Economic Analysis Study Guide

Study Notes

Chapter 1: Art and Science of Economic Analysis
- Scarcity in Economics is defined as limited resources and unlimited wants
- Opportunity Cost is the value of the next best alternative sacrificed
- Positive economics deals with what is, while normative economics deals with what ought to be

Production Possibilities Frontier (PPF) illustrates possible combinations of goods/services producible with available resources
Economic implication of PPF is that choices come with trade-offs, represented by opportunity cost
Distinction between inefficient, non-feasible zones, and efficient zones on the PPF
Absolute advantage is producing a good with fewer resources than another producer
Comparative advantage is producing a good at a lower opportunity cost than another producer
Increasing opportunity cost means that the more a resource is used to produce one good, the greater the opportunity cost of producing another. This typically leads to a PPF curve that is bowed outward.

Law of Demand states that price and quantity demanded are inversely related, all else being equal
Factors determining demand include consumer preferences, prices of related goods, income, and consumer expectations
Movement along the demand curve happens when the price of the good changes, while a shift in the demand curve occurs when other factors change
Distinction between quantity demanded and demand; graphically as well
Normal good is one whose demand increases with an increase in income
Inferior good is one whose demand decreases with an increase in income
Substitute goods are goods that can be used in place of each other, while complementary goods are goods that are used together

Elasticity measures the responsiveness of one variable to changes in another
Midpoint formula is used to calculate price elasticity if demand between two points on a curve
Elastic demand indicates that a change in price will result in a significant change in quantity demanded. Conversely, inelastic demand means that price changes do not cause a major change in quantity demanded
Factors affecting price elasticity of demand include availability of substitutes, proportion of income spent on the good, time horizon, duration of consumer adjustment, and category of goods
Normal and inferior goods are categorized based on how increases in income affect demand
Cross-price elasticity indicates whether goods are substitutes or complements
Price elasticity of supply measures how producers respond to changes in price

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual market price
Producer surplus is the difference between the minimum price a producer is willing to accept and the actual market price
Total surplus is the sum of consumer and producer surplus

Explicit costs are direct payments made for resources, while implicit costs are the opportunity cost of using resources that a firm already owns
Economic profit is total revenue minus implicit and explicit costs, while accounting profit is total revenue minus explicit costs
Short-run production refers to a period where at least one input is fixed
Marginal product is the additional output produced by adding one more unit of a variable input, holding all other inputs constant
Total fixed cost, total variable cost, and total cost
Calculation of short-run average, marginal, fixed and variable costs from total costs

Key characteristics of a perfectly competitive market include many buyers and sellers, homogeneous products, free entry and exit, and perfect information
Firms in perfectly competitive markets are price takers, meaning they must accept the market price
Firms maximize profit by producing where marginal cost equals market price
In the long run, firms in perfectly competitive markets earn zero economic profit

Key characteristics of a monopoly market include a single seller, unique product, significant barriers to entry, and price maker
Monopolies can charge higher prices and produce lower output than competitive firms, leading to a deadweight loss
Types of price discrimination
Monopoly vs perfect competition

Key characteristics of monopolistic competition include many firms, differentiated products, relatively low barriers to entry, and some degree of market power
Factors differentiating monopolistic competition from perfect competition and pure monopoly
Oligopoly is a market dominated by a small number of firms, where the actions of one firm can significantly affect the others
Oligopolies may collude or compete, leading to various market structures and consequences