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ECN 104 CONCEPTS ‐ 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 1 = (units lost of Good 2) / (units gained of good 1) DETERMINANTS OF DEMAND‐ shift in the demand curve P‐ Preferences and Tastes I ‐ Income P‐ Purchasers E‐ Expectations of the Future R‐ Related Goods DETERMINANTS OF SUPPLY‐ shift in the supply curve I ‐ Input prices N‐ Number of Suppliers E‐ Expectations 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) Midpoint method (Arc elasticity): (Q2‐Q1)/[(Q2+Q1)/2] (P2‐P1)/[(P2+P1)/2] Perfect inelastic demand: elasticity =0 Inelastic demand: elasticity < than 1 Elastic demand: elasticity > than 1 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 if answer is “+” substitute goods % change in Price of good 2 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 or little as it wants at this price ‐To find profit(loss): find where Price(D or AR or MR) intersects MC and move down(up) to ATC Profit= 0 where MC curve intersects ATC curve ‐Point that meets min. point on AVC curve is SHUTDOWN PRICE Shutdown operations if Price is below the shutdown price(Ps) ‐ 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
‐ In a Monopoly only 1 producer= demand curve slopes downward b/c as prices go up consumers buy less and reduces qty produced ‐Monopoly maximizes profit by choosing QUANTITY where MR=MC. Then move up to the demand curve at that quantity to find the Price Profit = area of ABCD Profit= (Average Total Revenue‐ Average Total Cost) x Quantity = (TR/Q‐ TC/Q) x Qe = (P‐ATC) x Qe EXTERNALITIES NEGATIVE EXTERNALITIES (e.g. Pollution) MSC = MC + Marginal external cost POSITIVE EXTERNALITIES (e.g. Knowledge) MSB = MB + Marginal external benefit ‐
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Graphically represented by a vertical shift of the supply curve equal to the amount of the externality ‐
Socially optimal equilibrium is achieved where MSC = MSB Graphically represented by a vertical shift of the demand curve equal to the amount of the externality