ECON-100-02 Midterm #2

Total Variable Cost (TVC)

Average Variable Cost (AVC) x Q

Total Cost (TC)

Fixed Costs (FC) + Variable Costs (VC)

Average Fixed Costs (AFC)

Fixed Costs (FC)/Q

Average Variable Costs (AVC)

Variable Costs/Q

Average Total Costs (ATC)

Total Costs (TC)/Q

Marginal Costs (MC)

Change in Total Costs (TC)/Change in Q

Total Revenue

Price x Quantity

Marginal Revenue (MR)

Change in Revenue/Change in Quantity

Total Cost

Average Fixed Cost (AFC) x Q

Total Fixed Costs

Average Fixed Costs x Q

Profit

Total Revenue (TR) - Total Costs (TC)

OR

Price Per Unit - Average Cost Per Unit x Quantity Produced

Constant Returns To Scale

Occurs when a proportional increase in all inputs (capital and labor) leads to an identical proportional increase in output

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, resulting in lower average costs per unit as output increases.

Monopoly Market

Single seller or producer supplies entire market. Very high barriers of entry. Firm becomes price maker due to domination. Lack of consumer choice with a downward sloping demand curve.

Natural Monopoly

Arise in situtations of high fixed costs of entry, firms experience constant economies of scale. Still limited by government.

Legal Monopoly

Dominate market due to being only firm that has access to resource. Granted time-sanctioneed patent. Cannot be regulated.

Government Monopoly

Government owns a company, providing for price/action. This is the postal service.

Factors of Monopoly

1. Higher barriers to market entry

2. Firm is Price Setter

3. No Consumer Substitutes

How Do Monopolies Set Prices

Monopolies determine price by maximizing profit, setting output where marginal revenue (MR) equals marginal cost (MC). Because they are the sole supplier, they charge the highest price consumers are willing to pay for that specific quantity, found on the demand curve, resulting in higher prices and lower output than competitive market. The more inelastic a demand curve, the greater a firm can charge.

Price Discrimination

A method by which to segment the market along the lines of identity.

Normal Profit

Minimum level of earnings required to keep a company in its current line of business, occuring when TR = TC. Represents zero economic profity, meaning all resources, including entrepreneur time + capital, are compensated just enough to prevent them from moving to a better alternative, providing for long-run stability.

Examples of Perfectly Competitive Markets

1. Agriculture

2. Currency Exchange

3. Stock Market

4. Generic Products

Monopolistic Competition

Many firms selling similar, but differentiated products.

Factors of Perfectly Competitive Markets

• Number of Firms: Very Large Number

• Type of Product: Homogenous

• Control Over Price: None (Price Taker)

• Barriers To Entry: Free Entry + Exit

• Demand Curve: Perfectly Elastic (Horizontal)

• Examples: Agriculture

• Profit In Long Run Normal Profit Only

• Advertising: None

• Efficiency: Allocative + Productively Efficient

Factors of Monopoly Markets

• Number of Firms: Single Firm

• Type of Product: Unique, No Substitutes

• Control Over Price: Full Control (Price Maker)

• Barriers To Entry: Very High Barriers

• Demand Curve Downward Sloping

• Examples: Utilities, Medicine

• Profit In Long Run: Supernormal Profit

• Advertising: Usuallly None/Marginal

• Efficiency: Often Inefficient (Deadweight Loss)

Factors of Monopolistic Competition Markets

• Number of Firms: Many

• Type of Product: Differentiated Products (Brands)

• Control Over Price: Same, Product Differentation

• Barriers To Entry: Low Barriers, Relatively Easy

• Demand Curve: Downward Slope, But Elastic

• Examples: Clothing, Brands, etc. . . .

• Profit In Long Run: Normal Profit In Long Run

• Advertising: Important For Product

• Efficiency: Some inefficency due to excess capacity

Deadweight Loss

The loss of total economic efficiency (or "surplus") when the free market equilibrium is not achieved, typically due to taxes, subsidies, price controls, or monopolies

Summary of Perfectly Competitive Markers

Many firms, identical products, no price control.

Summary of Monopolies

One firm dominates the market, price makers.

Summary of Monopolistic Competition

Many firms selling similar but differentiated products.

Negative Externality

A cost imposed on others that have nothing to do with the production process.

Positive Externality

A benefit given to those not involved in the production process.

Public Goods

Non-excludable in that people cannot be stopped from using it. Non-rivalrous in that the use of one does not reduce its availability to others.

Effects of Externalities

Violate the PPF and make perfect competition impossible.

Gross Domestic Product (GDP)

The total monetary value of all finished goods and services produced within a country’s borders in a year.

Total Monetary Value (GDP)

Anything and everything made, quantity times price, add each up, result is current value.

Final Goods (GDP)

Good that is purchasable, in a completed state. In direct contrast to double counting/intermediate goods.

Intermediate Goods

Goods that are not finished/ready to be sold to public.

Double Counting

Adding products before they reach a finished state.

Gross Domestic Product (GDP) Formula

GDP = Consumption + Investment + Government Investment + Trade Balance

OR
GDP = C+I+G+(X-M)

Trade Balance

Gap between exports (X) and imports (M)

Trade Deficit

Exists when a nation’s import exceed its exports, calculating them imports (M) - exports (X).

Trade Surplus

Exists when a nation’s exports exceed its imports, calculating them as exports (X) - imports (M).

GDP Measures

1. Durable Good

2. Non-Durable Good

3. Service

4. Structure

5. Inventories

Durable Good

Long-lasting good, such as a car or fridge.

Non-Durable Good

Short lived good, such as food or clothing.

Service

Product which intangible (in contrast to goods). This includes entertainment, healthcare, etc. . . .

Structure

Building used as residence, factory, office, retail store, etc. . . .

Inventories

Good that has been produced, but yet to be sold.

Gross National Product (GNP)

What is produced domestically + what is produced by produced by domestic labor + business abroad in a year. Basically GDP but without geographic borders.

Net National Product

Gross National Product (GNP) - Depreciation

Nominal GDP Value

GDP not adjusted for inflation, using current prices.

Real GDP

Nominal GDP adjusted by infation

Factors of Modern Economy

1. Households (C)

2. Business (I)

3. Government (G)

4. Net Exports (X-M)

Consumption

Households total spending on durable and non durable goods

Investment

Business investments in factors, real estate, etc. . . .

Government

Any and all expenditure on public goods and services.

Labor Productivity

The value of what is produced per worker, or per hour worked.

Human Capital

Accumulated skills + education of workers

Technological Change

Combination of invention + innovation

Aggregrate Production Function

Process wherby an economy as a whole turns economic inputs, such as human capital, physical capital, and technology into output measured as GDP per capita.

Capital Deepening

An increase by society in the average level of physical and/or human capital per person.

Components of Economic Growth

1. Physical Capital

2. Infrastructure

3. Human Capital

4. Technology

Physical Capital

The plant and equipment that firms use in the production process, this includes infrastructure.

Infrastructure

A component of physical capital, such as roads or railroads.

GDP Per Capita Formula

GDP Per Capita = GDP/Population

GDP Per Capita Percent Change Formula

Percent Change In GDP Per Capita = (New GDP - Old GDP/Old GDP) x 100

Overstate

Growing production hides declining health or environmental health quality.

Understatement

Cheaper products, greater choice, decreased crime rate, better health, no change, but a better overall quality of life that GDP does not measure.

How Are Negative Externalities Dealt With

Imposition of taxes on polluter/fixed costs. Will shift supply curve up-to-the left. shutdown firm, or push for innovation. Goal is to reduce pollution and output.

Real GDP Formula

Real GDP = Nominal GDP/GDP Deflator x 100

What Does GDP Fail To Measure

GDP measures the monetary value of final goods and services produced within a country, but it fails to account for well-being, income inequality, environmental degradation, cultural values, unpaid labor (like housework), and the sustainability of growth. It treats harmful activities (e.g., oil spills) as positive growth.

Real GDP Formula

Real GDP = Nominal GDP/Price Index x 100

GDP Deflator Formula

Nominal GDP/Real GDP x 100

Nominal GDP Formula

GDP Deflator x Real GDP

GDP Change Formula

Percent Change in Nominal = Percent Change In Price + Percent Change In Quanity

Recession

Significant decline in real GDP.

Depression

A lengthy + deep recession.

Peak

Highest economic point before the recession.

Trough

Low point of a recesion, before recovery bigs.

Business Cycle

Economy movement from peak to trough and trough to peak.