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 score
Friday – Free Response portion (3 questions – one long and two short) – counts as 1/3 of the score
Begin watching the videos assigned (partner quiz on January 21st or 22nd) and studying our vocabulary terminology (quiz on January 19th or 20th)

2. Microeconomics Review
Fall 2015

3. Circular Flow

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

5. PPC Shifters and Points of Interest
Technology (usually outward)
Resources (could be either direction)
Remember the whole curve does NOT always shift (capital v. consumer goods
Outward shift is economic growth
Trade allows consumption outside the PPC

6. Opportunity Costs, Trade Offs and scarcity
Demands that choices be made
Too many wants and not enough resources
Basic economic problem
Trade offs
All that is given up
Opportunity Costs
Next best alternative
On the PPC

7. Comparative Advantage
In table format
OOO (output question) – think about “units” of goods
IOU (input question) – how much time is used to produce?
In graph format

8. Comparative v. absolute advantage
Comparative Advantage
Lower opportunity cost of the item
Math involved
Only one comparative advantage per country
Absolute Advantage
More efficient use of resources
Produce more using same amount of resources

9. Utility Marginal Utility Total Utility
Extra satisfaction earned from purchasing or consuming one more good
Law of Diminishing Marginal Utility
MU/$ of good A= MU/$ of good B
Total Utility
Increases until MR equals 0

10. Economic Systems Market System Command System Traditional System
Private ownership of property
Contract rights
Price as an incentive
Command System
Government makes decisions
Traditional System
Habits and customs
Mixed System
Market and Command
Regulations, etc.

11. Right is INCREASE; Left is DECREASE
Supply and Demand
Demand 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 future
Supply 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 sellers
Right is INCREASE; Left is DECREASE

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

13. Shortages and Surpluses
Price charged is below equilibrium price
Fix by raising the price
Price charged is above the equilibrium price
Fix by lowering the price

14. Government interference
Price floors
Price Ceilings

15. Consumer Surplus, Producer Surplus and Deadweight Loss

16. Elasticity of Demand and Supply
Determinants of Demand
Availability of substitutes
Market structure (how much competition)
Proportion of income spent on the good
Time to adjust to changes in price
Necessity or luxury item
Determinants of Supply
Product type
Timing
Production Capacity
Input substitution
Flexibility and mobility

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

18. Graphs to know
Elastic Supply
Inelastic Supply

19. Elasticity of Demand Graphs
Relatively Inelastic
Perfect Elastic
Perfectly Inelastic
Perfectly Elastic

20. Elasticity and Total Revenue Test

21. Types of elasticity Cross Price Elasticity Income Elasticity
<0 (complements); >0 (substitutes)
<0 (inferior); >0 (normal)

22. Costs of Production Variable Cost Fixed Cost Total Cost Average
Changes with the amount of output
Increase, then decrease production
Fixed Cost
Does not change with the amount of output
Total Cost
Fixed plus variable
Average
Divide cost by quantity

23. Things to remember about cost curves
Marginal Cost (MC) crosses the AVC and ATC at the minimum points
MC>MR – decrease the level of production
MR=MC
Shut down rule – price below AVC
Economies of Scale
Long run ATC made up several short run ATC
Remember this is part of all the structures – your ATC curve is your LRATC
Increasing Returns to Scale= downward sloping LRATC

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

25. Perfect competition
Mr. DARP = MC (Marginal Revenue=Demand=Average Revenue= Price=Marginal Cost)
Demand increases quantity in short run will increase but Long run return
Characteristics 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 Takers
Identical products
Cannot 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 competition
Things to remember:
Excess Capacity
Price >MC
P=ATC
AR= Price
Long run:
MR=MC

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

29. Oligopoly Cartel – monopoly prices created Game Theory
Mergers – reduce the ATC for both firms

30. Monopoly Monopoly Price Fair Return Price Socially Optimal Price
MR=MC and up to demand
More than PC
Fair Return Price
Minimum ATC cross Demand
Break Even Point
Socially Optimal Price
MC=Demand
Subsidies required to break even

31. Monopolies Revenue Maximization Profit Maximization Power of the firm
MR = 0
If MR is negative, decrease production to increase profits
Profit Maximization
Elastic portion of the demand curve
Power of the firm
Barriers to entry
Price Discrimination
Reason for MR below D
Consumer Surplus will help define it
Charge different prices in order to make more money
Know demand elasticities
Characteristics
Under allocation of resources
Higher prices than Perfect Competition
MR< Price
Per unit tax shared by both consumers and producers
Under produces and charges higher price

32. Factor Economics Demand for inputs If MRP > MRC If MRP = MRC
Labor
Resources
Derived Demand drives the resource demand curve
MRP = Marginal Revenue Product
MR for factor markets
= ΔTR / ΔQ
Additional revenue a firm earns with a new unit of resource (usually worker)
MRC = Marginal Revenue Cost
MC for factor markets
= ΔTC / ΔQ
If MRP > MRC
Increase Production
If MRP = MRC
Max profits
Stop (ideal) Production
If MRP < MRC
Decrease production

33. Factor Economics Marginal Productivity / Least Cost Derived Demand
MPA / PA = MPB / PB
Firms produce at a level where all costs are minimized
This is the part where math is involved – you need to determine the “per unit cost” with division
Derived Demand
Demand for products creates or affects the demand for resources such as labor

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

35. Resource Market
The cost of a resource should be less than the marginal product
Hire labor until the Marginal Product of Labor is less than the price
Diminishing Marginal Product
Increase Price in PC, MRP will increase

36. Market Failures and Government Involvement
Public Goods
Non rivals
Non excludable
Lighthouses
Externalities
Positive – bird feeders, vaccinations
Negative – pollution, MSC>MSB; increase optimal quantity of the good

37. Negative Externalities
Externality
Cost
Supply Failure
Suppliers do not have to pay the full value
Will supply more b/c costs paid by others
Costs affect supply
Taxes raise price to public equilibrium
Social Cost P
Private
Cost P2 P1
Private
Value Q2 Q1 Q

38. Positive Externalities
Demand Failure
Public not willing to pay full value
Benefits or subsidies needed to induce suppliers to supply at lower price levels
Benefits affect demand
Subsidies absorb costs creating public equilibrium
External Benefit
Private Cost P
Public
Cost P1 P2
Private
Value Q1 Q2 Q

39. Market Failures
Lorenz curve – shows inequalities in income distribution
Taxes
Progressive – as income increases, proportional of tax increases – reduces inequalities
Regressive – as income increases, amount of tax decreases (sales tax)
Proportional – flat tax (same percentage for all income brackets)

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

41. Taxes and the government
Tax Incidence – who pays the tax burden

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

43. Test time
Next 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 grade
Second 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 grade
Grades:
74-90 points will receive a 5 or 95 (two times)-no retake
60-73 points will receive a 4 or 85 (two times)- no retake
48-59 points will receive a 3 or 75 (two times) – no retake
37-47 points will receive a 2 or 65 (two times) – may do retest by January 28 – two review sessions required
0-36 points will receive a 1 or 55 (two times) –may do retest by January 28 – two review sessions required