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Exam 2 Review

Exam 2 Review. elasticity profit graphs perfect competition monopoly. about acronyms. MC, MU, TR, etc. do NOT need to memorize spelled out on exam if in doubt, ask!. Elasticity. 4 types price elasticity of demand price elasticity of supply cross income. Elasticity.

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Exam 2 Review

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  1. Exam 2 Review • elasticity • profit • graphs • perfect competition • monopoly

  2. about acronyms • MC, MU, TR, etc. • do NOT need to memorize • spelled out on exam • if in doubt, ask!

  3. Elasticity • 4 types • price elasticity of demand • price elasticity of supply • cross • income

  4. Elasticity • measuring MAGNITUDE of change in Q due to change in price or income

  5. price elasticity of demand • how much does Qd change when P changes? • < 0 • price elasticity of supply • how much does Qs change when P changes? • > 0

  6. cross elasticity • how much does Qd change when P of related good changes? • < 0 for compliments • > 0 for substitutes • income elasticity • how much does Qd change when income changes? • > 0 for normal goods • < 0 for inferior goods

  7. example • elasticity of demand = -3 • demand is ELASTIC • demand curve is relatively flat • a 1% increase in P cause a 3% decrease in Qd

  8. inelastic P elastic D D Q

  9. Profit • Accounting profit • TR – explicit costs • Economic profit • TR – (explicit + implicit costs) • smaller than accounting profit

  10. normal profit • economic profit of zero • resources earn their opportunity cost • just enough to “make it worthwhile” in long run

  11. Graphs of market & firm • perfect competition • monopoly • be able to • select profit maximizing P & Q • identify consumer surplus • identify economic profit/loss

  12. perfect competition • market supply & demand determine price • all firms, all buyers • firm takes P, chooses Q • where P = MR = MC • P, Q, ATC • economic profit/loss in SR

  13. economic profit P P MC S ATC $5 D = MR = P $5 D $2 Q Q 10 1000 Market Firm ($5-$2)(10) = $30

  14. Perfect competition in LR • normal profit • zero economic profit • why? • entry/exit will shift S until market price gives firms normal profit

  15. P P MC S’ S ATC $5 D = MR = P $2 $5 D’ D $2 Q Q 10 1000 Market Firm Economic profit leads to entry, S increases, P falls until normal profit

  16. monopoly • firm supply IS market supply • firm fills market demand • firm sets P, Q • Q where MR = MC • P determined by the demand curve • P > MR

  17. consumer surplus P, MR Pm deadweight loss MC = ATC D MR Q economic profit Qm monopoly

  18. consumer surplus P, MR P, MR Pm MC = ATC D D MR Q Q Qm Qc MC = ATC Pc perfect competition monopoly

  19. Monopoly Perfect Competition price maker price taker P > MC, P > MR P = MR = MC higher price lower price lower output higher output LR economic profit possible LR normal profit lower consumer surplus higher consumer surplus deadweight loss

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