•1

Midterm #2 Review (Chapters 5, 7, 13-15)

Chapter 5: Elasticity

• Price elasticity of demandD fi iti i t iti t h d d h– Definition, intuitive concept on how demand changes

– Elastic, unit elastic, and inelastic demand– Normal vs. inferior good

• Cross-price elasticity, income elasticity– Cross-price & Complement goods vs. substitute goods– Income & Luxury goods

1

• Elasticity of Supply

• Short-run vs. long-run – “steepness” of demand curve; Examples: gas, milk, cars etc.

Chapter 7: Market Efficiency

• Consumer Surplus– Willingness to pay (WTP) and demand curve– Welfare Economics – allocation of resources and econ. well-being– Measuring surplus in the market

• Producer Surplus– Market supply curve– measuring surplus in the market

M k Effi i

2

• Market Efficiency– Total Surplus = Cons. Surplus + Prod. Surplus– Measurement of economic well-being of society– Benevolent social planner, “Laissez faire,” and invisible hand

•2

Chapter 13: Production Costs

• Profits (π) = Total Revenue (TR) – Total Costs (TC)– Explicit vs. implicit costs (econ vs. accounting)

• Production function - inputs to outputs• Production function - inputs to outputs– Diminishing marginal product of labor

• Costs: Total, Fixed, Variable, Average, Marginal– Thinking on the margin principle

• Characteristics of ATC, MC– When MC <=> ATC and efficient scale of production

3

When MC < > ATC and efficient scale of production

• Short-run vs. Long-run costs– Economies of scale – changing with time and level of prod.

Chapter 14: Firms in a competitive market• Definition of a competitive Market

– Many buyers, sellers – no one has pricing power– Firms’ goal to maximize profits

• Profit Max and thinking on the margin:– Average revenue, marginal revenue, marginal cost– If MR > MC ↑ Q; if MR < MC ↓ Q; – Set Q where MR = MC

• MC and firm’s supply decisionShort run decision vs long run decision; shut down vs exit

4

– Short-run decision vs. long-run decision; shut-down vs. exit– Zero-profit condition and Market Price relative to ATC

• Market short-run and long-run supply curve– Dynamics of firm entry and exit

•3

Chapter 15: Monopoly• One seller, many buyers; Firm has pricing power

– Barriers to firm entry (resource, regulation, production process)– Natural monopoly (falling ATC) dynamics

• Monopoly Profit Max production decision:– Set Q where MR = MC (same as competitive firm)– Read price off demand curve

• Monopoly and positive economic profits– P > ATC; Zero-profit condition and Market Price relative to ATC

5

• Welfare costs of monopoly– Generally P ↑ and Q ↓ compared to competitive market; DWL– Function of type of price discrimination– Public policy towards monopolies (antitrust, regulation)

Test format:

Four-part exam:Part A: multiple choice questionsPart B: short answer/definitions taken from study guidePart B: short answer/definitions taken from study guidePart C: quantitative/graphic questionsPart D: essay question on articles presented in class

• Closed book, closed notes• Pen, pencil, calculator only items needed

– No bluebook or extra paper needed

6

p p