Exam 2 Review

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# Exam 2 Review - PowerPoint PPT Presentation

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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Presentation Transcript
Exam 2 Review
• elasticity
• profit
• graphs
• perfect competition
• monopoly
• MC, MU, TR, etc.
• do NOT need to memorize
• spelled out on exam
Elasticity
• 4 types
• price elasticity of demand
• price elasticity of supply
• cross
• income
Elasticity
• measuring MAGNITUDE of change in Q due to change in price or income
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
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
example
• elasticity of demand = -3
• demand is ELASTIC
• demand curve is relatively flat
• a 1% increase in P cause a 3% decrease in Qd

inelastic

P

elastic

D

D

Q

Profit
• Accounting profit
• TR – explicit costs
• Economic profit
• TR – (explicit + implicit costs)
• smaller than accounting profit
normal profit
• economic profit of zero
• resources earn their opportunity cost
• just enough to “make it worthwhile” in long run
Graphs of market & firm
• perfect competition
• monopoly
• be able to
• select profit maximizing P & Q
• identify consumer surplus
• identify economic profit/loss
perfect competition
• market supply & demand determine price
• firm takes P, chooses Q
• where P = MR = MC
• P, Q, ATC
• economic profit/loss in SR

economic

profit

P

P

MC

S

ATC

\$5

D = MR = P

\$5

D

\$2

Q

Q

10

1000

Market

Firm

(\$5-\$2)(10) = \$30

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

P

P

MC

S’

S

ATC

\$5

D = MR = P

\$2

\$5

D’

D

\$2

Q

Q

10

1000

Market

Firm

S increases, P falls

until normal profit

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

consumer

surplus

P, MR

Pm

loss

MC = ATC

D

MR

Q

economic

profit

Qm

monopoly

consumer

surplus

P, MR

P, MR

Pm

MC = ATC

D

D

MR

Q

Q

Qm

Qc

MC = ATC

Pc

perfect

competition

monopoly

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