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‐ assume use all resources in economy to produce 2 goods ‐ shows tradeoffs between producing one good over another ‐outside the PPC not possible given current economic resources unless there is a shift in PPC outward due to productivity improvement
‐decrease in PPC curve ‐ natural disasters ‐ inefficient given economic resources Opportunity cost= whatever must be given up to obtain some item OC of Good of Good 1 = (units lost of Good of Good 2) / (units gained of good of good 1)
DETERMINANTS OF DEMAND‐ shift in the demand curve P‐ Preferences and Tastes I ‐ Income P‐ Purchasers
of the Future E‐ Expectations of the R‐ Related Goods
DETERMINANTS OF SUPPLY‐ shift in the supply curve
I ‐ Input prices
of Suppliers N‐ Number of Suppliers E‐ Expectations of the of the Future R‐ Related Goods T‐ Technology T‐ Taxes and Subsidies NOTE: shift in price represents only a movement along the demand/supply curve and does not shift the entire curve MARKET EQUILIBRIUM 3 Steps to Analyzing Market Equilibrium: 1) decide whether event shifts supply or demand curve or both 2) decide which direction the curve shifts 3) use the new supply and demand curves to see how the shift changes the equilibrium price and quantity
Price Elasticity of Demand(Supply) =
% change in Qd(Qs) % change in price
= measures how Qd(Qs) of a good responds to a change in price of that good Point Elasticity = (P / Q) * (1 / slope)
Perfectly elastic demand: elasticity = x(infinity) Short run: supply and demand more inelastic Long run: supply and demand becomes elastic (more time to adapt to changes) Cross Price Elasticity of Demand= % change in Qd of good 1 % change in Price of good 2
if answer is “+” substitute goods if answer is “‐“ compliment goods
COSTS OF PRODUCTION
average total cost(ATC)= Total cost=(VC+FC)_ Quantity = U‐shaped: bottom of U‐shape at qty that minimizes ATC is efficient scale average variable cost (AVC)= Variable cost
average fixed cost(AFC)= Total fixed cost (always declines as output rises
Quantity
Quantity
b/c FC spread over more units)
Marginal cost(MC)= change in total cost change in Quantity = increase in total cost from producing an additional unit PERFECT COMPETITION
MONOPOLY
‐ Demand horizontal line b/c competitive firm can sell as much
‐ In a Monopoly only 1 producer= demand curve slopes
or little as it wants at this price
downward b/c as prices go up consumers buy less and reduces qty produced
‐To find profit(loss): find where Price(D or AR or MR) intersects MC and move down(up) to ATC
‐Monopoly maximizes profit by choosing QUANTITY where
Profit= 0 where MC curve intersects ATC curve
MR=MC. Then move up to the demand curve at that quantity to find the Price
‐Point that meets min. point on AVC curve is SHUTDOWN PRICE
Profit = area of ABCD
Shutdown operations if Price is below the shutdown price(Ps)
Profit= (Average Total Revenue‐ Average Total Cost) x Quantity
‐ Shut down if P < AVC ‐ Shut down if TR < VC : revenue that it would get from producing at this cost is less than it’s VC of production
= (TR/Q ‐ TC/Q) x Q e = (P‐ATC) x Qe
EXTERNALITIES
NEGATIVE EXTERNALITIES
MSC = MC +
‐
‐
(e.g. Pollution)
Marginal external cost
Graphically represented by a vertical shift of
POSITIVE EXTERNALITIES
MSB
‐
(e.g. Knowledge)
= MB + Marginal external benefit Graphically represented by a vertical shift of
the supply curve equal to the amount of the
the demand curve equal to the amount of the
externality
externality
Socially optimal equilibrium is achieved where MSC = MSB
