SmokinNotes ECO2023 Index Card Template

FACTORS IMPORT EXPORT TARIFF/QUOTA Price PWORLD < PUSA PWORLD > PUSA P() Quantity QD > QS QD < QS QTRANSACTED() Producer (PS) LOSE () GAIN () GAIN () Consumer (CS) GAIN () LOSE () LOSE () Total (TS) GAIN () GAIN () LOSE () DWL S&D graph of USA the horizontal distance between the S&D curves = amount of export OR import.

Fixed CostsDo not change, includes: rent facilities, large machinery Variable CostsChange, as output increases, VC increases. TC=FC+VC AFC=FC/Q AVC=VC/Q ATC=TC/Q ATC=AFC+AVC MC=TC/Q TC=ATCQ MR=TR/Q (When Q = 0 and VC = 0 then TC = FC) MPL=Q/L (Marginal Product of Labor) MPYLD=Q/P PED=%QD/%P Marginal Utility = TU/Q Marginal AnalysisMUA/PA = MUB/PB Max UtilityMU/P=MU/P Expected Value=(Prob-APayoff-A) + (Prob-BPayoff-B) PE RatioPE=Price/Earnings OR Price/PE=Earnings DIV YLD=Dividend/Price Market Cap = PriceShares Issued ECO Profit=TR-TC When graphing note that MC curve crosses the ATC curve at its minimum. Displays Average/Marginal Relationship if MC > ATC then ATC will rise. Vertical distance between ATC and AVC = AFC (which decreases as we increase Q). AVC (and ATC)as output increases, AVC initially decreases, reaches its minimum, then increases. Minimums in order MC < AVC < ATC.

MC<ATC, ATC will fall. MC>ATC, ATC will rise. MC<AVC, AVC will fall. MC>AVC, AVC will rise. If P > ATC firm stays OPEN. If P < ATC firm will SHUT DOWN. (b/c there are no barriers into a perfectly competitive market, and a firm can only earn a normal profit in the long run) Profit MaxMC=MR, Economic ProfitP > ATC, Economic LossP < ATC, Normal ProfitP = ATC, Economic profit is profit above normal profit. Economic loss is profit below normal profit. Total Profit = TR TC OR = (P Q) (ATC Q) LRAC = Long-Run Average Cost Curve is U-shaped and reflects lowest AC of each individual SRAC curve for each level of capital. Economies of ScaleLRAC are falling as input goes up. Diseconomies of Scalefirm gets too big and increasing output actually increases ACs. Monopolies one firm, no close substitutes, insurmountable barriers to entry. MR curve lies below D curve, firm produces at MC=MR but charges at the price on the demand curve at the quantity it produced (extrapolate upward). CAN earn economic profit in long run because of HUGE barriers to entry/exit. Creates DWL and are overall very bad for society. (in SR will shut down if P<AVC) Natural Monopolies one firm supplies entire market at lower cost than could 2 or more firms. D curve crosses LRAC where LRAC is decreasing (example: FPL, TECO, GRU). For natural monopolies, when output () ATC ().

Marginal Cost Pricing Rule Produce where P=MC. Causes economic loss but no DWL Average Cost Pricing Rule Produce where P=LRAC. Causes normal profit & DWL . 2 ways to implement AC Pricing Rule (1) rate of return regulation (2) price cap regulation Price Cap Incentive Regulation pricing involves (1) setting max price firm can charge (2) letting firm keep any profit made from lowering cost below that price & (3) readjusting price cap periodically. This pricing gives firms incentive to cut costs while ensuring efficient prod. Price Discrimination is: (1) charging different customers different prices for the same good (2) charging a customer different prices for different units of a good. For price discrimination to occur there must be: (1) different classes of customers (2) different willingness to pay and (3) a way to prevent resale. Single Price Monopoliesdont use price discrimin. P>MR Proprietorship1 owners, easy to start, profits taxed once, unlimited liability. Partnership2 or more owners, simple to start but bit more complicated than proprietor, profits taxed once, unlimited liability. Corporationmany owners called shareholders who own stock, capital is easily obtained, difficult & costly to form, profits taxed twice, limited liability. Short Runperiod of time where one of firms inputs cannot be changed. In SR labor is variable, capital is fixed. Long Runperiod of time in which all firms inputs are varied. In LR labor and capital are variable.

FACTS Global trade around $38 trillion in 2008. USA = worlds largest trader. 30% of USA exports = services. Largest import = oil. Exports value of goods/services we sell. Imports value of goods/services we buy Net Export = Total exports of USA Total Imports of USA (Actual $1.8 - $2.5 = - $0.7) National Comparative Advantage (CA) major basis for trade, another country can produce same good as USA but at lower OC. If world has CA, PWORLD < PUSA without trade. International Trade overall societal net gain & increase in societys TS. A tariff is an import tax and an import quota is a numerical import limit. These protectionist policies increase PS (gain), decrease CS (lose), decrease TS, and cause a DWL. Tariffs effects: P, QTRANSACTED, Domestic production, Imports, tariff revenuemade. (Import quota like tariff in all ways except no gov revenue is made. Importers profit from buying at low import price and selling at high domestic price) Regulatory Barriers restrictions on imports for health or safety reasons. Voluntary Export Restraints (rarely used) gov-imposed restrictions on exports. Export Subsidies gov payments to producers of certain goods (e.g. $$farmers) Events: Peaked w/Smoot-Hawley Tariff Act in 1930, Dropped w/General Agreement on Tariffs & Trade in 1947, Currently USA tariffs are at lowest ever. Doha Devel. Agenda or Doha Round meeting of WTO, agree to reduce tariffs & barriers. Infant Industry Argument idea that country can only develop CA through learning-bydoing. WRONG Gov subsidy would be more efficient than protectionism. Dumping Argument exporters can eliminate domestic producers by dumping (selling exports at price below production cost). Gov regulation is better option than protectionism. Utility satisfaction gained from consumption of goods/services. Cardinal utility can be measured & compared between people & ordinal utility is where the person can tell if the change made them the same, better, or worse off. Assumptions: (1) we can measure utility (2) people strive for maximum utility. Marginal Utility (TU/Q) change in total utility from a 1-unit increase in quantity consumed. This decreases as consumption increases. Consumer equilibrium where TU is maximized. Occurs when MU/P is equal for all goods and all of the budget is spent. Marginal Analysis MUA/PA = MUB/PB Total Utility increases as wealth increases, but by smaller and smaller amounts aka the Diminishing Marginal Utility of Wealth. Expected Value = sum of probabilities payoffs. Outsourcingbuying finished goods, components or services from other firms. Offshoringproducing in other countries and using foreign labor. Rent seeking individuals lobby for policies that benefit self & are, on net, bad for society. Insurance companies buy your risk. You pay a premium and they promise to cover any loss you incur. Everyone wins from insurance, consumer and insurance company. Adverse selection occurs when people who really need insurance are more likely to purchase it than others. Moral hazard occurs when insured people are more likely to act in risky ways than the non-insured. Adverseproblem before insured. Moralproblem after. Risk-aversewhen utility for fo-sho amount > the utility for the gamble, will choose fo-sho! Lemon Problemex: eBay Louie sales. Hard to distinguish reliable from lemon bc of the mass amount of lemons. This creates a pooled equil bc all products look the same. We try to create a separating equil by distinguishing products or offering signals like warranties. The Indifference Curve shows combinations of goods among which the consumer is indifferent. These baskets of goods generate the same amount of utility for the consumer. Points below curve = less preferred, above = more preferred. There are an infinite # of ICs for any individual. Higher IC = more preferred and more utility. The Budget Line shows what you can afford. Budget means, (1) you have a limited amount of money, (2) you must pay for the products you buy. Consumer equil is found where the budget line intersects (is tangent to) the IC. This is best combo of goods for given income. ONLY 3 things to change budget line: Price A, Price B, or budget (income). Stocksactual shares of ownership of the company. Payout dividends. Gain value from capital gain. Have infinite life. PE RatioPrice/Earnings=PE, When PE=33, investors are willing to pay $33 for every $1 of earnings. Dow Jonesavg of stock prices of 30 large industrial companies. Standard & Poors 500avg stock prices of 500 large companies. Short Sellingborrow stock, sell it, hope price drops so you can re-purchase the stock & repay borrowed shares. Put Optionsgive holder right to sell at given price during given period. Short Selling & Put Options are only helpful if you expect a price drop. Call Optionsgive holder right to buy at a given price during a given period. Only helps if future price increase is expected. BOTH S&D curves will shift if anything affects expected return or perceived risk. Stock market = Efficient Market so only new info can affect stock prices. Costs of Business (1) wages (2) interest on capital investment (3) rent (4) normal profit amount own must make to keep business open. ALL firms max profit when they produce where MC=MR. When perfectly competitive, MR=Demand & is completely horizontal at market price. Perfect Competition (1) lots of firms and buyers (2) no barriers to entry (3) identical product (e.g. potatoes). Market determines product price which = MR curve (which is also the demand curve). Firms in PC can only earn normal profit in the long run because of easy entry of new competitors. In LR it is not possible for a monopoly to incur an economic loss and in the LR it is not possible for a firm in PC to incur an economic loss. In SR it is possible for both monopoly & firm in PC to incur an economic loss.

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