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| | == Economic graphs on the CLEP exam == | | == Economic graphs on the CLEP exam == |
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| − | On the CLEP exam, slightly less than 10% of the questions are about graphs. To answer them correctly, it helps not to be overwhelmed or give up too quickly. The questions simply test and retest a few basic principles in economics, such as where a monopolist sets his price: | + | On the CLEP exam, slightly less than 10% of the questions are about graphs. To answer them correctly, it helps not to be overwhelmed or give up too quickly. The questions simply test and retest a few basic principles in economics. A favorite topic of graphical questions concerns where a monopolist sets his price. |
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| − | *A monopolist has no supply curve, because he is the only supplier. There is only a demand curve, a marginal revenue curve, and some cost curves for a monopolist. If given a graph with these curves, simply find where the marginal revenue curve intersects the marginal cost curve, and that '''''determines the quantity''''' Here are some graphical questions to be able to answer:
| + | [[Image:Econ13c.jpg|right|250px|thumb|Figure C]] |
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| − | Here are some more common graphical questions:
| + | A monopolist has no supply curve, because he is the only supplier. There is only a demand curve, a marginal revenue curve, and some cost curves for a monopolist. If given a graph with these curves, simply find where the marginal revenue curve intersects the marginal cost curve, and that '''''determines the quantity'''''. |
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| − | *consumer surplus (only occurs where demand curve is higher than price paid, because buyers paid less than they would have)
| + | On the graph to the right (Figure C), there is no supply curve so you know that this represents a monopolist. A typical question is to ask you where the monopolist sets his price in order to maximize his profits. To find this price point, recall that a monopolist sets his price where MC=MR. The graph gives you curves for both MC and MR, so find where they intersect: point A. But that point gives you the quantity supplied, not the price demanded. To find the demand price at the quantity supplied, you have to find the corresponding price point on the demand curve. You trace a line vertically from the quantity to find the price on the demand curve: point D in Figure C. |
| − | *curves for monopolist (no supply curve; output set by MC=MR, price sent by demand curve at that output)
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| − | *deadweight loss: the lost consumer surplus AND (in the case of a tax) the lost producer surplus
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| − | *optimal market price: where supply meets demand, or (for a monopolist that has no supply curve) where MC intersects demand curve (MC=P)
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| − | *comparing price and curves for ATC, AVC and MC, and realizing that maximum profits occur when MC=P; the firm shuts down in the long run when ATC>P; and the firm shuts down in the short run when AVC>P, but keeps operating in the short run when AVC<P but P<ATC (remember: "variable cost" is a short run issue; "total cost" is a long run issue)
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| − | ===Example===
| + | That is the answer to a question about where a monopolist sets his price, but that is not the best price for the public. It is higher than the price the public would enjoy if the market were fully competitive. Another question on a CLEP exam might ask where the competitive price would be, also known as the "allocatively efficient" price because it represents the most efficient allocation of resources. That price (and quantity) is where the MC curve intersects the demand curve: point <> in Figure C. |
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| − | [[Image:Econ13c.jpg|right|250px|thumb|Figure C]]
| + | Figure C also has a curve for average total cost (ATC). Recall that a firm shuts down in the long run when ATC>P; and the firm shuts down in the short run when AVC>P, but keeps operating in the short run when AVC<P but P<ATC. This is because "variable cost" is a short run issue, while "total cost" is a long run issue. Does the firm in Figure C shut down? No, because we determined above that the monopolist can sell at point D, and there ATC=P. He is covering (paying for) all his costs. The firm can continue in business. |
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| | + | Here are some other common graphical questions: |
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| − | Consider the graph on the right. <need more here>
| + | *optimal market price: where supply meets demand, or (for a monopolist that has no supply curve) where MC intersects demand curve (MC=P), as explained above |
| | + | *consumer surplus (the benefit to the consumer where the demand curve is higher than price paid, because the buyers pay less than they were willing to pay, as when you would have paid $15 to see a movie but the charge was only $10: your consumer surplus is $5) |
| | + | *deadweight loss: the lost consumer surplus explained above AND (in the case of a tax) the lost producer surplus (benefit to the seller who was willing to produce at a price less than what he sold it for) |
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| | == Review: Government Policy == | | == Review: Government Policy == |