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Basic Economic Concepts, Perfectly Competitive Markets, Intro to…
Basic Economic Concepts
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Scarcity: Society’s wants are unlimited, but ALL resources are limited
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Marginal Analysis involves making decisions based on the additional benefit vs. the additional cost.
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Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.
Using transitive preferences we know that there is always a most desirable option forgone to do something else, this is called Opportunity Cost!
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During Trade
Absolute Advantage: The producer that can produce the most output or require the least amount of inputs (resources).
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Intro to Monopolies
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A monopolist produces where MR=MC, but charges the price consumers are willing to pay, identified by the demand curve!
Monopolies under-produce and over charge, decreasing CS and increasing PS
Natural monopolies are created by the fact that the start up cost, or fixed costs, are extremely high and continued cost of production is very high as well.
Price Discrimination: The practice of selling the same products to different buyers at different prices based on their elasticity
A perfectly discriminating firm can charge each person differently so the Marginal Revenue is equal to Demand=Price
In the long-run, new firms will enter, driving down DEMAND for firms already in the market!
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Collusion results in the incentive to cheat consumers and each other.
Firms make informed decisions based on their dominant strategies
Supply, Demand, and Consumer Choice
Demand is the different quantities of goods that consumers are WILLING and ABLE to buy at different price points.
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Sub Effect: This effect states that if the price goes up for one product, consumers of that product will choose to purchase a substitute product (and vice versa).
This effect occurs because if the price goes down for a product, the PURCHASING POWER increases for consumers – allowing them to purchase more.
The Law of Diminishing Marginal Utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease.
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Supply is the different quantities of a good or service that sellers are willing and able to sell (produce) at different price points.
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If TWO curves shift at the same time (S+D), EITHER price or quantity will be indeterminate.
Price Ceiling
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.
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Producer Tax
To dissuade the producer from making their good or service. This is because the government deems their product dangerous or unwanted
Subsidy
This government intervention strategy is used to encourage producers to make more of their good because it is deemed beneficial to people of our society.
Quota and Tarrifs
The purpose is to 1) Protect domestic producers from cheaper world prices and 2) prevent domestic unemployment created by increased importation from other countries.
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Supply, Demand, and Consumer Choice
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When we do not know specific % change, we can use this test to determine how changes in price will affect total revenue
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