GRAPHS

• Production Possibilities Curve


  Shows the maximum combinations of two goods that can be produced with available resources and technology
• Production Possibilities Curve


  • Points on the curve-efficient
  • Points inside the curve-inefficient
  • Points outside the curve-unattainable with available resources
• Gains in technology or resources favoring one good

  Both not other
• Demand and Supply: Market clearing equilibrium


  The point where the quantity demanded equals the quantity supplied, determining the equilibrium price and quantity
• Floors


  Creates surplus, Qd<Qs
• Ceilings


  Creates shortage, Qd>Qs
• Shifts in demand and supply caused by changes in determinants


  Causes changes in equilibrium price and quantity
• Changes in slope caused by changes in elasticity


  Affects how responsive quantity demanded/supplied is to changes in price
• Effect of Quotas and Tariffs

  Restrict quantity supplied, causing shortages and higher prices
• Consumer and Producer Surplus

  Measure of economic welfare, with consumer surplus being the area below the demand curve and above the price, and producer surplus being the area above the supply curve and below the price
• Effect of Taxes


  Taxes on buyers cause demand curve to shift left, taxes on sellers cause supply curve to shift left, with the incidence depending on elasticity
• Short Run Cost


  AFC declines as output increases, AVC and ATC decline initially then increase (U-shaped), MC declines sharply then rises sharply, MC intersects AVC and ATC at minimum points
• Long Run Cost


  Economies of scale, diseconomies of scale, constant returns to scale
• Perfectly Competitive Product Market Structure

  Firms are price takers, P=MR=MC=min ATC, achieves allocative and productive efficiency
• Imperfectly Competitive Product Market Structure: Pure Monopoly


  Firm is a price maker, earns economic profits, may produce less than socially optimal quantity
• Imperfectly Competitive Product Market Structure: Monopolistically Competitive


  Firms have some pricing power, P=AC at MR=MC output
• Perfectly Competitive Resource Market Structure

  Firms are wage takers, changes in labor demand do not raise wages
• Imperfectly Competitive Resource Market Structure

  Firms are wage makers, quantity derived from MRC=MRP, wage comes from that point downward to supply curve
• Externalities


  External costs - production/consumption costs inflicted on third parties without compensation, external benefits - production/consumption benefits conferred on third parties without compensation
• Allocative Efficiency


  Occurs when Marginal Cost = Marginal Benefit, no resources should be allocated beyond that point
• Diminishing Marginal Utility


  As consumption of a good increases, the additional satisfaction derived from each extra unit decreases
• Law of Diminishing Returns


  As more of a variable input is added to fixed inputs, the marginal product of the variable input eventually declines
• Total Utility


  Increases at a diminishing rate, reaches a maximum and then declines
• Marginal Utility


  Diminishes with increased consumption, becomes zero where total utility is at a maximum, and is negative when Total Utility declines
• When Total Utility is at its peak, Marginal Utility is becomes zero. Marginal Utility reflects the change in total utility so it is negative when Total Utility declines.
• Total Product


  Total quantity or total output of a good produced
• Marginal Product


  Extra output or added product associated with adding a unit of a variable resource
• Average Product


  The output per unit of input, also called labor productivity
• Law of Diminishing Returns


  • As successive units of a variable resource are added to a fixed resource beyond some point the extra or the marginal product will decline; if more workers are added to a constant amount of capital equipment, output will eventually rise by smaller and smaller amount
• The marginal product intersects the average product at its maximum average product. When the TP has reached it maximum, the MP is at zero. As TP declines, MP is negative.
• Fixed Cost


  Costs which in total do not vary with changes in the output; costs which must be paid regardless of output; constant over the output
• Variable Cost


  Costs which change with the level of output; increases in variable costs are not consistent with unit increase in output; law of diminishing returns will mean more output from additional inputs at first, then more and more additional inputs are needed to add to output
• Total Cost


  The sum of fixed and variable. Most opportunity costs will be fixed costs.
• Average Costs (Per Unit Cost)


  Can be used to compare to product price
• Marginal Costs


  The extra or additional cost of producing one more unit of output; these are the costs in which the firm exercises the most control
• There is no relationship between MC and AFC
• Marginal Revenue


  The change in total revenue from an additional unit sold
• Marginal Cost


  The change in total costs from the production of another unit
• Competitive Firms determine their profit-maximizing (or loss-minimizing) output by equating the marginal revenue and the marginal cost. The MR=MC rule will determine the profit maximizing output.
• In the long run for a perfectly competitive firm, after all the changes in the market (more demand for the product, firms entering in search of profit, and then firms exiting because economic profits are gone), long run equilibrium is established. In the long run, a purely competitive firm earns only normal profit since MR=P=D=MC at the lowest ATC. This condition is both Allocative and Productive Efficient.