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When a monopolistic firm or any type of firm for that matter can no longer afford to satisfy it’s AVC then it should shutdown because even if they can’t completely fufill their Average fixed cost they can hope to make some profit and start to pay off their average fixed cost, and they can hope to expand so as to obtain economies of scale, while leaving diseconomies of scale. Finally if firm can no longer satisfy the lowest level of average total then they should be in the shutdown phase because they can no longer afford to pay off anything, and they sure as hell aren’t satisfying the lowest portion of Average Total Cost.

Monopolies cannot charge whatever they want for a product because the higher the price the less of a good will be demanded. A monopoly will try to profit maximize which is there goal so they will price there good where MR = MC interesects the ATC curve. The reason that they cannot a price at whatever price they choose is because they will loose money as the amount quantity demanded begins to fall in which marginal revenue begins to diminish and ATC starts becoming more than marginal revenue.

The post below this one has some micro in it, but soon you’ll start seeing a lot more microeconomics being posted on this blog rather than macroeconomics since I’ll be shifting the amount of time that I spend studying for macro over to micro, and since one of the major reasons that I’ve been posting so much macro, or rather economics in general is because I think that it is really helping me study for the exam since almost every question that I do incorporates a lot of different macroeconomics questions and the more I explain the better that I get at answering the quetions.

So all in all, I hope that you are gaining something from reading this blog, as I gain from writing on it.

This is a post to just revise over the different formulas for elasticity.

Elasticity of deman = change in quantity demanded / change in price

Elastic = Ed > 1

Unit Elastic = Ed = 1

Inelastic = Ed < 1

Perfect elasticity has a horizontal demand curve which means that any price increase will lead to zero sales because no one will buy the good if it increases in price. Perfect inelasticity revolves around a vertical demand curve meaning that at any price range the amount of demanded will not change since people are willing to pay whatever is charged for the product.

Elasticity of supply:

Es = Change in quantity supplied / Change in price

Cross price Elasticity:

Ec = Change in quanity demanded for good one / Change in price for good 2

Income Elasticity:

Ei = Change in quantity demanded / Change in income

The question for the free response portion for the 2004 Form B free response were, what would happen if the price of oil increased, what would happen to real output and what would happen to price level? Show how a higher price for oil would affect the short run Philips curve. Finally how would an increase in the money supply effect aggregate demand in the short run, and how would the increase in the money supply affect real output and price level?

To answer the first part we know that any halt in shipments, increase in price, or decrease in supply is known as a supply shock, and is also known for cost-push inflation. Well just like the 1970s a higher price in oil would result in a shift of the Aggregate supply curve for oil, so the shift would be leftward resulting in a decline in supply, an increase in price level, and a decrease in GDP or output.

We know that the Philips curve represent aggregate supply, and we know that higher prices lead to inflation, we also know that for aggregate demand we move along the curve, and for aggregate supply we shift the curve, and the only way to go for high inflation is to the right, which also leads to an increase in unemployment.

Finally we know that the everytime the money supply is increased the nominal interest rate declines and therefor GDP, specifically Consumption + Investment in capital goods incrase, so this would shift the aggregate demand curve outward or to the right resulting in higher price level, and an increase in output or real GDP.

As i sit here in the library and type away this post at school I’m very mad because our school system limits collaboration, they actively try and limit team work and I’m not sure why. People need to come in and get a computer if they would like one but once they have a computer they are not allowed to get up, leave, talk to one another, it’s like a prison with your mouth sown shut.. you simply can’t work with other students. It’s infuriates me that I cannot get up as I please, it hurts me to see that people cannot sit next to a friend who is doing the same homework, or they can’t talk about concepts.. why? I’m constantly trying to find out why we as students who are told that we should be creative, and we should be inspired be shut into a cold room with unecessary rules, and regulated topics. It’s stupid, it’s a stumbling stone on our way to higher learning, it’s school.

Problem #80:

According to the Keynesian model, an expansionary fiscal polcy would tend to cause which of the following changes in output and interest rates?

OUTPUT INTEREST RATES
A) Increase Increase
B) Increase Decrease
C) Decrease Increase
D) Decrease Decrease
E) No change Decrease

First let’s go over what Keynesian economist believe.. They believe that the government should regulate demand in times during a recession, they believe in shifting the aggregate demand curve or aggregate expenditures. We know that fiscal policy revolves around government spending, and expansionary means an increase, so more government spending which is a direct portion of GDP (Consumption + Investment + Government + (Net Exports)). We can automatically eliminate C, D, and E because they are all saying that Output decreases which is false due to the Aggregate demand curve shifting righward as government expenditures increase, and thus GDP increases which is directly related to output. So now we are left with A & B. First we’ll start with letter B which states that Output will increase and Interest rates will decrease. This is partially right because Output will increase but as government expenditures increase the government continues to borrow, and we know that from our Money Market graph that Ms (Money supply) is a vertical line, and Md (Money demand) intersects Ms at some point, as Md shifts upward more money is demanded, thus interest rates rise.

So the answer is A) Output increases, and Interest rates rise.

Problem #101 Macro Test 1990:

In one year, real gross national product fell by 3 percent, inflation rose to 10 percent, and unemployment rose to 11 percent. Which of the following may have caused these changes?

a) A decrese in the money sypply and a decrease in government spending.
b) A decrease in inflationary expecectations
c) An increase in investment in inventories
d) An increase in the money supply and an increase in government spending
e) An increase in inflationary expectation.

For this questions we can rule out letter A because a decrease in the money supply would cause interest rates to increase which would counteract inflation, and the decreased government spending would eliminate some demand pull inflation. We can rule out letter B because a decrease in inflationary expectation would cause an increase in Aggregate demand fueling growth, and businesses would then decide to pursue investment because a lower risk of inflation. For letter C I got a gut feeling, and I thought investment in invetories? wtf. Plus increased investment would cause Aggregate Supply to shift right therefor lowering price level, and thus inflation and in addition furthering GNP. Finally I ruled out letter D because an increase in the money supply would cause lower interest rates which in GDP, Investment in capital goods is the most sensitive to interest rates and therefor a lower interest rate would prompt expansionary monetary policy therefor boosting GNP, and with increased government spending GDP should also increase due to the multiplier of spending, along a shift in the AD curve rightward.

So we are left with E, which is “An increase in infaltionary expectations”.

An increase in inflationary expectations would prompt people to save or atleast put off consumption, business would not want to take the extra risk of investment, and businesses would not higher extra labor.

School life reall enrages me, I hate the fact that there are so many rules & regulation that dictate what I can and cannot due with own time… Stupid things like walking into a room right outside my classroom but then being told that I have to go around, through jammed halls. Upon asking why I’m told “Because it’s wrong”, and I ask “why?”, and i’m answered with a “Because it’s wrong”. I seem to have knack for starting trouble or arguing, so I persist and I’m told to not argue, blinking with a blank look on my face as if I was shot I turn and leave muttering to myself, and hopefully one day Karma will kick ass and seek out revenge for me.

Well I think I should start off with macroeconomics since that’s what I’m most familiar with.. I’ve been doing macroeconomics for a couple months and it seems to be my subject choice for studying. Eventually I’m going to have to start microeconomics but since macro has some of the same concepts of micro I think it doesn’t matter which one I start off with. The main differences between micro and macro is that micro focuses on the individual firm or industry while macro focuses on the economy on a whole so to add a little perspective micro deals with the individual spec of sand while macro deals with the entire beach.

You might have learned something from this post, we never cease to learn.