Econ Midterm 2 Flashback

When to close if you’re NOT producing

q = 0, if producer surplus = TR - VC < 0

When to close if you’re producing

q > 0, if producer surplus = TR - VC > 0

In the short run, what is unavoidable?

Fixed costs, but in the long run it turns into variable costs

Profit in the long-run

profit = 0

When should you shut down in the short run?

If the price is less than the average variable cost (AVC)

When should you keep going in the short run?

P > AVC, even if the firm is losing money (P < ATC)

When should you shut down in the long run?

If the P < ATC

Market with positive short run profits

Not good, more firms enter because the market looks good. More elastic, you lose demand

Market with negative short run profits

Good! firms will exit because the market looks bad. Less elastic, you gain demand

In the long run equilibrium…

P = ATC, MC = MR, profit = 0

Pareto Efficiency

no potential transaction that will make someone better off without making someone worse off

Market Power

a firm's ability to influence the price of its product, allowing it to charge a price above marginal cost without losing customers

(P - MC) / P

In a perfectly competitive market, NO MARKET POWER (thus, price takers)

Market Power Relationships With Substitutes

Fewer Substitutes: demand steeper, More MP!

• Higher markup (amount a firm prices its product above its marginal cost)

• More DWL

More Substitutes: demand flatter, less MP

• Lower markup

• Less DWL

Extreme Case of fewer substitutes

Monopoly - only one guy running everything

• Barriers to entry

• no substitutes

Extreme Case of more substitutes

Perfect Competition: selling identical products

• horizontal (perfectly elastic) demand

• no MP

• firms are price takers (must sell the market price)

Law of Supply

Quantity Supplied: # of goods sellers can sell

Qs increases when price increases

Price Elasticity of Supply

Always positive

E > 1, elastic supply. Small change in price = large change in quantity supplied

E < 1, inelastic supply, big charge in price = small change in quantity supplied

E = 1, unit elastic

How to calculate Price Elasticity of Supply

Change in % of Supply / change in % of price

Shortage on the graph?

Q demanded - Q supplied

Price Ceiling

A regulation of max price - binding only when it’s below the equilibrium

Price Floor

A regulation of minimum price - binding only when set above the equilibrium

Taxes

Raise revenue. Price paid by buyers - Price sold by sellers = tax

How do taxes shift the curves

If consumers pay, demand curve shifts down by per unit tax.

If producers have legal burden, supply curve will shift up by per unit tax

Elasticities + Burden

More inelastic = more burden for taxes (bad)
More inelastic = more benefits for subsidies (good)

Subsidies

Opposite of taxes, P sold by sellers - Price bought by buyers = subsidy

Government loses the middle square

PPF

Plots points relating with two goods. Slope is opportunity cost between each

Inside PPF

No opportunity cost. Feasible but not productively efficient

On PPF

OC is slope, feasible and productively efficient

Absolute Advantage

ability to produce a larger quantity with the same resources (do not multiple by N)

• who is better than who at what

Comparative Advantage

Whoever has the lower opportunity cost for a certain good. Each individual should specialize in what they have a CA in

Plotting Trade Line

Using Consumer Possibility Frontier (CPF), slope is the exchange rate between the two goods.

Inelasticity vs Taxes/Subsidies

Inelastic → more burden on tax

Inelastic → more benefit from subsidy

P < AVC

Doesn’t even cover variable costs, shut down in the short run

AVC < P < ATC

Covering variable costs, but not total cost. Produce in the short run, but exit in the long run

FOR SR = compare against AVC

FOR LR = compare against ATC

P >= ATC

produce in general, you’re doing good.

If you have a comparative advantage in say books

you will EXPORT BOOKS, and import other goods (lowest OC for books, 1 book is worth like 1/20 car

Perfectly Inelastic vs Perfectly Elastic Demand

Inelastic CS ? Slight-None

Inelastic PS ? Slight

Inelastic DWL ? None (Q doesn’t change)

Elastic CS ? None

Elastic PS ? Yes

Elastic DWL ? Yes

When to divide by workers in OC questions

When to divide by workers	When NOT to divide
When countries have different numbers of workers and the question gives you total output “given their workforce.”	When the question already gives total country output after accounting for workforce/hours or explicitly says “In a day, they can produce…”
Goal: find productivity per worker to compare fairly.	Goal: directly compare total production with equal resource bases already implied.

Profit equation

TR - TC, PS-FC

Market Price, Market Quantity, Individual quantity, and number of firms calculation

# of firms = Market quantity / individual quantity

in the LR, P (both market and individual in PC) = ATC

Using P, find the MQ and the individual q