the production Average Product (AP): “labor productivity” is the output per unit of labor output Total fixed cost (TFC): cost that DO NOT change relative to units produced or sold (TP) Total variable cost (TVC): costs that vary or change (directly) relative to units of output produced or sold Total cost (TC): a cost that varies or changes directly relative to units produced or sold. Marginal cost (MC): the change or additional cost that results from producing OR selling an additional units of output Average fixed cost (AFC: fixed cost per unit Average variable cost (AVC): labor cost per unit of output Average Total Cost (ATC): cost per unit of output Law of diminishing returns: As additional units of a variable resources (ex) labor, is added to a fixed resource (Plant capacity) a point will be reached beyond which output Law of increasing returns: As additional units of a variable resources (ex) labor, is added to a fixed resource (Plant capacity) output will increase at higher rate or marginal product rises Long run: is a period long enough for the firm to adjust the quantities of all the resources that it employs, including plant capacity (VARIABLE PLANT) Market structure: pure competition (perfectly elastic), monopolistic competition, oligopoly, pure monopoly Cost strategy: producing at a lower cost Product differentiation: opposite of low cost and building value, adding value to the products (Apple, BMW) product attributes, customer service, location, brand name and packaging Characteristics of an oligopoly: mutual interdependence, entry barriers, mergers HHI: measures the level of market concentration within an industry NASH Equilibrium: is represented by the dominant price strategy of each firm Dominant price strategy: that price strategy that yields the best or optimal final results for the firm regardless of the pricing strategy of its rivals Characteristics of the four basic market model: Number of firms, Type of product, Control over price, Conditions of entry, Nonprice competition, Examples / Economic system: A particular set of institutional arrangement and a coordinating mechanism that addresses the economizing problem productive efficiency = full employment + full production Inefficiency = actual GDP - potential GDP = GDP GAP Ed = % change in quantity demanded of product X/ % change in price of product X Ed = change in quantity demanded of X/ original quantity demanded of X/change in price of X/original price of X Ec = % change Qd (sales) “X” / % change price “Y” Ei = % change Qd (sales) / % change in disposable income Economic cost = Explicit costs + Implicit costs Accounting profit = total explicit cost - total sales revenue Economic profit = revenue - explicit costs implicit costs Marginal product = change in total product/change in labor input Average product = total product/unit of labor Total Cost = TFC + TVC Marginal Cost = Change in TVC/ change in Q units sold or change in TC/change in Q units sold Average Fixed Cost = TFC/Q Average Variable Cost = TVC/Q Average Total Cost = TC/Q or AFC + AVC = ATC Total Revenue = Price x Units sold Demand curve (short run) = change in TR/ Change in quantity sold Resources: Full employment and full production, Resources are fixed, Technology is fixed, Consumer goods and Capital goods Factors of Economic Growth: An increase in the quantity of resources, Improvements in the quantity of resources, Improved technology Factors of economies of Scale (Long Run) (plant size): labor specialization, managerial specialization, efficient capital, buying power (leverage) Factors of Economies of Scale: Labor specialization, Managerial specialization, Efficient Capital Ex: small firms cannot afford equipment to make products (high volume of production) CARS & STEEL, Buying power (leverage) Savings Investment Economic growth / Economizing = limited resources VS unlimited wants Characteristics of pure capitalism (powers the individual): Private property (own by individuals and business, not the government), Reliance on the market system (economic freedom), Prices are the function of the market, Role of self-interest (Invisible hand) Plastic coefficient: Ed = Elasticity demand, Ed > 1 = Price change is elastic (buyers responded strongly to a change in price or Buyers had a low willingness to pay the price), < Less than 1 = price change is inelastic Price elastic = increase in price = decrease in total revenue, Price elastic = decrease in price = increase in total revenue, Price inelastic = increase in price = increase in total revenue, Price inelastic = decrease in price = decrease in total revenue Ec > +1 = X & Y are substitute goods Ec < - 1 = X & Y are complementary goods Ei > 1 = Cyclical product Ex: drop in sales in Automobiles, housing, housing appliances, European travel Ei < 1 = Non - cyclical product Ex: Agricultural products, health care service Gaining efficiency → decrease in ATC → increase in profit per unit → increase in profits / MR > MC YES MR = MC → Profit maximization or loss maximization profit MC > MR NO Should the firm produce or sell? If the price > minimum AVC = YES If the price < minimum AVC = NO (shutting down your business) What is the optimal quantity? MR = MC (#9) What is the Total Revenue? Price X Quantity (131 X9 = 1179) What is the Total cost? ATC X Quantity (97.78 X 9 = 880) round to the nearest dollar What is the profit or loss? Total revenue - Total cost (1179 - 880 = + 299) Maximum PROFIT Discourage from price competition (disincentive): Meet the competition clause (store can meet the price from somewhere else - lowest price) Characteristics of pure capitalism (powers the individual): Private property (own by individuals and business, not the government), Reliance on the market system (economic freedom), Prices are the function of the market, Role of self-interest (Invisible hand) Characteristics of socialism (pure command system): Government ownership of property resources, NO COMPETITION (monopoly), Prices are determined by the government 5 Fundamental economic questions: 1. What goods and services should the economy produce? (command system) Government Central economic planning board Power at the top Buyer (consumer) (capitalism) 2. How should the goods and services be produced? (command system) Government Central economic planning board Business (capitalism) 3. Who gets the goods and services? (command system) Income Income (capitalism) 4. How does the economy system promote innovation (technology)? (command system) Slow Fast (capitalism) 5. How does the economy accommodate change? (command system) Slow Fast (capitalism) The total revenue test of demand elasticity: Price elastic = increase in price = decrease in total revenue, Price elastic = decrease in price = increase in total revenue, Price inelastic = increase in price = increase in total revenue, Price inelastic = decrease in price = decrease in total revenue, Data analytics! Demand = MR (marginal revenue) = Price (perfectly elastic)