Topics for Exam 2

Topics for Exam II
Fall 2005

Principles of Microeconomics

Wednesday November 9
Chapters 11, 6, 8, 12, 5, 13, 14

You will probably want a calculator for this exam

I. The Role of Government (Con't.)

A. Market Failure (con't.)

1. Monopoly

a. price too high, quantity too low
b. policy

    i. antitrust
    ii. regulation
    iii.public ownership

    2. The problem of public goods
        a. non-rival and non-excludable
        b. private markets won't provide an efficient amount
        c. quasi-public goods
            i. open access resources (overuse)
            ii. excludable public goods (quantity too low)
        d. Policy

B. Address income distribution

C. Macroeconomic Policy
    1. stabilization
       a. expansionary policy reduces unemployment
             i. fiscal: increase government spending, decrease taxes
             ii. monetary: decrease interest rates, increase money supply
       b. contractionary policy reduces inflation
             i. fiscal: decrease government spending, increase taxes
             ii. monetary: increase interest rates, decrease money supply
    2. growth
       a. enhance supply of productive resources
       b. efficient use of resources
       c. long-run goal

D. Taxes

    i. progressive
    ii. proportional
    iii. regressive

c. benefits principle
d. market distortion
i. disincentive to engage in taxed activity
ii. deadweight loss

C. Cost Benefit Analysis

D. Public Choice Theory

II. Elasticity

A. Price elasticity of Demand

B. Cross elasticity

1. complements
2. substitutes
3. unrelated goods

C. Income elasticity

1. normal goods
2. inferior goods

D. Elasticity of Supply

III. Short run costs

A. total fixed cost
B. total variable cost
C. total cost
D. average fixed cost
E. average variable cost
F. average total cost
G. marginal cost

IV. Other Cost concepts

A. implict and explict costs
B. dimishing returns and increasing marginal cost
C. marginal and average cost
    1. U-shaped
    2. minimum average cost is at intersection of AC and MC
D. Costs and Profit
    1. profit (P>ATC)
    2. loss (P<ATC)
    3. breakeven (P=ATC)
E. Sunk Costs
    1. unrecoverable
    2. no opportunity cost
    3. no impact on operating or exit decisions
    4. only affect entry decision

V. Profit Maximization
A. Economic Profit
    1. profit = total revenue - total cost
    2. best quantity: marginal revenue = marginal cost
    3. find price on demand curve at q*

B. Economic Loss
    1. exit (only in long run)
    2. short run
        a. minimize loss
        b. shutdown
C. Breakeven
    1. firm is covering all its costs
    2. no excess profit
D. The Long Run
    1. Entry and Exit
        a. impact on industry
        b. impact on firm

VI. Market Structure
A. Market structures

1. competition
2. monopoly
3. oligopoly
4. monopolistic competition

B. Industry versus individual firm demand
    1. monopoly: firm = market
    2. oligopoly: firm demand is only part of market
    3. monopolistic competition: firm is a small part of large market
    4. competition: firm is an infinitesimal part of market
            a. competitive firms are price takers
            b. firm demand is horizontal

VII. Competition

A. Market and representative firm

1. market determines price
2. firm can sell any quantity it desires at market price (infinitely elastic demand)
3. profit maximization (MC=MR)

B. marginal cost and supply

C. profits, losses, and breakeven for the competitive firm

1. compare price to average total cost
2. shutdown conditions: P<AVC

D. competition in the long run

1. profits attract entry
2. losses cause exit
3. long run competitive equilibrium

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