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Five topics are on this test, and you already own two of them (MC and ATC). Everything below comes from the ECON 202 Midterm 2 review session.
| Topic | Where you stand |
|---|---|
| Supply and demand | Learn (section 1) |
| Shifters | Learn, the biggest one (section 2) |
| Monopoly | Learn (section 3) |
| Cross-price elasticity | Learn (section 4) |
| Production (marginal product) | Learn, it is short (section 5) |
| Costs | You know MC and ATC, just add FC and VC (section 6) |
Game plan: read sections 1 and 2 first, then monopoly, elasticity, production, and costs. Do the practice problems and the quiz last, and use the cheat sheet the night before.
The graphs from the review session were not available, so graph questions are described in words. Sketch each one on paper as you read.
1. Supply and demand in plain words
Demand is what buyers plan to buy, and supply is what sellers plan to sell, at every possible price. Each one is a whole curve, not one number.
- Demand curve slopes down. Higher price, buyers plan to buy less.
- Supply curve slopes up. Higher price, sellers plan to sell more.
- Equilibrium is where the curves cross. Buying plans match selling plans.
The one rule that decides most questions
| Words on the test | Meaning | On the graph |
|---|---|---|
| Quantity demanded / quantity supplied | One point on the curve | Slide along the same curve |
| Demand / supply | The whole curve | The curve shifts left or right |
Example: pizza gets cheaper, so quantity demanded rises. You slide down the same curve. Now a study says pizza is healthy. The price did not change, but buyers want more at every price, so the whole demand curve shifts right.
What a shift does to price and quantity
| Shift | Price | Quantity |
|---|---|---|
| Demand right | Up | Up |
| Demand left | Down | Down |
| Supply right | Down | Up |
| Supply left | Up | Down |
Right means "more at every price". Left means "less at every price". Demand and price move the same way. Supply and price move opposite.
2. Shifters: what moves the curves
If the event is not the good's own price, ask: is it about buyers or sellers, and does it make them want more or less at every price?
Demand shifters (buyers)
| Shifter | Example | Demand moves |
|---|---|---|
| Number of buyers | More people move into town | Right |
| Preferences | Study says pizza is unhealthy | Left |
| Price of a substitute | Brick gets pricier, buyers switch to plywood | Right (plywood) |
| Price of a complement | Printers get pricier, fewer cartridges needed | Left (ink) |
| Related market booms | Construction boom, builders need plywood | Right (plywood) |
| Income (normal goods) | Incomes rise | Right |
Substitutes are either-or goods (pizza and hamburgers). Complements are used together (printers and ink, hot dogs and buns).
Supply shifters (sellers)
| Shifter | Example | Supply moves |
|---|---|---|
| Number of sellers | More logging firms open | Right |
| Input costs up | Flour or wages get pricier | Left |
| Input costs down | Cooks' wages fall | Right |
| Technology | A new method lowers production cost | Right |
Costs and supply move in opposite directions. Higher costs, sellers plan to sell less at every price, so supply shifts left.
The traps
- Inputs are supply, not demand. Cotton is an input to clothing, so cotton prices shift clothing supply.
- Complement vs input. A complement is used by buyers together with the good. An input is used by sellers to make it.
- Do not call a price change a shift. If the question names the good's own price, the answer is "quantity demanded" or "quantity supplied".
- A cost drop is a right shift. Lower costs, more selling plans, supply right.
Three-step method
- Is it the good's own price? If yes, it is a movement along the curve. Stop.
- If not, is it about buyers (demand) or sellers (supply)?
- Does it make them want more at every price (right) or less (left)?
3. Monopoly
A monopoly is the only seller, so it faces the whole market's demand curve, and that curve slopes down. A firm facing a downward sloping demand curve is not in perfect competition, so it is a monopoly. A price taker in perfect competition faces a flat, horizontal demand curve.
Why MR sits below demand
To sell one more unit, a monopolist has to lower the price on every unit. Selling 1 unit at $10 brings in $10. Selling 2 units at $9 each brings in $18. The 2nd unit adds only $8 (that is the MR), even though the price is $9.
The 4-step method
- Find Q*. Go to where MC = MR. This picks the quantity.
- Read the price. From Q*, go straight up to the demand curve.
- Read the cost per unit. From Q*, go straight up to the ATC curve.
- Compare price and ATC.
| Price vs ATC | Economic profit |
|---|---|
| Price above ATC | Positive (profit) |
| Price equals ATC | Zero (break even) |
| Price below ATC (ATC curve is above demand at Q*) | Negative (loss) |
MR = MC picks the quantity, demand sets the price, ATC tells you profit or loss.
Worked examples (made-up numbers)
- Q* = 10, price $20, ATC $15: profit = ($20 - $15) × 10 = +$50.
- Q* = 10, price $12, ATC $15: profit = ($12 - $15) × 10 = -$30, a loss.
- Q* = 10, price $15, ATC $15: profit = $0, break even.
Natural monopoly vs regular monopolist
A natural monopolist has a horizontal (flat) MC line. The regular monopolist in the exercise had increasing marginal costs, a J-shaped MC curve.
- Do not read the price off the MR curve. Use MR and MC for Q*, then go up to demand.
- Do not find Q* where price = ATC. That is break even, not the quantity the firm picks.
4. Cross-price elasticity
It measures how much the quantity demanded of one good (A) changes when the price of a different good (B) changes. The sign tells you if they are substitutes or complements.
Midpoint method
Percent change = the change divided by the average of the old and new values.
- Quantity of A: change ÷ average of the two quantities.
- Price of B: change ÷ average of the two prices.
- Divide the first answer by the second.
- Keep the sign. Do not drop a negative.
| Answer | Meaning | Why |
|---|---|---|
| Positive (+) | Substitutes | B gets pricier, buyers switch to A, A's quantity rises |
| Negative (-) | Complements | B gets pricier, buyers use less of both, A's quantity falls |
| Near zero | Unrelated | B's price barely affects A |
Worked examples
Margarine and butter. Margarine $2 to $6. Butter 10 to 30 pounds. Quantity: 20 ÷ 20 = 100%. Price: 4 ÷ 4 = 100%. Elasticity = +1, substitutes.
Tea and coffee. Tea $3 to $5. Coffee 40 to 60 cups. Quantity: 20 ÷ 50 = 40%. Price: 2 ÷ 4 = 50%. Elasticity = 0.8, substitutes.
Hot dogs and buns. Hot dog price +10%, bun quantity -20%. Elasticity = -20 ÷ 10 = -2, complements.
If the percents are already given, skip the midpoint step and just divide.
5. Production: marginal product
Marginal product (MP) is the extra output from adding one more unit of input, like one more worker. "Marginal" means the change in the total.
| Units of input | Total output | Marginal product |
|---|---|---|
| 0 | 0 | n/a |
| 1 | 10 | 10 |
| 2 | 40 | 30 |
| 3 | 60 | 20 |
MP of the 2nd input = 40 - 10 = 30. MP of the 3rd = 60 - 40 = 20. MP went up, then down. Later workers add less because the space or equipment gets crowded. That is diminishing returns.
Link to costs: when MP falls, each extra unit takes more input, so MC rises.
6. Costs: FC, VC, TC, ATC, MC
You already know MC and ATC. The new pieces are fixed cost and variable cost.
| Term | Meaning | Formula |
|---|---|---|
| Fixed cost (FC) | Paid no matter what, even at zero output | Total cost at 0 output |
| Variable cost (VC) | Rises as you make more | TC - FC |
| Total cost (TC) | Everything you pay | FC + VC |
| Average total cost (ATC) | Cost per unit | TC ÷ Q |
| Marginal cost (MC) | Extra cost of one more unit | New TC - old TC |
Fixed cost never shows up in MC, because it does not change when you make one more.
Recap: the shirt shop ($30 fixed cost)
| Shirts | TC | MC | ATC |
|---|---|---|---|
| 0 | $30 | n/a | n/a |
| 1 | $42 | $12 | $42 |
| 2 | $52 | $10 | $26 |
| 3 | $60 | $8 | $20 |
| 4 | $72 | $12 | $18 |
| 5 | $90 | $18 | $18 |
- ATC works like a grade average and MC is your newest score. MC below ATC pulls it down. MC above pulls it up. Equal, and it stops moving.
- MC bottoms out first (shirt 3). ATC bottoms out later (shirt 5), where MC meets it.
- MC crosses ATC at the lowest point of ATC.
- Sell at $14? Keep making shirts while price is at least MC. The 5th shirt costs $18, so stop at 4.
Getting VC from ATC (favorite test question)
- TC = ATC × Q
- VC = TC - FC
At 17 units, ATC is $8.24 and FC is $100: TC = $140.08, VC = $40.08.
At 20 units, ATC is $9.50 and FC is $100: TC = $190, VC = $90.
Practice problems
Try each one on paper, then open the answer.
Quiz: all topics
Cheat sheet
| Topic | Rule |
|---|---|
| Movement vs shift | Only the good's own price moves you along the curve. Everything else shifts it. |
| Demand shifters | Number of buyers, preferences, substitute or complement prices, related markets, income |
| Supply shifters | Number of sellers, input costs, technology |
| Substitute price up | Demand for the other good shifts right |
| Complement price up | Demand for the other good shifts left |
| Costs up | Supply shifts left |
| Demand right / Supply right | Price up, quantity up / Price down, quantity up |
| Spot a monopoly | Downward sloping demand curve (a price taker has a flat one) |
| Monopoly MR | Below the demand curve |
| Monopoly Q* | Where MR = MC |
| Monopoly price | Go up from Q* to the demand curve |
| Profit or loss | (P - ATC) × Q*. P above ATC = profit, equal = break even, below = loss |
| Natural monopoly MC | Horizontal. Regular monopolist: increasing (J-shaped). |
| Cross-price elasticity | %ΔQ of A ÷ %ΔP of B, midpoint method, keep the sign. + substitutes, - complements. |
| Midpoint % change | Change ÷ average of old and new |
| Marginal product | New total output - old total output |
| FC / TC / ATC | TC at zero output / FC + VC / TC ÷ Q |
| MC | New TC - old TC. Never includes FC. |
| VC from ATC | TC = ATC × Q, then VC = TC - FC |
| MC and ATC | MC crosses ATC at ATC's lowest point |
Test-day checklist
- Circle the word: "quantity demanded" (movement) or "demand" (shift)?
- Sketch the curves before you answer. Old curve first, then the new one.
- Monopoly: mark Q* first, then go up. Never read price off MR.
- Elasticity: write both percent changes before dividing.
- Costs: "marginal" or "extra" means a change, not a total.