ECON 2113: STUDY GUIDE
110 Cards in this Set
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Price ceiling
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Max price sellers may charge legaly
generates shortages
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Price Floor
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Mim price sellers may recieve
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Consumer Surplus
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difference between highest price consumer willing to pay and price consumer actually pays: as price falls consumer surplus rises: net benefit
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Marginal Benefit
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additional benefit to consumer from CONSUMING 1 more unit of good: demand curve shows whether consumer is willing to purchase product at different prices
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Marginal cost
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additional COST of producing 1 more unit: supply curve: shows willingness to supply at different prices
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Producer Surplus
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The difference bettween lowest price a firm is willing to accept and the price it recieves
:as price of a good rises producer surplus rises : net benifit
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Deadweight loss
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reduction in economic surplus results from market NOT BEING IN EQUILIBRIUM
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economic efficiency
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market outcome to which marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and the sum of consumer and producer surplus is at max
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black market
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buying and selling take place at prices that violate gov. regulations
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tax incidence
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actual division of tax burden
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externality
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benefit or cost that effects someone not directly involved in production or consumers effect economic efficency and market equilbrium
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private cost social cost
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cost to producer;total cost
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private benefit;social benefit
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consumer benefit:total benefit
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Market faliure
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market fails to produce efficent level of out put
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property rights
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rights individulas have to bussinesses or property incomplete rights= failure and externalities
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The Coase Theorem
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The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.
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Pigovian taxes and subsidies
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Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities. set to cost of externality
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Rivalry
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The situation that occurs when one person’s consuming a unit of a good means no one else can consume it.
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Excludability
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The situation in which anyone who does not pay for a good cannot consume it.
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common resource
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rival non exclusive
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private good
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rival exclusive
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quasi public good
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quasi public good
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public good
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non rival non exclusive
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Elasticity
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how much econmic variable responds to change in another economic varable
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Price elasticity of demand
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response of demand to change in price %change in demand/%change of price
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Prices elasticity demand
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change quanity demanded/ change in price
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Elastic demand
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change in demand GREATER than change in price GREATER THAN 1
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Inelastic demand
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change in demand is LESS THAN change in price LESS THAN 1
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unit elastic demand
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change in demand is EQUAL to change in price = 1
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perferctly inelastic
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demand unresponsive to price ex:meds
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perfectly elastic
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demand infinately responsive to price
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determinants of price elasticity of demand
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avalibility of subs MOST IMPORTANT passage of time , luxuries vs necessites,definition of market, share of good in consumers budget
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total revenue
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total funds recieved by seller of good or service PriceXunits sold
when price inelastic price cut decreases revenue
when price elastic price cut increases revenue
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cross price elasticity demand
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%change in quanity demanded/% change in price of another good
substitutes:positive complements: neg
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Income elasticity of demand
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change in quanity demanded/change in income
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tariff
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A tax imposed by a government on imports
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Imports
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Goods and services bought domestically but produced in other countries
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Exports
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Goods and services produced domestically but sold in other countries
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Comparative Advantage
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The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
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Opportunity Cost
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The highest-valued alternative that must be given up to engage in an activity.
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Absolute Advantage
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The ability to produce more of a good or service than competitors when using the same amount of resources.
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Autarky
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A situation in which a country does not trade with other countries.
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Terms of Trade
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The ratio at which a country can trade its exports for imports from other countries
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External Economies
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Reductions in a firm’s costs that result from an increase in the size of an industry
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Quota
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A numerical limit imposed by a government on the quantity of a good that can be imported into the country.
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Voluntary export restraint (VER)
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An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country
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World Trade Organization (WTO)
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An international organization that oversees international trade agreements.
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Globalization
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The process of countries becoming more open to foreign trade and investment.
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Protectionism
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The use of trade barriers to shield domestic firms from foreign competition.
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Dumping
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Selling a product for a price below its cost of production.
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Multinational enterprise
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A firm that conducts operations in more than one country
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A competitive firm is the price ________.
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taker
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A monopoly firm is the price _______.
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maker
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Name an example of a monopoly.
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Greenville utilities
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What is the fundamental cause of a monopoly?
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Barriers to entry
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What are the Monopoly's resources?
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Sole ownership or control of a key resource used in production. (ex: DeBeers Diamond monopoly-- 80% of the market)
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Exclusive right to a product for 20 years.
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Patents
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Who can grant exclusive rights to sell a good or a service?
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the government
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A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
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Natural monopoly
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What are the two kinds of monopolies?
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-Government-created Monopolies
-Natural Monopolies
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What is the cause of natural monopolies?
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The Average total cost falls as firm grows (economies of scale)
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T/F: The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This is evidence that they have a monopoly position to some degree.
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True
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T/F: The amount of power that a monopoly has is a function of whether there are close substitutes for its product.
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true
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T/F: Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.
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true
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How does the demand curve of a firm in perfect competition look?
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Completely horizontal
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How does the demand curve of a monopoly look?
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Decreasing from left to right
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What type of market (monopoly or perfect competition) has a perfectly elastic demand?
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a firm in perfect competition
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What are two characteristics of a monopolies demand and marginal revenue curve?
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-always start at the same point (because P=MR for the first unit sold)
-every other level of output the marginal revenue lies below the demand curve because marginal revenue is less than Price)
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How does a monopoly maximize profit?
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When price is greater than Marginal revenue
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How is the monopolist's price determined?
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by the demand curve (which shows us the willingness to pay of customers)
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How does one find the monopolist's profit when given the price, average total cost, and quantity.
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Profit=(price-average total cost) * quantity
Profit=(P-ATC)*Q
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T/F: When a monopoly charges a higher price, fewer of its goods are sold.
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True
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T/F: Average revenue for a monopoly is the total revenue divided by the quantity produced.
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true (AR=TR/Q)
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T/F: For a monopoly, marginal revenue is often greater than the price they charge for their good.
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false; always less
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T/F: Like monopolies, competitive firms choose to produce a quantity in which marginal revenue equals marginal cost.
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true (MR=MC)
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T/F: During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
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True
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T/F: A competitive firm is a price maker and a monopoly is a price taker.
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false
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T/F: A monopoly's marginal cost will be less than its average fixed cost.
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false
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T/F: a monopoly has the ability to set the price of its product at whichever level it desires.
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true
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Examples of barriers to entry include which:
(a) A key resource is owned by a single firm
(b) The costs of production make a single producer more efficient than a large number of producers
(c) The government has given the existing monopoly the exclusive right to produce the good.…
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all of the above
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To define a monopoly, we cite the following characteristics:
(a) The firm is the sole seller of its product
(b) The firm's product does not have close substitutes
(c) The firm generates a large economic profit
(d) The firm is located in a small geographic market
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a & b
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T/F: A natural monopoly occurs when the product is sold in its natural state (such as water or diamonds)
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false
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T/F: The defining characteristic of a natural monopoly is constant marginal cost over the relevant range of output.
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false
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T/F: Natural monopolies differ from other forms of monopoly because they are not subject to barriers to entry.
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false
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T/F: Patent and copyright laws are major sources of natural monopolies.
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False
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T/F: Bill owns the only grocery store in a small community that lies 200 miles form the nearest city. This represents a monopoly situation.
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true
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T/F: A government-created monopoly arises when government spending in a certain industry gives rise to monopoly power.
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false
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Allowing an inventor to have the exclusive rights to market her new invention will lead to:
(a) a product that is priced higher than it would be without exclusive rights
(b) desirable behavior in a sense
(c) Higher profits for the inventor.
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all of the above
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T/F: The costs of production make a single firm more efficient than a large number of firms, this is a primary source of barriers to entry.
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true
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T/F: the key difference between a competitive firm and a monopoly firm is the ability to select the level of competition in the market.
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false
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T/F: The market demand curve for a monopolist is typically unitary elastic at the point of profit maximization.
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false
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T/F: When a firm operates under conditions of monopoly, its price is not constrained.
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false
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T/F: In order to sell more of its product, a monopolist must sell to the government.
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false
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T/F: Economists assume that monopolists behave as cost minimizers
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False
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T/F: A monopolist's average revenue is always equal to marginal revenue.
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false
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T/F: A profit-maximizing monopolist faces a downward-sloping market demand curve, its average revenue is less than the price of the product.
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false; marginal revenue is less than the price of the product
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T/F: For a profit maximizing monopolist, Price>marginal revenue=Marginal cost
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true
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T/F: When a monopolist increases the amount of output that produces and sells, its average revenue increases and its marginal revenue increases.
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false
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T/F: Controlling the price of its goods is an impossible feat for a monopolist to accomplish
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false
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T/F: Marginal revenue for a monopolist is computed as average revenue divided by quantity sold.
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false
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T/F: The demand curve for a monopoly is depicted by curve A. (RED GRAPH)
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true
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T/F: The marginal revenue curve for a monopoly firm is depicted by curve A. (RED GRAPH)
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False
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T/F: The marginal cost curve for a monopoly firm is depicted by curve A. (RED GRAPH)
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False
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T?F: The average total cost curve for a monopoly firm is depicted by curve A. (RED GRAPH)
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False
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T/F: If the monopoly firm wants to maximize its profit, it should operate at a level of output equal to Q1. (RED GRAPH)
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False; Q2
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T/F: Profit will be maximized by charging a price equal to P0. (RED GRAPH)
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false; P3
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T/F: Profit on a typical unit sold for a profit-maximizing monopoly would equal P2-P1. (PURPLE GRAPH)
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False
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T/F: At the
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...
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T/F: The monopolist's profit maximizing quantity of output is determined by the intersection of the marginal cost and demand.
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False
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T/F: for a monopolist, profit is determined by profit=total revenue-total cost
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true
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ECON 2113: FINAL