Microeconomics Test Review 1: How Demand and Supply Affect Profit
Economics Test Review Notes has all our free economics review notes. updated 10/17/16 Walter Antoniotti

I. How Elasticity of Demand Affects Total Revenue
II. Consumer Behavior and Demand Theory
III. How Cost of Production Affects Supply
IV. Understanding Profit
19 Minute Micro Review Video

 I. How Elasticity of Demand Affects Total Revenue Review View Entire Chapter 19     A. Elasticity of demand measures the responsiveness of quantity demanded           to changes in price, income, and the price of related goods.     B. Price elasticity of demand measures the effect of price changes on  quantity demanded.      C. Coefficient of elasticity of demand for product x measures its price elasticity.
 D. Interpreting Elasticity of demand Relative Change  in Quantity Terminology ED  Parameters None, will pay anything, numerator is  zero. Perfectly Inelastic ED  = 0 E . Summary Elasticity of Demand and Total Revenue Small Inelastic 0 < ED < 1 When Price Increases Total Revenue Q demanded and P change same percentage Unitary Elasticity ED = 1 ED   >1 Somewhat Elastic Quantity Changing a Lot so you could lose lots of money. decreases Large Elastic 1 < ED  < ED = 1 Unitary Elasticity Quantity/Price Changing Same % no change Infinitely Large, price doesn't change, denominator is zero Perfectly Elastic ED  is undefined, can't divide by zero. ED <1 Somewhat Inelastic Quantity Doesn't Change Much, so you could make lots of money increases

 II. Consumer Behavior and Demand Theory Review View Entire Chapter 20       A. Satisfaction received and limited budgets determine            consumer demand.      B. Utility measures the want-satisfying power of a good           or service.      C. Marginal utility is the additional or incremental            satisfaction (utility) a consumer  receives from acquiring           one additional unit of a product.      D. Law of diminishing marginal utility: Consuming more of           a product within a given period will at some point result in             diminishing marginal utility.       E. Utility maximizing rule: When spending a limited amount          of money, consumers try to equate the marginal utility per           dollar for the items being purchased.      F. Consumer's surplus           1. All goods are purchased at an equilibrium price.            2. Because consumers would have paid more for smaller              quantities purchased, they are said to receive a surplus.    G.  Normal Goods, consumers buy more as income rises,           Inferior Goods, buy less.    H. Consumer's and Producer's Surplus: Allocation efficiency           exists at the equilibrium quantity and at other quantities,           there are efficiency losses or Deadweight Loss      I. Understand cost  of production is necessary to understand profit.
 III. How Cost of Production Affects Supply Review   View Entire Chapter 21       A. Understanding costs           1. Costs are the dollars paid for the factors of production.           2. Opportunity cost is the value of the best alternate use, e.g., the cost of labor is the value that could have been                 received from using capital.             3. Explicit costs versus implicit costs               a. Explicit costs require an out-of-pocket expenditure, e.g., wages, materials, and overhead.               b. Implicit costs do not require an outlay, e.g., forgone wages for uncompensated efforts by family members in                   a family-operated business, included a normal return on investment, which is the minimum amount required                   to keep resources employed at their current use.            4. Short run costs are both fixed and variable, in the long run, all costs are variable               a. Fixed costs do not vary with production, e.g., plant and equipment, property taxes, most overhead, etc.               b. Variable costs vary directly with production, e.g., labor and materials                c. Marginal cost is the change in total costs which results from making one more unit.           5. Diminishing returns:                 a. Adding a variable resource (labor) to a fixed resource (capital) will increase production for a while.               b. At some point the rate of increase declines and eventually becomes negative.                c. Diminishing returns affect both the production of labor and cost of production.               d. Example: Using three people to do the dishes didn't make sense because the third person just got in the way.                   Mom did agree so she relaxed.      B. Accounting profits versus economic profits          1.  Accounting profit is revenue minus explicit costs and economic profit is revenue minus explicit plus implicit costs.          3  Since implicit cost includes a payment for the risk factor part of  interest and payment for entrepreneurial skill.          4. This means Normal Profit is a cost  to economists and paid for as an explicit cost, in the long run competition               causes economic profit to be zero. In analyzing profit, average cost data is  often used. Our Site http://www.businessbookmall.com/ Free%20Internet%20Libraries.htm improve grades and careers. Or Google "Free Internet Libraries"
 Total product of labor (TPL) measures total production occurring as more workers are added to a production process containing fixed resources. Marginal product of labor (MPL) measures the change in the TPL which occurs as more workers are added to a production process containing fixed resources. Average product of labor (APL) measures the average production of all workers as additional workers are added to a production process containing fixed resources. Note: MPL should be plotted at the mid-point on the x-axis. Stage 1 Increasing marginal returns to scale (getting bigger) because of worker specialization. Stage 2 Decrease marginal returns to scale because of fixed resources. Stage 3 Negative marginal returns to scale because workers are in the way of each other.
 Note that AV is the mirror image of AP and MC is the mirror image of MP. Analysis: At low quantities MP is above AP so AP is rising. As MP starts to fall AP flattens but continues to rise because MP is still higher. When MP drops below AP, AP immediately begins to decrease indicating the intersection must be AP's highest point. At low quantities MC is below AVC so AVC is falling. As MC starts to rise AVC flattens but continues to decrease because MC is still lower. When MC rises above AVC, AVC immediately  begins to rise indicating the intersection must be AVC's lowest point.
 IV. Understanding Profit Review View Entire Chapter 20      A. Profit equals total revenue minus total costs.       B. Understanding profit requires bringing revenue and costs together.      C. Demand determines marginal revenue.           1. Marginal revenue (MR) is the change in total revenue which is                received from selling one more unit.           2. Demand may be thought of as average revenue with what is happening               on the margin an indication of what is happening to the average.          3. When product demand is down sloping, marginal revenue is below               demand indicating the average          4. The special case of horizontal  perfectly elastic demand will be explored              in chapter 23. Telling Teachers about these free learning materials at http://www.textbooksfree.org/  might help lower the cost of textbooks. Maximizing profit using marginal analysis Maximizing profit using total analysis of revenue and cost Economies and diseconomies of scale   affect profit Long-run costs Long-run average total costs are the horizontal summation of ever larger short-run average total costs. Free Internet Libraries   improve grades and careers. Free Stuff  For StudentsEconomics Macro Review 2.htm   Google  "Free Internet Libraries" learning and career information.