G8 Economics Q2 Study Guide

Complete the following questions in this Q2 Study Guide. Review your guided notes, draw graphs,
make calculations, and explain your answers.

Topics to be covered in the exam:

1. Per-unit tax and tax revenue
2. Per-Unit Subsidies
3. Consumer and Producer Surplus (calculate for individuals and the market)
4. Deadweight loss for taxes, price floors, and price ceilings
5. Price Ceiling
6. Price Floor
7. Effect on producer and consumer surplus for taxes, price floors, and price ceilings
8. Short-Run vs Long-Run (Fixed Factors of Production vs Variable Factors of Production)
9. Diminishing Marginal Returns (definition and graph)
10. Costs (TC, VC, FC)
11. Cost Curves (ATC, AVC, AFC)
12. Revenue (TR, AR, MR)
13. Profit maximizing rule (MC=MR)
14. Perfect competition (characteristics)
15. Perfect competition (short-run vs long run)
16. Productive efficiency vs allocative efficiency

THE KEYS TO SUCCESS ON THE 8th GRADE ECONOMICS EXAMS ARE GRAPHS, DEFINITIONS, AND
CALCULATIONS!

1. Illustrate and explain the effects of a per unit tax using a demand and supply diagram.
How much of the tax does the consumer/producer pay?
Video help: https://www.youtube.com/watch?v=9gwTH4Yme8I&t=1s

Impact of tax on price:

Impact of tax on quantity:
Label on the graph:
• tax revenue
• consumer surplus
• producer surplus
• DWL
 2. Illustrate the effect of a per unit subsidy. Explain the effects on price and quantity.
Highlight the area the shows the cost of the subsidy.
Video help: https://www.youtube.com/watch?v=aUAR9yOWNlo

Impact of subsidy on price: DECREASE

Impact of subsidy on quantity: INCREASE
Label on the graph:
• Total subsidy
• Per-unit subsidy

NOTE: You DON’T need to label CS, PS, and DWL on a SUBSIDY graph

3. Illustrate and explain the effect of a price ceiling and price floor.

Price Ceiling Price Floor

CEILING causes a shortage or surplus? Shortage
Do producers benefit? NO
Do consumers benefit? Some
Impact on price: Decrease
Impact on quantity: Decrease
Why is there a Shortage: Qd > Qs
FLOOR causes a shortage or surplus? Surplus
Do producers benefit? Some
Do consumers benefit? NO
Impact on price: Increase
Impact on quantity: Decrease
Why is there a Surplus: Qs > Qd
 4. What is the difference between fixed factors of production and variable factors of
production? Provide examples.
Fixed resources DON’T change with Quantity produced (Factory)
Variable resources DO change with Quantity produced (Workers and Raw Materials)

5. In microeconomics, what is the difference between the short-run and the long-run?

Short-run: At least one input is FIXED

Long-run: ALL inputs are VARIABLE

6. Define marginal product and explain what is meant by the Law of Diminishing Marginal
Returns:

MP: Additional output when one more worker is hired

Diminishing Marginal Returns: As more workers are hired the MP for each additional worker
will decrease

Illustrate and explain why the marginal product

Why does MP initially rise:

SPECIALIZATION
(green section on graph)

Why does MP eventually fall:

DIMINISHING MARGINAL RETURNS
(yellow section on graph)

Video help on Law of Diminishing Marginal Returns:

https://www.youtube.com/watch?v=xLSRMt-wWAM
7. Formulas to calculate Total Costs: Formulas to calculate Average Costs:
Total Cost (TC) = FC + VC Average Total Cost (ATC) = TC / Q

Variable Cost (VC) = TC - FC Average Variable Cost (AVC)= VC / Q

Fixed cost (FC) = TC - VC Average Fixed Cost (AFC) = FC / Q

 8. How do economists calculate Revenue:

Total revenue (TR)= P x Q Marginal revenue (MR)= Change TR / Change Q

Average Revenue (AR)= TR / Q

9. What is the difference between how an accountant calculates profit and how an
economist calculates profit?

Accounting Profit = TR – Explicit Costs Economic Profit = TR - (Explicit Costs+ Implicit Costs)

Video Help on Calculating Profit: https://www.youtube.com/watch?v=6OZUruDdhF4

10. What is the profit maximizing rule? MC = MR

Show on a graph for a perfectly competitive firm (Draw MC and MR)
Industry Firm
(price taker)
P S P MC

$7 $7 MR

D
10,000 Quantity Q Quantity

Video help on Maximizing Profit

https://www.youtube.com/watch?v=BQvtnjWZ0ig

11. What are the characteristics for perfect competition:

1) Identical Product
2) Price Taker
3) Many Sellers
4) Low Barriers to Entry
12. Can a perfectly competitive firm make positive economic profits in the SHORT-RUN? Explain
YES, a firm can enjoy positive economic profits (prior to new firms entering the market)

13.Can a perfectly competitive firm make positive economic profits in the LONG-RUN? Explain
NO, positive profits will cause new firms to ENTER and reduce profits to ZERO Economic profit
(also called a normal profit)

14. Draw a perfectly competitive MARKET graph and FIRM graph in LONG-RUN equilibrium
(ZERO ECONOMIC PROFIT)

MR=D=AR=P

If firms are making positive economic profits, what will happen in the market? Firms will ENTER
If firms are making LOSSES, what will happen in the market? Firms will EXIT

15. Illustrate a firm making positive profits (short-run): (Draw ATC Below MR)

Industry Firm
Price (price taker)
S Price

MC
ATC
$7 $7 MR
Profit

D
10,000 Quantity Q Quantity
16. Illustrate a firm making losses (short-run): (Draw ATC Above MR)
Industry Firm
Price (price taker)
S Price ATC
MC

$7 $7
Loss
MR

D
10,000 Quantity Q Quantity

Video help on Perfect Competition ATC

https://www.youtube.com/watch?v=ZtSZNcaWbf4
MR

17. Define Productive Efficiency: ATC is at its MINIMUM Point Q

MC
18. Define Allocative Efficiency: MR=MC MR

Illustrate a firm making a zero economic profit. Identify the allocative efficient and productively
efficient points.

In the Long-Run,
Perfect Competition is
BOTH
Allocatively Efficient
And
Productively Efficient

Q
REMEMBER TO REVIEW POWER POINTS ON TEAMS. MAKE SURE TO BE FAMILIAR WITH
GRAPHS, DEFINITIONS, AND CALCULATIONS!