Tips Flashcards
Do something if…
Do something if the Marginal benefits > Marginal Cost
Stop doing something if…
Stop doing something when the marginal benefits = marginal costs of doing it
Never do something when the…
Never do something when the marginal benefits < marginal cost of doing it
The slope of the curve, 2 in our case, measures the opportunity cost of the good on the x-axis
The inverse of the slope, 1 ⁄2 in our case, measures the opportunity cost of the good on the y axis.
The law of demand predicts a downward- (or negative) sloping demand curve (Figure 6.1). If the price moves from $1 to $1.25 and all other factors are held constant
we observe a decrease in the quantity demanded from 60 to 40 cups. It is important to place special emphasis on “quantity demanded.” If the price of the good changes and all other factors remain constant, the demand curve is held constant and we simply observe the consumer moving along the fixed demand curve. If one of the external factors change, the entire demand curve shifts to the left or right.
As suppliers increase the quantity supplied of a good
they face rising marginal costs
As suppliers increase the quantity supplied of a good, they face rising marginal costs….
As a result, they only increase the quantity supplied of that good if the price received is
high enough to at least cover the higher marginal cost.
When both demand and supply are changing
one of the equilibrium outcomes (price or quantity) is predictable and one is ambiguou
Before combining the two shifting curves
predict changes in price and quantity for each shift, by itself
The variable that is rising in one case and falling in the other case is
your ambiguous prediction.
The area under the demand curve and above the market price is equal
to total consumer surplus.
The area above the supply curve and below the market price is equal
to total producer surplus.
When describing or calculating elasticity measures,
you must use percentage changes
• In general, the more vertical a good’s demand curve (D0)
the more inelastic the demand for that good.
The more horizontal a good’s demand curve (D1)
, the more elastic the demand for that good.
Despite this generalization, be careful;
elasticity and slope are not equivalent measures.
Inelastic demand Ed < 1: % DQd < % DP,
(D = Change)
so total revenue increases with a price increase.
• Elastic demand Ed > 1: % DQd > % DP,
so total revenue decreases with a price increase.
Unit elastic demand Ed = 1: % DQd = % DP
(D = Change)
so total revenue remains the same.
If EI > 1, the good is
normal and income elastic (a luxury).
If 1 > EI > 0, the good is
normal but income inelastic (a necessity)
If EI < 0
the good is inferior.
• A cross-price elasticity of demand less than zero identifies
complementary goods.
A cross-price elasticity of demand greater than zero identifies
substitute goods.
Taxes create lost efficiency by
moving away from the equilibrium market quantity where MB = MC to society
The area of deadweight loss (triangle DWL) increases as the
quantity moves further from the competitive market equilibrium quantity.
A price floor is installed when producers
feel the market equilibrium price is “too low.”
A price floor creates a
permanent surplus at a price above equilibrium.
• If the government purchases the surplus
taxpayers eventually pay the bill.
The more price elastic the demand and supply curves,
s, the greater the surplus and the greater the government spending to purchase the surplus.
• The price floor reduces net benefit by
overallocating resources to the production of the good.
A price ceiling is installed when consumers feel
the market equilibrium price is “too high.”
A price ceiling creates a
permanent shortage at a price below equilibrium
The more price elastic the demand and supply curves,
the greater the shortage
• The price ceiling reduces net benefit by
underallocating resources to the production of the good.
Economic Effects of the Tariffs
• Consumers pay….
higher prices and consume less steel. If you are building airplanes or door hinges, you have seen an increase in your costs.
Economic Effects of the Tariff
• Consumer surplus…
s has been lost.
Economic Effects of the Tariff
• Domestic producers…
increase output. Domestic steel firms are not subject to the tariff, so they can sell more steel at the price of $90 than they could at $80.
Economic Effects of the Tariff
Declining imports
Fewer tons of imported steel arrive in the United States.
Economic Effects of the Tariff
Tariff revenue.
The government collects $10 ¥ 2 million = $20 million in tariff revenue as seen in the shaded box in Figure 7.17. This is a transfer from consumers of steel to the government, not an increase in the total well-being of the nation.
Economic Effects of the Tariff
Inefficiency.
There was a reason the world price was lower than the domestic price. It was more efficient to produce steel abroad and export it to the United States. By taxing this efficiency, the United States promotes the inefficient domestic industry and stunts the efficient foreign sector. As a result, resources are diverted from the efficient to the inefficient sector
Economic Effects of the Tariff
Deadweight loss…
now exists
utility maximizing rule is expressed
MUx /Px = MUy/Py or MUx /MUy = Px /Py
If MPL > APL:
APL is rising.
If MPL < APL
APL is falling.
If MPL = APL
APL is at the peak.
• As MPL is falling (diminishing marginal returns),
MC is rising
As MPL is rising (increasing marginal returns),
MC is falling.
When MPL is highest,
MC is lowest.
As APL is falling
AVC is rising.
• As APL is rising,
AVC is falling
When APL is highest,
AVC is lowest.
Since the only decision to be made by the perfectly competitive firm is to choose the optimal level of output, the firm’s rule is as follows:
Choose the level of output where MR = MC.
• If P > ATC
P > 0.
If P < ATC
P < 0.
If P = ATC,
, P = 0
If TR ≥ TVC
the firm produces qe where MR = MC.
If TR < TVC,
the firm shuts down and q = 0.
If P ≥ AVC,
the firm produces qe where MR = MC
If P < AVC
the firm shuts down and q = 0.
Demand is horizontal,
and P = MR in perfect competition.
Demand is downward sloping,
and P > MR in monopoly
The monopolist operates in
the elastic (or upper) range of demand.
• Find Qm where MR = MC
Once you have found Q m, never leave it
Find Pm vertically from the demand curve above
MR = MC
Find ATC vertically at Qm.
If you move downward, P > 0. If you move upward, P < 0
Move horizontally from ATC to the y axis to
complete the rectangle and clearly label it as positive or negative.
In competitive markets, MRP
L is the firm’s labor demand curve.
In competitive markets,
wage is the firm’s labor supply curve
MPL/PL = MPK/PK
or equivalently, MPL/MPK = PL/PK
Under monopsony, employers hire
Lm < Lc.
Monopsony firms pay
Wm < Wc = MRPL.
The existence of spillover costs in a market results in
an overallocation of resources in that market. In other words, there is too much of a bad thing.
The closer the Gini ratio gets to zero,
the more equal the distribution of income
The closer the Gini ratio gets to one,
the more unequal the distribution of income.
TIP 1:
On graphing problems, you can lose a point for not indicating which variables lie on each graphical axis. In this case, it would be as simple as a $ and a Q.
TIP 2:
When asked to identify equilibrium price and quantity, do these in some way. Dashed lines from the intersection to the axes are enough, or label the intersection E1.
TIP 3:
Draw your graphs large enough for you to clearly identify the area of profit/loss. If your graph is the size of a postage stamp, it becomes more difficult for you to identify all relevant parts. It is also very tough for the reader to find all of the points.
