Economics ECN 104 Final Exam Review

Review of Chapters for Final ECN 104 – Introductory Economics Tsogbadral Galaabaatar  Chapter 4 Perfectly competitive market and price-taker assumption. Demand schedule and demand curve. Quantity demanded and law of demand. A change in (only) price cau...

Review of Chapters for Final ECN 104 – Introductory Economics Tsogbadral Galaabaatar  Chapter 4 Perfectly competitive market and price-taker assumption. Demand schedule and demand curve. Quantity demanded and law of demand. A change in (only) price causes movement along the curve. Demand curve shifters: number of buyers, income (normal and inferior goods), price of related goods (substitutes and complements), tastes and expectations. 2  Chapter 4 Supply schedule and supply curve. Quantity supplied and law of supply. Supply curve shifters: number of sellers, input prices, technology, expectations. Equilibrium: quantity supplied equals quantity demanded. Equilibrium price and equilibrium quantity. If the market price is higher (lower) than equilibrium price, there is surplus (shortage). Difference between change in supply (shift of supply curve) and change in quantity supplied (movement along the supply curve). 3  Chapter 4 Analysis of the changes in equilibrium: 1. If only supply curve shifts to right (left), the equilibrium price is lower (higher) and new equilibrium quantity is higher (lower). 2. If only demand curve shifts to right (left), price higher(lower) and quantity higher (lower) 3. If both curve shifts to right (left), quantity higher (lower), price ambiguous. 4. If demand curve shifts to right (left) and supply curve to left (right), price higher (lower), quantity ambiguous. 4  Chapter 5 Elasticity and related applications. In order to calculate elasticity, we use the midpoint method. Price elasticity of demand depends on the availability of close substitutes, whether the good is necessity or luxury, how broadly the good is defined, whether we dealing with short run or long run. The flatter (steeper) the demand curve, the bigger (smaller) the elasticity. 5  Chapter 5 If the demand curve is inelastic, an increase (decrease) in price causes revenue increase (decrease). If the demand curve is elastic, an increase (decrease) in price causes revenue decrease (increase). Price elasticity of supply: The flatter (steeper) the supply curve, the bigger (smaller) the elasticity. If good is normal (inferior), income elasticity of demand is positive (negative). If two goods are substitutes (complements), cross- price elasticity of demand is positive (negative). 6  Chapter 6 Price ceiling and price floor. Binding price ceiling and non-binding price ceiling. Binding price floor and non-binding price floor. Resulting shortage or surplus. 7  Chapter 6 Tax and its effect A tax on buyers shift demand curve and a tax on sellers shifts supply curve. The resulting equilibrium will be the same. (Compared to the equilibrium without tax) tax decreases the quantity, increases the price buyers pay and decreases the price sellers receive. Tax incidence (how tax burden is shared) depends on elasticity. If demand (supply) is more elastic, incidence is lower for buyers (sellers). 8  Chapter 7 Consumer surplus = Willingness to pay – Price Demand curve can be constructed  if we know each consumer’s willingness to pay. Marginal buyer: At quantity Q, marginal buyer has willingness to pay equal to the height of demand curve (price). Marginal buyer would leave the market if price is any higher. Total consumer surplus equals area under the demand curve and above the price line. Area of triangle = ½ × Base × Height 9  Chapter 7 Producer surplus = Price– Cost Supply curve can be constructed if we  know each producer’s cost. Marginal seller: At quantity Q, marginal seller has cost equals to the height of supply curve (price). Marginal seller would leave the market if price is any lower. Total producer surplus equals area above the supply curve and below the price line. 10  Chapter 7 If price falls (rises), the consumer surplus increases (decreases). This is due to increase (decrease) in consumer surplus for the existing consumers and increase (decrease) due to new consumers arrival (some consumer’s leaving) after price decrease (increase). Similarly, if price falls (rises), the producer surplus decreases (increases). Total Surplus=Consumer Surplus + Producer Surplus. Market equilibrium quantity maximizes the total surplus. 11  Chapter 13 Difference between explicit and implicit cost. Also, economic cost (profit) vs. accounting cost (profit). The production function expresses the relationship between inputs and output. Marginal product (of an input) is the additional output produced if we increase the input by 1 unit. Diminishing marginal product: marginal product of labour decreases as labour quantity increases. Total Cost (TC)=Fixed Cost (FC) + Variable Cost(VC). 12  Chapter 13 Marginal Cost is defined as MC=ΔTC/ΔQ. Due to diminishing marginal product, MC is upward sloping. Average Total Cost (ATC) is U-shaped and MC goes through the bottom of ATC. The same is true for AVC. Short run: some inputs are fixed (usually capital or land). Cost of those fixed inputs is Fixed Cost. Long run: all inputs are variable Relationship between long run ATC and short run ATC. 13  Chapter 14 For an competitive firm AR(average revenue) =MR(marginal revenue)=P(price of the good) Profit maximizing quantity satisfies MC=MR or MC=P. If MR>MC (MR