ECON 202: STUDY GUIDE
168 Cards in this Set
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perfect competition
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many firms
price takers
standardized product
free entry and exit
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monopoly
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one firm
price maker
standardized product
high barriers
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oligopoly
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few firms that compete
all kinds of products
price makers
high barriers
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oligopoly
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market structure with a few strategically interacting firms
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monpolistic competition
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many firms
differentiated products
some ability to set price
free entry and exit
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monopolistic vs. all other market structures
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perf comp: firms have some power to set prices
mono: firms face some competition
olig: there are many firms and free entry
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HHI
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square root of each firms share of market sales
1: perf comp
Below 1,000: strongly competitive
1,000-1,8000 is somewhat competitive
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natural monopoly
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exists whenever a single firm experiences economies of scale over the entire range of production that is relevant to its market
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perf comp demand curve
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perfectly elastic (horizontal line)
d = p = mr
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perf comp profit max Q
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p = mc
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what happens if a firm in perf comp tries to raise price?
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cause the firm to lose all sales, but it can sell any Q at market price
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break even price (perf comp)
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the min avg total cost of a price taking firm...
the p at which it earns zero/normal economic profit
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shut down price (perf comp)
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the price at which a firm ceases production in the short run if the market price falls below the shut down price which is equal to minimum avg variable cost
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short run production decision
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shutting down may cost more than staying open without profits because of fixed costs
shut down in SR p < avc
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SR market equil (perf comp)
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when the q supplied equals the q demanded taking the number of producers as given
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LR market equil (perf comp)
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the value of marginal cost is the same for all firms, with free entry and exit firms will earn zero econ profit in LR
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total surplus under mono
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total surplus is the sum of profit and consumer surplus is smaller under mono than perf comp
mono generates DWL and produces a net loss for society
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pranti trust policy
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prevent or break up monos
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public ownership mono
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the gov establishes an agency to control a monopoly instead of private ownership
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price regulation mono
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price ceiling that limits the prices to be charged
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gov. policies focus on...
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preventing DWL rather than price discrimination
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price discriminationmono
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charging different prices to consumers for the same good
ex: business people have to fly and are willing to pay $500 vs. students who don't have to and are only willing to pay $150
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sensitivity to price mono
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a high price has a larger effect in discouraging purchases (students)
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insensitive to price mono
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have to have the product no matter the price
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perfect price discriminationmono
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when a monopolist charges the exact willingness to pay of the consumer
the greater number of prices charged the closer to perf price discrimination
techniques: advance purchase restrictions, volume discounts, two part tariffs
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interdependece
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oligopoly
the profit of each firm depends on the actions of other firms in the market
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collusion olig
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when they cooperate to raise joint profits
strongest form is a cartel
ultimately more profitable
illegal
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collusion and competitive: a positive quantity effect
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one more unit is sold increasing total revenue by the price at which it sold
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collusion and competition: negative price effect
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in order to sell one more unit, the mono must cut the market price on all units sold
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oligopolists face a _____ price effect than monopolists
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smaller
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price competition (bertrand) olig
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oligopolists repeatedly undercut each others prices charging a bit less than the others to steal their customers until prices reach the level of marginal cost
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quantity competition (Cournot) olig
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choosing quantities and charging as much as possible for those quantities... each olio treats the output of its competitiors as fixed
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game theory
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any situation in which the reward to any one player (the payoff) depends not only on his or her own actions but also those of other players in the game
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dominant strategy
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when it is the players best action regardless of the action taken by the other player
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equilibrium
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an outcome in which no individual or firm has any incentive to change his or her action
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ash equilibrium
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the players in nash do not take into account the effect of their actions on others... non cooperative equal: each player choses the action that best benefits itself
exists when there is no dominant strategy
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strategic behavior
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oligopolists do not decide what to do based on the effect of profit in the SR, but take into account the affects of its action on the future action of other players
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tit for tat
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strategic behavior that plays cooperatively at first and then doimg whatever the player did in the previous period
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more profitable... tit for tat or always cheat?
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depends on how many year each firm expects to play the game and what strategy its rival follows
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tacit collusion
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normal state of an olig... limit production and raise prices in order to raise each others profits
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collusion is far from perfect because... (3)
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1. large numbers: the more firms in an olig, the less incentive to behave cooperatively
2. differences in interests
3. bargaining power of buyers: often oligopolists dont sell to consumers but to large buyers who are in a position to bargain for cheaper prices
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product differentiation and price leadership
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effect is to reduce the intensity of competition among firms
-price differentiation: in many olig industries, firms make efforts to convince consumers that their product is different
-price leadership: one company tacitly sets prices for the industry as a whole
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non price competition
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using advertising and other ways to increase sales
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what market is most common?
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oligopoly
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1 firm, not diff products
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mono
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many firms, not diff products
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many firms, not diff products
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many firms, diff products
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monopolistic competition
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few firms with both diff and not diff products
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oligopoly
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profit max quantity for mono
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MR = MC
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diff between perf comp and mono (3)
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PC is a price taker vs. mono is a price maker
in LR PC earns zero econ profit b/c of free entry and exit
in LR mono can earn profit b/c of high barriers to entry
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a perf comp SR supply curve is...
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the MC curve above the AVC
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economic profit
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total revenue - opportunity costs
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economic profit
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total revenue - implicit and explicit cost
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law of diminishing returns
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marginal cost will rise in the short run as a result of production expansion
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law of diminishing returns
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increase of one input factor (while keeping other factors fixed) will eventually lead to decline in productivity (performance limit?)
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law of diminishing returns
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as more variable input is added to fixed amounts of other inputs eventually marginal productivity will decline
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Economies of Scale
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economies of mass production drive down total average costs - increasing by certain output will always result in output growing at a greater percentage. industries grow to become larger and share costs
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sunk costs - how should it affect decisions
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it shouldn't
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price-takers
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in a perfectly competitive market, make up only a portion of supply
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price-taker
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a buyer or seller who is unable to alter the price
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perfectly competitive industry
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firms will have perfectly elastic demand due to homogenous product. marginal revenue = price, perfect example is corn farmers
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what point should a firm shut down?
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(short term) price<average variable price
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firms enter competitive industry until -
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price=average cost
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competitive equilibrium and what it signifies
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price = marginal cost, optimal amount of output is being produced
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possible disadvantages of perfect competition
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firms may lack resources and incentives to innovate much
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long-run equilibrium for monopoly
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MR=MC, P>MR, P>ATC
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what a monopoly should focus on to maximize profit
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price and quantity demanded, as this will affect cost and profit
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monopolistic competitive market
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slight differentiated product, perfect example restaurants
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oligopoly "kinked demand curve"
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demonstrate why industries have constant prices over time
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"prisoner's dilemma"
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where two firms are unable to cooperate and end up worsening themselves - Nash equilibrium
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prisoner's dilemma
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a game in which pursuing dominance causes noncooperation that eventually leaves eveyone worse off
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oligopoly market
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few firms - auto producers
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diseconomies of scale
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where long run average cost increase as firm expands its output, causes government to produce a good
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diseconomies of scale
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where long run average cost increases as a firm expands its output (according to economic theory, if it becomes too big)
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fixed cost
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a cost that does not change regardless of production
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demand curve
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slopes downward (as the price of a good falls, the quantity demanded rises)
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a demand curve
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a downward slope
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elasticity
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measure of how responsive an economic variable is to another (purchases/suppliers to price changes)
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equilibrium price
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"market-clearing price" - price at which quantity demanded equals quantity supplied
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if a price is below equilibrium price:
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a shortage will occur and the quantity supplied will increase and the price will increase
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supply curve
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slopes upward (as the price of a good rises, the quantity demanded rises)
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positive analysis
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"what is?"
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normative analysis
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"what ought to be?"
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price ceiling
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sets a max price - because supply went down, demand went up (rent control)
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price floor
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minimum price sellers can receive (labor)
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consumer surplus
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difference between willingness to pay and price actually paid for the good (value of a discount)
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marginal cost
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additional cost resulting from producing another good/service
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marginal cost
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extra cost caused by an additional 1-unit of output
change in total cost/quantity
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marginal benefit
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consumer benefit from receiving one or an additional unit (always decreasing)
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producer surplus
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difference between the minimum price a good is worth and the price actually paid for it
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deadweight loss
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net loss of consumer and producer surplus - result from market not being in equilibrium
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(market) efficiency
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marginal benefit = marginal cost and consumer/producer surplus is maximized
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tax incidence
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distribution of tax burden among producers and consumers
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total revenue
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amount of money a firm receives from the sale its products & services
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opportunity cost
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cost of an activity measured in terms of the sacrificed next best alternative
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opportunity cost
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best alternative of your time
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sunk cost
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cost that has already been paid, cannot be recovered - should not affect decision making
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total cost
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variable cost + fixed costs
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total cost
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fixed cost + total variable cost
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explicit cost
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monetary cost
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implicit cost
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nonmonetary opportunity cost
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implicit cost
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the opportunity cost of a self owned resource for which no payments are made
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economics of scale
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where long-run average cost falls as a firm increases output (mass production)
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scarcity
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limited resources for unlimited wants and desires
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marginal analysis
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comparison of marginal benefit and marginal cost
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equity
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comparison of marginal benefit and marginal cost
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ceteris parabis
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all things constant
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production possibility frontier
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curve showing combos of two separate goods/services that can be produced to efficiently use society's resources
bowed out- increasing opportunity cost
straight - continuous oppourtunity cost
bowed down - decreasing opportunity cost
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comparative advantage
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one country has a comparative advantage in the production of a good or service if they can do so at a lower opportunity cost
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imports
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goods produced abroad
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exports
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domestically produced goods, sold abroad
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autarky
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self-sufficiency (country tries to produce all its own needs)
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substitutes
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products that serve same purpose - people will go for cheaper one, especially in price hikes
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normal good
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demand increases when income increase
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inferior good
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good that decreases in demand when income increase
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complements
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goods and services that have a beneficial relationship
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subsidies
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monetary grants given to producers to encourage certain behaviors (continue to operate at certain cost)
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shortage
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demand too high for scarcity - results in price ceiling
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(total) surplus
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(producer + consumer surplus) too much supply considering demand
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quotas
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quantity controls (keep prices high)
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excise tax
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indirect tax on sale of a particular good
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tax equity
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financing by taxation
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regressive tax
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lower income pay higher fractions of their income than do wealthier people
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progressive tax
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taxation rate increases on high-income
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tariffs
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tax on imports or exports
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total utility
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total amount of satisfaction a person derives from consumption - is maximized when marginal utility is 0
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normal profit
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accounting profit after the firm's incurred opportunity cost
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choices having to be made about how resources are used
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a consequence of economic scarcity is
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Land, labor, capital & entrepreneurship
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the basic factors of production are
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marginal product
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change in total output of production when an input is increased (cost is rising when this decreases)
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marginal product
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the additionalv output produced by 1 unit increase
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successful advertising
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demand curve shifts to right and gets steeper (people are willing to pay the higher price)
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production possibilities curve determines
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the max combos of g's&s's an economy can produce given its available resources
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when a good is used in the production of another good
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the supply curve for that good shifts left (people will not be willing to pay such a high price in larger quantities)
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=according to the law of increasing opportunity costs
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to produce additional units of a particular good, it is necessary for a society to sacrifice increasingly large amounts of alternative goods
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a change in price or quantity
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indicates a movement along the line that makes up the supply or demand curve
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market share
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percentage of total market captured (output produced) by firm
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If an economy is producing inside the possibility curve then:
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It can produce more of one good without giving up some of another good
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how to determine elasticity
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% change in quantity supplied /% change in price
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concentration ratio
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sum of market share in the top firms of an industry
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The Market Mechanism
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works because prices serve as a means of communicating between consumers and producers
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public goods
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non-rival, non-excluded (provided by government due to tendency to not be supplied in sufficient quantities)
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a Mixed economy
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utilizes both market and non-market signals to allocate goods and services
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product markets
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business firms supply goods and services to:
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factor markets
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business firms purchase factors of production in:
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ceteris paribus
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all things constant
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a change in demand means there has been a shift in the demand curve and a change in the quantity demanded
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means that the price has changed and there is movement along the demand curve
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monopolistic competition
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when firms sell differentiating products, but easy market entry often brings economic profit to 0
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externalities
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the impact of one thing that affects the well-being of some other party
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Market demand is determined by
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expectations about future income, income, tastes
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the law of supply
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upward sloping to the right
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if the quantity demanded of a good is greater than the quantity supplied of the good at the current price then:
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price will increase until it reaches the equilibrium price
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when a surplus exists for a product
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producers reduce the level of output and reduce the price
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average product
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total output/ labor used
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total fixed cost
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costs that remain fixed when output changes in the short run
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total variable cost
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costs that vary when output changes cost of variable outputs
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average fixed cost
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total fixed cost/quantity
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average variable cost
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total variable cost/quantity
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average total cost
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total cost/quantity or average cost + average variable cost
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the total economic cost of production for a firm equals
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explicit costs plus implicit costs
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skunk costs
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historic and uncoverable
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to maximize profits a monopoly firms decisions will focus on:
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both the price it charges and the resulting quantity that will be demanded, since the combo affects revenue, costs, and profits.
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oligpoly
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few firms that compete in all types of products
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individual consumers supplies; and purchases
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factors of production, final goods and services
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a buyer is said to have a demand for a good only when:
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the buyer is both willing and able to purchase the good at an alternative price
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if production in the economy is efficient then changes in the market prices
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move us along the perimeter of the PPC
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Market failure implies that
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leads the economy to the wrong mix of output
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the market tends to underproduce market goods because
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joint consumption allows those who do not pay for the good to still benefit from the good
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ECON 202: STUDY GUIDE