Econ 202- Ole Miss Final Exam, Matthews

Production Possibilities Frontier (PPF)

-A graph that shows combinations of output that the economy can possibly produce

-Factors of Production

-Production Technology

-Economy can produce any combo on or inside the frontier

Efficient levels of production

-The economy is getting all it can from the scarce resources available

-Points on PPF

Inefficient levels of production

Points inside PPF

Technological Advance (PPF)

-Outward shift on the PPF

-Economic growth

-Produce more of both goods

Absolute Advantage

-The ability to produce a good using fewer inputs than another producer

-One person can have Absolute Advantage in both goods

Comparative Advantage

-The ability to produce a good at a lower opportunity cost than another producer

-One person cannot have Comparative Advantage in both goods

Supply and Demand

Relationship between the amount of product and the desire for the product

Demand

Relationship between price and the quantity demanded of a certain good or service

Law of Demand

-When the price of a good rises, the demand falls

-When the price falls, demand rises

Demand Curve

-A Graph with the price on the Y-axis and the quantity on the X-axis

Shifts in Demand Curve

-Increase in demand, curve shifts right

-Decrease in demand, curve shifts left

Market Demand

The sum of all the individual demands for a particular good or service

Market Demand Curve

The horizontal sum of all individual demand curves

Variables that shift the demand curve

-Income

-Price of related goods

-Tastes

-Expectations

-# of buyers

Income Effect on Demand

-Normal Good: Increases in income, increases demand

-Inferior Good: Increase in income, decreases demand

Supply

Relationship between price of a good and the quantity supplied

Law of Supply

-When price increases, supply increases

-When price falls, supply falls

Market Supply

Sum of the supplies of all sellers for a good or service

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied

Shifts in Supply Curve

-Increase in supply, curve shifts right

-Decrease in supply, curve shifts left

Variables that shift supply curve

-Input prices

-Technology

-Expectations about future

-# of sellers

Market Equilibrium

-Situation in which quantity demanded = quantity supplied

-Supply & Demand curves intersect

Surplus

-Supply is greater than Demand

-Excess supply

Shortage

-Demand is greater than Supply

-Excess Demand

Elasticity

-A measure of the responsiveness of quantity demanded or quantity supplied

Price Elasticity of Demand

-A measure of how much the quantity demanded of a good responds to a change in the price of that good ---Midpoint Method to calculate

Determinants of Price Elasticity of Demand

-Availability of close substitutes

-Necessities vs Luxuries

-Definition of the market

-Time horizon

Midpoint Method

-2 points: (Q1,P1) & (Q2,P2)

-(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

Cross-Price Elasticity of Demand

-A measure of how much the quantity demanded of one good responds to a change in the price of another good

-% change in demand of first good/ % change in price of second good

Price Elasticity of Supply

-A measure of how much the supply of a good responds to a change in the price of that good

-Midpoint Method

Determinant of Price Elasticity of Supply

Time period (supply is more elastic in the long run)

Income Elasticity of Demand

-A measure of how much the quantity demanded of a good responds to a change in consumers' income

-% change in quantity demanded divided by the % change in income

Profit

Total Revenue - Total Cost

Total Revenue (TR)

-The amount paid by buyers and received by sellers of a good

-Quantity of output x Price output is sold

-PxQ

Total Cost (TC)

-Market Value of the inputs a firm uses in production

-Fixed Costs + Variable Costs

Firms Cost of Production

-Include all the opportunity costs of making its output of goods and services

-Explicit costs

-Implicit costs

Explicit Costs

Input costs that require an outlay of money by the firm

Implicit Costs

Input costs that do not require an outlay of money by the firm

Fixed Costs

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that vary with the quantity of output produced

Average Fixed Cost (AFC)

-Fixed cost divided by the quantity of output

-AFC=FC/Q

Average Variable Cost (AVC)

-Variable cost divided by the quantity of output

-AVC=VC/Q

Average Total Cost (ATC)

-Total costs divided by quantity of output

-ATC=TC/Q

Marginal Cost (MC)

-Increase in Total Cost arising from an extra unit of production

-MC= Change in TC/Change in Q

Marginal Product

-Increase in output that arises from an additional unit of input

Diminishing Marginal Product

Marginal Product of an input decreases as quantity increases

Competitive Market

-A market with many buyers and sellers

-Trading identical products

-Each buyer and seller is a price taker

Average Revenue (AR)

-Total Revenue divided by the Quantity sold

-AR=TR/Q

Marginal Revenue

-Change in total revenue from an additional unit sold

-MR=Change in TR/Change in Q

Monopoly

A market in which there are many buyers but only one seller

Monopolistic Competition

-Market structure in which many companies sell products that are similar but not identical

-Free entry and Exit

Oligopoly

Market structure in which only a few sellers offer similar or identical products

Nash Equilibrium

-Economic actors interact with one another and each choose the best strategies

-Each is given the strategies that all other actors have chosen

Prisoners Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Dominant Strategy

A strategy that is best for a player in a game, regardless of the strategies chosen by the other players

Collusion

Agreement among firms in a market about quantities to produce or prices to change

Economic Profit

-Total Revenue - Total Cost (explicit costs - implicit costs)

Accounting Profit

-Total Revenue - Total Explicit Costs

-AP=TR-TEC

Price Ceilings

A legal maximum on the price at which a good can be sold

Price Ceiling Binding

-Set below the equilibrium price

-Shortage

-Sellers must ration the scarce goods

Price Ceiling Not Binding

-Above the equilibrium price

-No effect on the price or quantity sold

Price Floor

A legal minimum on the price at which a good can be sold

Price Floor Binding

-Set above the equilibrium price

-Surplus

-Some sellers are unable to sell what they want

Price Floor Not Binding

-Set below the equilibrium price

-No effect on the market

Consumer Surplus (CS)

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller's cost

Total Surplus (TS)

-The sum of consumers' surplus and producers' surplus

-TS = CS + PS

Deadweight Loss

-The total loss of producer and consumer surplus from underproduction or overproduction

Negative Externality

-The harm, cost, or inconvenience suffered by a third party because of actions by others

-We tax negative externalities bc it improves efficiency

Positive Externality

-A benefit received by someone who had nothing to do with the activity that generated the benefit

Coase Theorem

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Corrective Tax

-Induce private decision makers to take account of the social costs that arise from a negative externality

-Price on the right to produce

-Reduces pollution at lower cost to society

Free-Rider Problem

-People who receive benefits of a good, but avoid paying for it

-Public Goods not excludable

-Prevents private market from supplying the goods

Command and Control Policies

-Regulate behavior directly

-Regulation

Private Goods

-Excludable and Rival in Consumption

-Ice cream cones, Clothing, Congested toll roads

Public Goods

-Not excludable, not rival in consumption

-Goods available to everyone free of charge, cannot be denied

-Tornado siren, National Defense, Uncongested nontoll roads

Club Goods

-Excludable but not Rival in consumption

-Fire protection, Cable TV, Un-congested toll roads

Common Resources

-Rival in Consumption, Not Excludable

-Fish in the ocean, The environment, Congested nontollroads

Lighthouses

-Most operated by Gov.

-Public goods

Cost-Benefit Analysis

-A study that compares the costs and benefits to society of providing a public good

-When Benefit>Cost

Pollution Permits

Federal permit allowing a public utility to release pollutants into the air; a form of pollution control

-Firms willingness to pay