ECON 505 Final Exam Cheat Sheet
Mastering market dynamics, cost structures, and firm behavior to analyze competitive landscapes and strategic decision-making.
Core Principles
- Perfect Competition: P = MC = AC in the long run; economic profit is zero.
- Monopoly: P > MC; creates deadweight loss; firm maximizes profit where MR = MC.
- Elasticity: % change in Q / % change in P. Elastic > 1, Inelastic < 1.
- Sunk Costs: Irrelevant to future decisions; focus only on future revenue vs. future costs.
- Creative Destruction: Innovation shifts supply right, lowering costs and prices.
- Regulatory Capture: Barriers to entry that reduce supply and increase prices.
Action Steps
- 1. Identify market structure (Perfect Competition vs. Monopoly).
- 2. Determine if the decision involves sunk costs (ignore them).
- 3. Calculate Marginal Cost (MC) and Marginal Revenue (MR).
- 4. Set MR = MC to find profit-maximizing quantity.
- 5. Check if Price >= Average Cost (AC) to ensure profitability.
- 6. Use graphs to visualize shifts in Supply and Demand.
- 7. Group all multi-part answers into a single document for upload.
Formulas
- $TC = FC + VC$
- $AC = \frac{TC}{Q}$
- $MC = \frac{\Delta TC}{\Delta Q}$
- $Profit = (P - AC) \times Q$
- $E_d = \frac{\% \Delta Q}{\% \Delta P}$
- $Lerner Index = \frac{P - MC}{P}$
Key Terms
- Deadweight Loss (DWL) Loss to society due to market power where P > MC and output is restricted below competitive levels.:
- Price Discrimination Charging different prices to different consumers for the same good to capture consumer surplus.:
- Elasticity A measure of how responsive quantity demanded or supplied is to a change in price.:
- Regulatory Capture When regulatory agencies act in the interest of the industry they are supposed to regulate rather than the public.:
Pro Tips
- If demand is elastic, price increases reduce total revenue.
- If demand is inelastic, price increases raise total revenue.
- MC always crosses AC at the minimum point of the AC curve.
- When in doubt, draw the graph; it is the most reliable way to solve economic problems.
Pitfalls to Avoid
- Forgetting to label axes (P and Q) on graphs.
- Confusing short-run vs. long-run elasticity.
- Including fixed costs in marginal decision-making.
- Uploading multiple files when only one is permitted.
- Assuming AI answers are always correct; they must be improved upon.
Myth vs Reality
- Greedflation: Inflation is caused by companies suddenly becoming 'greedier'.: Firms always maximize profit; inflation is driven by underlying supply/demand shocks or increased market power.
- Sunk costs should influence future investment decisions.: Sunk costs are gone; only future incremental costs and revenues matter.
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