Mastering Comparative Advantage and Elasticity for ECON 202

School

Dordt University**We aren't endorsed by this school

Course

ECONOMIC 202

Subject

Economics

Date

Dec 10, 2024

Pages

Uploaded by LieutenantWaterWalrus49

ECON 202 Final Exam ReviewWhat is comparative advantage?oProducing goods at the lowest opportunity cost compared to another producer. oNote: once each country produces the good with its comparative advantage, productionincreases. Countries can consume more of each good now. Know how to identify the country or firm that has a comparative advantage.oCalculate the opportunity cost of producing each – the amount of the other good that is given up producing one unit of the first good. oThe one with the lower opportunity costs of each good has a comparative advantage. Know how to determine the gains from specialization and trade.oSpecialization increases productivity – have more knowledge of specific areas. oTrade increases consumption – more products produced, more products to be consumed. oEveryone (producers and consumers) benefits from trade and specialization. oConsumer surplus below the demand curve and above the equilibrium price. oProducer surplus above the supply curve and below the equilibrium price. Know the laws of supply and demand, and what demand and supply curves represent.oSupply: show quantity supplied at different prices. Law: Higher prices lead producers to supply a higher quantity to the market. Thesupply curve is positively sloped. As the price rises, the quantity supplied increases, as the price decreases, the quantity supplied decreases. Quantity supplied: quantity sellers are willing and able to sell at a particular price. oDemand: show quantity demanded at different prices. Law: The demand curve is negatively sloped. The lower the price, the greater the quantity demanded. Demand summarizes how consumers choose to use a good, given their preferences and possibilities for substitution. Quantity demanded: quantity that buyers are willing and able to buy at a particular price. If income increases and demand increases -> normal goodIf income increases and demand decreases -> inferior goodWhat are the factors that cause shifts in the demand curve and the supply curve?oSupply Shifters: technology (increases – right, decreases – left), taxes (increases – left), subsidies (decrease – right), expectations (increase - left/decrease – right), producer entry (increase – right) exit (decrease – left), opportunity cost (increase – left / decrease – right)oDemand Shifters: income, population (increase – right / decrease – left), price substitute(increase – right / decrease – left), price of complement (increase – right / decrease – left), expectation (decrease – right / increase – left), and taste (increase – right / decrease – left)

Know how to calculate consumer surplus (CS) and producer surplus (PS).ooGreen is consumer surplus. (actual price – price willing to pay) (b*h*1/2) Price increases, consumer surplus decreases. oBlue is producer surplus. (cost of production – actual price) (b*h*1/2)Price increases, producer surplus increases.What is elasticity? How is it calculated?oElasticity of demand: measures how responsive the quantity demanded is to a change inprice. More responsive = more elastic. oElastic is horizontal. oFormula: %change in quantity demanded / %change in price. ((Q(after) – Q(before)) / (average quantity)) / ((P(after) – P(before)) / (average price))oRule: if two linear demand (or supply) curves run through a common point, then the curve that is flatter is more elastic. oElasticity of supply: measures how responsive the quantity supplied is to a change in price. oElasticity > 0 the goods are substitutes. oElasticity < 0 the goods are complements. oElasticity > 1 The goods are luxury. Identify whether elasticity is elastic or inelastic.oElastic: horizontal, greater than 1Quantity is very responsive to price. oInelastic: vertical, less than 1Quantity is not very responsive to price. oUnit elastic: equal to 1How does elasticity affect the impact of a price change on the change in total revenue (i.e., increase or decrease)?oElastic: price increases, revenue decreases. Price decreases, revenue increases. Price increases, quantity decreases = total revenue decreases. Price and total revenue move opposite of each other. oInelastic: price increases, revenue increases. Price decreases, revenue decreases. Price increases, quantity decreases = total revenue increases. Price and total revenue move the same.

How is the burden of a tax divided between buyers and sellers?ooElastic = escapeThe more elastic curve can escape the tax. The more inelastic curve carries more of the burden of a tax. oHow does a tax affect CS, PS, and deadweight loss? ooProducer and consumer surplus both decrease. oShifts supply to left. How does a subsidy affect price, quantity, CS, PS, and deadweight loss?ooBoth producer and consumer surplus increase. oShifts supply curve to the right.

Identify the prices paid by buyers and received by sellers when a tax or a subsidy is imposed.oTax on buyers:Reduces demand. Sellers must lower the price. The demand curve moves to the left. oTax on sellers:Raises cost of sellingSupply curve moves to the left.Buyers pay more. Calculate government revenue from a tax and the cost to government for a subsidy.oGraphs up above. Know how price floors and price ceilings affect the equilibrium price and quantity for a market, and how they affect CS, PS, and deadweight loss.oPrice ceilings: maximum price allowed by law. Effects: create shortages, reduce product quality, wasteful lines and other search costs, loss of gains from trade, and misallocation of resources.Consumer Surplus: increasesProducer Surplus: decreasesEquilibrium price increases.equilibrium quantity decreases. oPrice floor: minimum price allowed by law. Effects: create surpluses, lost gains from trade (deadweight loss), wasteful increases in quality, and misallocation of resources. Consumer Surplus: decreasesProducer Surplus: increasesEquilibrium price decreases. equilibrium quantity increases.

Identify how free trade impacts markets in both importing countries and exporting countries.oLower prices, increased exports, benefits economies of scale, hurts small businesses, easy to produce more, higher demand. How does free trade affect price, quantity, CS, PS, and total surplus?oLower prices. oHigher quantity. oIncrease in consumer surplus. oDecrease in producer surplus. oIncrease total surplus. What impact does a tariff have on price, quantity produced domestically, quantity imported, CS, PS, and deadweight loss?oo

ooPrice – increasesoQuantity produced domestically – increaseoQuantity imported – decreasesoConsumer surplus – decreasesoProducer surplus – increasesoDeadweight loss – increases??What are externalities? How do externalities (both external benefits and external costs) affect the price and quantity produced, relative to the socially optimal or efficient quantity?oExternalities: external costs or benefits that fall on bystanders. oExternal costs: costs paid by people other than the consumer or the producer. ooExternal benefits: a benefit received by people other than the consumers or producers trading in the market.o

oEfficient quantity: the quantity that maximizes social surplus. Who bears the cost is irrelevant for efficient quantity. oSocial surplus: consumer surplus plus producer surplus and everyone else’s surplus. What are some solutions for addressing externalities?oCommand and control.When external costs are significant (market quantity > efficient quantity)Government orders firms to use or make less. oTaxes and subsidies are more flexible. oTradable allowances.Congress sets the total amount of allowances. Firms can trade or bank allowance for future use. How do tradable pollution permits work?oTradable between firms. oFirms which it is most expensive to reduce pollution will want more permits. oFirms which it is the least expensive to reduce pollution will sell permits. oSocially optimal. What are some characteristics of perfectly competitive markets, oligopolies, and monopolies?operfectly competitive markets: many competitors with nearly identical goods or services. Incentives to set the same price. oOligopoly: an industry that is dominated by a small number of firms. oMonopoly: firm with market power. Market power: the power to raise price above marginal cost without fear that other firms will enter the market.For which of these market types can firms influence the price?o??? maybe monopolyKnow how to find the profit-maximizing points for perfectly competitive firms and for monopolies. Note that maximizing profit could actually be minimizing losseso???oFor a perfectly competitive firm, the marginal revenue is equal to the market price. Know the relationship between marginal cost and average cost. Market price in an oligopoly tends to be higher than in a perfectly competitive market but lower than in a monopoly. Know what the prisoner’s dilemma is, and how the dominant strategy is determined. What is price discrimination?oSelling the same product at different prices to different customers. How does differences in elasticity between different groups of consumers affect the ability to price discriminate?How is monopoly markup affected by elasticity?What is a natural monopoly?oWhen a single firm can supply the entire market at a lower cost than two or more firms can. Know how to find the profit-maximizing quantity and price for a monopoly.Know where to find the deadweight loss on a chart for a monopoly.

What is a cartel? How does cheating affect a cartel and the profits for each firm in a cartel?oCartel: an oligopoly that tries to act together to reduce supply, raise prices, and increaseprofits. A group of firms that tries to act like a monopoly. oCheating: The cartel succeeds, and each member makes high profits. These profits create an incentive to cheat. When everyone reduces production and price rises, some members will then cheat by producing more. oPrisoner’s dilemma: a situation in which the pursuit of individual interest leads to a group outcome that is in the interest of no one. oWhat is a public good?oNonexcludable and nonrivalNonexcludable: if people who don’t pay cannot be easily prevented from using the good. Nonrival: if one person’s use of the good does not reduce the ability of another person to use the same good. Know the difference between public goods, club goods, common resources, and private goods – rival vs. nonrival; excludable vs. nonexcludable. oPublic goods: nonexcludable and nonrivalDifficult to get people to pay for them voluntarily. oPrive goods: excludable and rivalThere is an incentive to pay for, and thus to produce them. oNonexcludable: if people who don’t pay cannot be easily prevented from using the good. oNonrival: if one person’s use of the good does not reduce the ability of another person to use the same good. oClub goods: nonrival private goods. oCommon resources: goods that are nonexcludable but rival.

oWhat is the tragedy of the commons?oTendency of any resource that is unowned and hence nonexcludable to be overused andundermaintained. Solution: command and controlInstituting property rights.