Today we will.. Begin our review of the entire MICRO economics course – any notes you - PowerPoint Presentation

1. Today we will..Begin our review of the entire MICRO economics course – any notes you take from the power point (in your own handwriting) may be used on the test to be given next week.Wednesday – Multiple choice portion (60 questions) – counts as 2/3rds of the scoreFriday – Free Response portion (3 questions – one long and two short) – counts as 1/3 of the scoreBegin watching the videos assigned (partner quiz on January 21st or 22nd) and studying our vocabulary terminology (quiz on January 19th or 20th)

2. Microeconomics ReviewFall 2015

3. Circular Flow

4. Basic Economic Concepts to Know:Production Possibilities Curve- law of increasing costs (not perfect substitutes, show opportunity costsProduction Possibilities Curve – Constant Cost – perfect substitutes for each other

5. PPC Shifters and Points of InterestShifters:Technology (usually outward)Resources (could be either direction)Remember the whole curve does NOT always shift (capital v. consumer goodsOutward shift is economic growthTrade allows consumption outside the PPCPoints of Interest

6. Opportunity Costs, Trade Offs and scarcityScarcityDemands that choices be madeToo many wants and not enough resourcesBasic economic problemTrade offsAll that is given upOpportunity CostsNext best alternativeOn the PPC

7. Comparative AdvantageIn table formatOOO (output question) – think about “units” of goodsIOU (input question) – how much time is used to produce?In graph format

8. Comparative v. absolute advantageComparative AdvantageLower opportunity cost of the itemMath involvedOnly one comparative advantage per countryAbsolute AdvantageMore efficient use of resourcesProduce more using same amount of resources

9. UtilityMarginal UtilityExtra satisfaction earned from purchasing or consuming one more goodLaw of Diminishing Marginal UtilityMU/$ of good A= MU/$ of good BTotal UtilityIncreases until MR equals 0

10. Economic SystemsMarket SystemPrivate ownership of propertyContract rightsPrice as an incentiveCommand SystemGovernment makes decisionsTraditional SystemHabits and customsMixed SystemMarket and CommandRegulations, etc.

11. Supply and DemandDemand shifters“T” – tastes and preferences“R” – related goods (think about substitutes and complements)“I” – income (normal and inferior goods)“B” – number of buyers“E” – expectations for the futureSupply Shifters“R” – resource costs“O” – opportunity costs (could I produce something else)“T” – technology“T” – taxes and subsidies (taxes-left; subsidies – right)“E” – expectations for future“N” – number of sellersRight is INCREASE; Left is DECREASE

12. Change in Quantity – due price and only PRICEChange in…… due to factors other than price

13. Shortages and SurplusesPrice charged is below equilibrium priceFix by raising the pricePrice charged is above the equilibrium priceFix by lowering the price

14. Government interferencePrice floorsPrice Ceilings

15. Consumer Surplus, Producer Surplus and Deadweight Loss

16. Elasticity of Demand and SupplyDeterminants of DemandAvailability of substitutesMarket structure (how much competition)Proportion of income spent on the goodTime to adjust to changes in priceNecessity or luxury itemDeterminants of SupplyProduct typeTimingProduction CapacityInput substitution Flexibility and mobility

17. Price Elasticity of SupplyIf the price of a coffee increases 10%, and the supply increases 20%, the PES is 2If the price of bananas decreases 12% and the quantity supplied falls 2%, then PES =.16Inelastic SupplyPES< 1Increase in price leads to a small change in supplyElastic SupplyPES>1Increase in price leads to a bigger % increase in supply

18. Graphs to knowInelastic SupplyElastic Supply

19. Elasticity of Demand GraphsRelatively InelasticPerfect ElasticPerfectly InelasticPerfectly Elastic

20. Elasticity and Total Revenue Test

21. Types of elasticityCross Price ElasticityIncome Elasticity<0 (complements); >0 (substitutes)<0 (inferior); >0 (normal)

22. Costs of ProductionVariable CostChanges with the amount of outputIncrease, then decrease productionFixed CostDoes not change with the amount of outputTotal CostFixed plus variableAverageDivide cost by quantity

23. Things to remember about cost curvesMarginal Cost (MC) crosses the AVC and ATC at the minimum pointsMC>MR – decrease the level of productionMR=MC Shut down rule – price below AVCEconomies of ScaleLong run ATC made up several short run ATCRemember this is part of all the structures – your ATC curve is your LRATCIncreasing Returns to Scale= downward sloping LRATC

24. Perfect CompetitionThree Outcomes – things to think about – usually side by side graphsWhere is the ATC curve in relation to Price?Go in a straight line from price to ATC for profit or lossShort Run Supply curve is MC from AVC and long run is from ATC

25. Perfect competitionMr. DARP = MC (Marginal Revenue=Demand=Average Revenue= Price=Marginal Cost)Demand increases quantity in short run will increase but Long run returnCharacteristics of:Free entry and/or exit from (loss firms leave; profit firms enter)Know the side by side graphs (industry is basic supply and demand)Price TakersIdentical productsCannot change price ever (this is important)Perfect Information for all involved (buyers and sellers)Long Run: P=AR=MR=ATC (tangent)

26. Role of taxes and subsidies

27. Monopolistic competitionThings to remember:Excess CapacityPrice >MCP=ATCAR= PriceLong run: MR=MCP=ATC

28. MC v. PCNOTICE: (1) both ATC curves are tangent to the price but(2) Monopolistic Competition price is greater than MCIn PC, MC equals the PriceBIG difference – please remember this part.

29. OligopolyCartel – monopoly prices createdGame TheoryMergers – reduce the ATC for both firms

30. MonopolyMonopoly PriceMR=MC and up to demandMore than PCFair Return PriceMinimum ATC cross DemandBreak Even PointSocially Optimal PriceMC=DemandSubsidies required to break even

31. MonopoliesRevenue MaximizationMR = 0If MR is negative, decrease production to increase profitsProfit MaximizationElastic portion of the demand curvePower of the firmBarriers to entryPrice DiscriminationReason for MR below DConsumer Surplus will help define itCharge different prices in order to make more moneyKnow demand elasticitiesCharacteristicsUnder allocation of resourcesHigher prices than Perfect CompetitionMR< PricePer unit tax shared by both consumers and producersUnder produces and charges higher price

32. Factor EconomicsDemand for inputsLaborResourcesDerived Demand drives the resource demand curveMRP = Marginal Revenue ProductMR for factor markets= ΔTR / ΔQAdditional revenue a firm earns with a new unit of resource (usually worker)MRC = Marginal Revenue CostMC for factor markets= ΔTC / ΔQIf MRP > MRCIncrease ProductionIf MRP = MRCMax profitsStop (ideal) ProductionIf MRP < MRCDecrease production

33. Factor EconomicsMarginal Productivity / Least CostMPA / PA = MPB / PBFirms produce at a level where all costs are minimizedThis is the part where math is involved – you need to determine the “per unit cost” with divisionDerived DemandDemand for products creates or affects the demand for resources such as labor

34. Resource Market PlaceDerived Demand – resource market for labor that produces the good or service

35. Resource MarketThe cost of a resource should be less than the marginal productHire labor until the Marginal Product of Labor is less than the priceDiminishing Marginal ProductIncrease Price in PC, MRP will increase

36. Market Failures and Government InvolvementPublic GoodsNon rivalsNon excludableLighthousesExternalitiesPositive – bird feeders, vaccinationsNegative – pollution, MSC>MSB; increase optimal quantity of the good

37. Negative ExternalitiesSupply FailureSuppliers do not have to pay the full value Will supply more b/c costs paid by othersCosts affect supplyTaxes raise price to public equilibriumP2P1PPrivate ValueSocial CostPrivate CostQ1Q2QExternality Cost

38. Positive ExternalitiesDemand FailurePublic not willing to pay full value Benefits or subsidies needed to induce suppliers to supply at lower price levelsBenefits affect demandSubsidies absorb costs creating public equilibriumP2P1PPrivateValuePrivate CostPublicCostQ1Q2QExternal Benefit

39. Market FailuresLorenz curve – shows inequalities in income distributionTaxesProgressive – as income increases, proportional of tax increases – reduces inequalitiesRegressive – as income increases, amount of tax decreases (sales tax)Proportional – flat tax (same percentage for all income brackets)

40. Market FailuresPer unit tax v. Lump Sum tax (who pays depends on elasticity)Next slide shows the difference with relation to elasticity

41. Taxes and the governmentTax Incidence – who pays the tax burden

42. Can you?Draw and explain the cost curves and relationships for perfect competition and monopolistic competitionDraw and explain the cost curves and relationships for a monopolistic producer (only one)?Game Theory – determine and read the matrixMarginal Utility, Total Utility and Marginal Utility per dollarDetermine the costs for a firm in perfect competition

43. Test timeNext class – the multiple choice section of the test – 60 questions to be answered within the class period – this part will count as 2/3rds of the total gradeSecond class – the free response portion of the test – you will have the entire class to do the questions, but bring something to keep you quiet just in case you finish early. This will count as 1/3 of the gradeGrades: 74-90 points will receive a 5 or 95 (two times)-no retake60-73 points will receive a 4 or 85 (two times)- no retake48-59 points will receive a 3 or 75 (two times) – no retake37-47 points will receive a 2 or 65 (two times) – may do retest by January 28 – two review sessions required0-36 points will receive a 1 or 55 (two times) –may do retest by January 28 – two review sessions required