# Economics Study Guide
## Production & Costs
1. Total Product (TP): Total output produced.
2. Marginal Product (MP): Additional output from one more unit of input.
- Increasing MP: Initially, due to specialization (e.g., first few workers).
- Decreasing MP: Diminishing returns set in (e.g., after the 4th unit).
3. Cost Curves:
- Average Total Cost (ATC): U-shaped; minimized where MC = ATC.
- Marginal Cost (MC): ΔTC / ΔQ; intersects ATC at its minimum.
- Long-Run Average Cost (LRAC): Envelope of short-run ATC curves.
- Economies of Scale: LRAC decreases as output rises.
- Diseconomies of Scale: LRAC increases due to inefficiencies (e.g., movie theater’s uncontrollable resource like limited parking).
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Consumer Behavior
1. Consumer Surplus: Difference between willingness to pay and actual price.
- Example: Fred’s $20k max for a car → surplus if price < $20k.
- Newspaper Vending Machines: Consumers take one paper because marginal utility of additional papers < price.
2. Utility Maximization:
- Rule: \( \frac{MU_A}{P_A} = \frac{MU_B}{P_B} \).
- Total Utility (TU): Increases if MU > 0; peaks when MU = 0.
3. Income vs. Substitution Effects:
- Income Effect: Price change alters purchasing power.
- Substitution Effect: Consumers switch to cheaper alternatives.
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## Elasticity
1. Price Elasticity of Demand:
- Formula: \( \frac{\%\Delta Q}{\%\Delta P} \).
- Elastic (>1): Flat demand curve (e.g., leisure subway riders).
- Inelastic (<1): Steep curve (e.g., rush-hour subway riders).
- Unit Elastic (=1): Total revenue maximized.
2. Cross-Price Elasticity:
- Substitutes (+): Golf balls vs. tennis balls.
- Complements (-): Golf balls vs. golf shoes.
3. Income Elasticity:
- Normal Goods (>0): Demand rises with income.
- Inferior Goods (<0): Demand falls as income rises.
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## Supply & Demand
1. Demand Curve:
- Linear Curve: Elasticity varies; higher price = more elastic.
- Total Revenue: Peaks at unit elasticity.
2. Supply Curve:
- Elastic: Flat (responsive to price).
- Inelastic: Steep (e.g., perishable goods).
- Perfectly Inelastic: Vertical line (fixed quantity).
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## Costs & Profits
1. Explicit vs. Implicit Costs:
- Explicit: Direct payments (e.g., rent, wages).
- Implicit: Opportunity costs (e.g., chef’s forgone salary).
2. Profit Types:
- Normal Profit: Covers implicit costs (economic profit = 0).
- Economic Profit: Revenue > total costs (including implicit).
3. Accounting vs. Economic Loss:
- Accounting Loss: TR < explicit costs.
- Economic Loss: TR < (explicit + implicit costs).
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## Key Scenarios
1. Oil Pipeline: Doubling circumference triples volume → economies of scale (lower average cost for large firms).
2. Shoe Store:
- Economic Profit: TR > total costs → firms enter market.
- Economic Loss: TR < total costs → firms exit.
3. Movie Theater Diseconomies: Uncontrollable factors like city regulations.
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## Graphs & Calculations
1. MC & ATC: MC intersects ATC at its minimum (U-shaped).
2. Linear Demand Curve: Calculate elasticity between points (e.g., price ↑ from $200→$300, Q ↓ 6→3 → unit elastic).
3. Utility Table: TU increases while MU > 0 (column 1 rises as column 2 stays positive).
Knowt
