Diminishing Marginal Utility: the decline of enjoyment from consuming or buying one additional good.

● First slice of pizza is incredible but you won't be willing to pay the same price for the 6th slice.
Marginal Cost: the change in total cost that comes from making or producing one additional item. The more
you produce, the more it costs.

Equilibrium: when the quantity people are willing to buy equals the quantity suppliers are willing to sell at
each price.

Demand shifters: preference, population, substitutes, income

Supply shifters: input cost, productivity/technology, entry/exit, taxes/subsidies

-
increase in supply and a decrease in demand=The equilibrium price would fall, and the equilibrium
quantity could rise or fall
Sunk Fallacy-a person is reluctant to abandon a strategy or course of action because they have invested heavily
in it
Scope is producing together, scale is producing more
Economics of scale decreases average costs as production increases

Week 2Wealth:
Absolute Advantage: when one country produces a good with the best quality at a faster rate than the other.
Comparative Advantage: is when a country has a potential to produce a product better than any other country.
- The opportunity cost (potential benefit that has been forfeited) for one company is lower than that of
another
PD < PW domestic country has a comparative advantage…Exports the good (generally)
PD > PW domestic country has a comparative disadvantage…Imports the good (generally)

Why do we impose tariffs if they destroy wealth?

- Protect jobs and protect certain industries
- Increase government wealth but also even out consumer and producer surplus
Quota: similar to tariffs except for no revenue for governments

Contribution margin represents the portion of a product's revenue that isn't used up by variable cost, therefore it
can cover the company’s fixed cost. (price-MC) (or P - AVC)

Breakeven Equation Fixed cost/ (price - marginal cost)= break even quantity FC/P-MC= Q
Break even fallacy: when demand falls so you raise the price however raising the price is not the answer EX:
ESPN, Netflix

NPV = Cash ow / (1 + i)^t – initial investment

Drivers of Elasticty:
● Luxury vs necessity: more necessary means less elastic
● Substitutes: more substitutes means more elastic
● Complementary: more complements, less elastic
● Proportion of income: smaller % of income means less elastic
● Time of adjustment: shorter time means less elastic

Mark-up rule: actual mark-up= P-MC/P =desired markup= 1/ |Ep|

*don't use if demand is inelastic

Emarket/mktshare = Efirm

inferior good is a good whose demand decreases when consumer income rises. Normal goods are those goods
for which the demand rises as consumer income rises.
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 Elasticity for your product is about -1.5. If you increase your price by 15%, your revenue will change by about.
Price up by 15% causes quantity to fall by about 22.5% (-1.5 = x/15, 15 time 1.5 = 22.5). So, revenue falls by
7.5%

PPF

Barriers too entry in monopoly:

Economies of Scale (Natural Monopoly) Capital Requirements
Pure Quality and Cost Advantages Product Differentiation
Control of Resources
Patents, Copyrights, and other Legal Barriers Strategic Barriers

Concentration Ratio (CRN): What percentage of the market do a certain number of firms account for?
Eg, CR4 represents the market share held by the top 4 firms. Q
Herfindahl-Hirschman Index (HHI): Big firms are more important, so square firms’ market shares, and we care
about all firms, so add all squared shares
N HHI = s21 +s2 +···+s2N = ∑s2i
Unconcentrated Markets: HHI below 1500
Moderately Concentrated Markets: HHI between 1500 and 2500
Highly Concentrated Markets: HHI above 2500
Agencies will care, potentially significant competitive concerns, ifmerger
Results in moderately concentrated market and ∆HHI > 100 OR Results in highly concentrated market and 200
> ∆HHI > 100

Five forces model: Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of Entry, Threat of
Substitutes, Internal rivalry

Solution to repeated prisoners dilemma:

Grim Trigger Strategy: I will cooperate in the first period, and I will cooperate in every subsequent period, as
long as you cooperate. However, once you cheat, I will cheat forever.
Tit for tat: I will cooperate in the first period, and then after that I will choose whatever you chose in the
previous period.
Tit for two tats: Lets the first defection go unpunished.

Real GDP is a measure that can be used to accurately compare GDP across multiple years, ie it
accounts for changes in price level

How is GDP awed? Describe at least three ways

• Ignores damage to environmen
• Ignores leisure/other quality of life metric
• Ignores unof cial transactions, both black market as well as home productio
• Ignores distribution of GD
• Includes reconstruction of lost capital stock (as in a natural disaster
• Perhaps misses most of the bene t of the digital era(considerWikipedia

Frictional unemployment occurs because of the normal turnover in the labor market
and the time it takes for workers to nd new jobs
Over time, the economy experiences many ups and downs. That's what we call
cyclical unemployment because it goes in cycles

Structural unemployment is caused by the absence of demand of certain types of worker. Like,
automation may replace a particular job

Oversimpli ed multiplier is 1/m

The federal fund rate is the rate that applies when banks borrow and lend reserves to one an- other

The discount rate is the rate that the Fed itself lends at to commercial banks

The correct chain of causation illustrating the changes caused by monetary policy is
money,interestrates,I,C+I+G+(EX-IM)

The Marginal Propensity to Consume (MPC) is de ned as the change in consumption over the
change in disposable incom
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 Changing interest rates and money supply is Monetary Policy.

Fiscal policy consists of taxes and interest rates

Open market operations directly impact the base. The money multi- plier is directly impacted by the
reserve requirement (how much banks have to hold on to). Changes in availability of loans impact the
base

Explain the linkages (there are at least four links) in the causal chain when the Fed conducts a
contractionary monetary policy. What will be the ultimate effect on GDP
Solution
• It beings with the Fed engaging in one of three activities
– Open Market Operations: Selling T-Bills (which takes Money from the Money Supply and puts in the
Fed, and has a multiplied effect
– ReserveRate:RaisingtheReserveRate(whichlowerstheMoneyMulti- plier, shrinking the multiplier
effect which reduces the Money Supply
– Discount Rate: Raising the Discount Rate (which makes it costlier fo
banks to overlend, meaning they will not engage in as many risky loans, put less Money in the Money
Supply
• All of the above result in a decrease in the Money Supply..
• which leads to an increase in the Interest Rate (as Money becomes mor
scarce)..
• which results in a decrease in Investment (as it is now more expensive t
borrow funds)..
• which is a component of AD, and as such AD falls
.

 • Now, with a new level of AD, we have less Y..

• and C will decrease (by ∆Y · MPC)..
• which results in less Y ..
• etc, et

Does a reduction in the money supply by the Fed make owning stocks less or more attractive?
Explain
Less attractive. The reduction in the money supply raises the interest rate. So the return on bonds
increases relative to the return on stocks.* The increase in the interest rate also causes Investment
spending to fall, so that revenues and pro ts fall, making shares of ownership in corporations less
valuable.
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