ECON 1123: FINAL EXAM
79 Cards in this Set
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Economies of Scale
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causes downward U-Shape of LRAC--reasons: specialization, improvements in productive equipment
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Rent Seeking
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behavior directed toward avoiding competition, resources extended to protect a monopoly position
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Natural Monopoly
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a market for a good or service that has no close substitutes and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms
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Barriers to Entry
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1. Government regulators, i.e. patents & licenses
2. High start up costs
3. Economies of scale
4. Product differentiation
5. Access to suppliers and distribution channels
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Product Differentiation
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1. occurs in monopolistic competition and is accomplished through 'branding' a product and advertising
2. does not have to be physically different, difference can be just in the consumer's imagination
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Indifference Curve
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rate at which we are willing to trade between good; reflects subjective preferences
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Diminishing Marginal Utility
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1. increasing consumption of a good results in smaller and smaller additions to total satisfaction
2. as additional units of a good are given up, larger and larger amounts of satisfaction are sacrificed.
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Utility
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Satisfaction
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Budget Constraint
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rate at which we can afford to trade between goods; reflects objective circumstances; slope is reflected by the relative price ratio
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Explicit Cost
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land, labor, capital. These are costs that can be seen and physically calculated. (accounting costs)
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Implicit Cost
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opportunity costs. when added to explicit costs, adds to be economic costs.
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Economic Cost
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includes explicit (fixed & variable) costs and implicit (opportunity) costs
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Accounting Cost
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includes only explicit (fixed & variable) costs
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Short Run
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not enough time for a firm to make adjustments; labor is the variable cost
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Long Run
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time period in which full adjustments can be made to any change in the economic environment
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Perfect Competition
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a market in which there are many firms, each selling an identical product; many buyers; no restrictions on the entry of new firms into the industry; no advantage to established firms; and buyers and sellers are well informed about prices
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Assumptions of Perfect Competition
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1. Many buyers and sellers
2. Homogeneous products
3. Easy entry and exit
4. Perfect Information
5. Perfect capital mobility
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Elasticity
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a measure of responsiveness i.e., how people respond to changes in their economic environment
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Zero Economic Profit
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P = ATC
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Shutdown Point
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Minimum of the AVC
if price falls below that level, a firm will cease production because it can no longer afford to operate
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Constant Cost Industry
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1. as output increases, ATC remains the same
2. Horizontal LR supply
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Increasing Cost Industry
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as output increases, ATC shifts up
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Decreasing Cost Industry
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as more firms enter the industry, avg costs of a representative firm decrease
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Cartel
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a group of firms who sell a similar or identical product who agree to not compete with each other
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Determinants of Demand
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1. Income
2. Substitutes
3. Compliments
4. Future expectations
5. Buyers' tastes
6. Number of buyers
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Determinants of Supply
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1. Price of resources (L,L,C,E)
2. Number of sellers
3. Technology
4. Sellers' expectations
5. Cost of production
6. Taxes/subsidies
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Parity Price Ratio
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price of farm goods/price of non farm goods; ratio of the price of farm products to the price of non-farm products
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Price Floor
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prices cannot be set below a specific price, causing a surplus
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Price Ceiling
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prices cannot be set above a specific price, causing a shortage
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Price Elasticity of Supply
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1. a measure of how responsive sellers are to a change in price, ceteris paribus
2. %△ in QS / %△ in P
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Positive Economic Statements
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statements of empirical relationships; i.e. if this, then that. Analysis strictly limited to objective statements
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Normative Economic Statements
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involves value judgments regarding whether the outcome is good or bad. key word in normative statements: should
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Productive Efficiency
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producing goods at the lowest possible cost
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Allocative Efficiency
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distributing goods to people who value them the most
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Types of Spending
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1. Consumer
2. Investment
3. Government
4. Exports/Imports
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Demand
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the quantities of the good or resource that people are willing and able to buy at various prices during a specified time period, ceteris paribus
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Supply
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the quantities of a good or resource that people are willing and able to produce and offer for sale at various prices during a specified time period, ceteris paribus
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Inferior Good
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less desirable good
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Normal Good
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more desirable good
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Surplus
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excess supply
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Shortage
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excess demand
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Total Revenue
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Price per unit * Number of units
P * Q
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Price Elasticity of Demand
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1. measure of responsive buyers to changes in price, ceteris paribus
2. %△ in QD / %△ in P
3. elastic - luxury goods, substitutes
4. inelastic - essential, few substitutes
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Determinants of Elasticity of Demand
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1. Number of substitutes
2. Price as a fraction of buyers' income
3. Time period to adjust to a price change
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Elastic
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1. E(sub)d > 1
2. E(sub)s > 1
3. Very responsive to changes in price
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Inelastic
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1. E(sub)d < 1
2. E(sub)s < 1
3. Unresponsive to changes in price
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Consumer Choice Theory
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An individual has subjective preferences but is limited by objective circumstances. Unlimited wants and needs but scarce resources
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Marginal Cost
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1. measure of how the firm's TC change when an additional unit of output is produced
2. change in total cost/change in quanity
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Profit Maximization
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MR = MC
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Transitivity
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the idea that indifference curves cannot intersect
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Consumer Surplus
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the difference between what a consumer is willing to pay for a good and what they actually have to pay for a good
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Producer Surplus
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the difference between the price a seller is willing to produce a product for and the actual product of that price
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Income Effect
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has to do with real purchasing power; higher interest rates raise a saver's income
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Slope of Budget Constraint
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Relative Price Ratio: rate at which an individual CAN trade one good for the other (depends on market and Disposable Income)
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Slope of Indifference Curve
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Marginal Rate of Substitution: RATE at which goods can be traded for one another to maintain an individual's level of satisfaction
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Diseconomies of Scale
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causes upward U-Shape of SRAC--reasons: managerial/administrative costs, information
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Minimum Efficiency Scale
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lowest rate of q at which avg costs are at a minimum
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Relative Price Ratio
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the rate at which the consumer can trade one good for a different good in the market; slope of budget constraint
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Substitution Effect
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change in relative prices when interest rate raises consumption, because the individual sacrifices more future consumption
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Slope of the Intertemporal Budget Constraint
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the rate at which a consumer can trade a unit of current consumption for the future
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Price Discrimination
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charging different consumer groups different prices for the same product or service
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Arbitrage
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buying or selling when different prices exist for the same good at the same time
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Perfect Price Discrimination
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charging each consumer the max price he/she is willing to pay
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Second Degree Price Discrimination
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charging different customers different prices based on the quantities purchased
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Third Degree Price Discrimination
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charging different groups of customers different prices based on their price elasticities of demand
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Oligopoly
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a market with few firms firms dominating the industry where each firm must consider its competitors when making its own decisions
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Marginal Product of Labor
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1. change in output/change in labor
2. initially output increases faster than costs but after some point, costs increase faster than change in output
3. Minimum of u-shaped SRAC
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Diminishing Marginal Product
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1. when additional units of one factor of production (labor) are added to a fixed unit of the other factor (capital) at first total product increases faster than TC, so AC will decline, and beyond that more labor (variable product) adds more to the TC than to total output so AC inclines
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Positive Economic Profit
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P > ATC
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Negative Economic Profit
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P < ATC
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Market/Industry Supply Schedule
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the horizontal sum of all the individual firm supply schedules
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Determinants of Price of Supply Elasticity
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1. mobility
2. resource availability
3. production process length
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Income Elasticity of Demand
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measures the responsiveness of the demand for a good with a change in income level
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Marginal Revenue
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measures a change in TR brought about by the sale of one additional unit of output
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Marginal Rate of Substitution
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rate at which an individual is willing to trade one good for another to maintain a certain level of satisfaction; slope of an indifference curve
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Monopolistic Competition
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a market in which a large number of firms compete by making similar but slightly different products
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Price Taker
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a firm that cannot influence the price of the good or service that it produces
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Diminising Marginal Returns
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In production, as you add more and more of the variable factor the AVC will get closer and closer to the u-shaped ATC, until at a certain point the amount returned will begin to level off rather than increase.
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Deadweight Loss
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the fall in total surplus that results from a market distortion, such as tax
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ECON 1123: CHAPTER 3