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Microeconomics Bashaw
Chapters 7, 13-17
111
Economics
Undergraduate 1
11/29/2011
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Term
welfare economics
 Definition
the study of how the allocation of resources affects company well-being.
Term
willingness to pay
 Definition
measures how much the buyer values the good.
Term
consumer surplus
 Definition
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
Term
marginal buyer
 Definition
the buyer who would leave the market first if the price was any higher.
Term
The area below the demand curve and above the price measures:
 Definition
the consumer surplus in a market.
Term
cost
 Definition
the value of everything a seller must give up to produce a good.
Term
producer surplus
 Definition
the amount a seller is paid for a good minus the seller's cost of providing it.
Term
The area below the price and above the supply curve measures the:
 Definition
producer surplus in a market.
Term
total surplus
 Definition
the sum of consumer and producer surplus. (value to buyers - amount paid by buyers) + (amount recieved by sellers - cost to sellers).
Term
consumer surplus=
 Definition
value of buyers - amount paid by buyers
Term
producer surplus=
 Definition
amount recieved by sellers - cost to sellers
Term
efficiency:
 Definition
the property of a resource allocation of maximizing the total surplus recieved by all members of society.
Term
equality
 Definition
the property of distributing economic prosperity uniformly among the members of society.
Term
The three market outcomes:
 Definition

1. Free markets allocate the supply of goods to the buyers who value them most hilghly, as measured by their willingness to pay.

2. Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Term
maket failure:
 Definition
the inability of some unregulated markets to allocate resources efficiently.
Term
total revenue:
 Definition
the amount a firm recieves for the sale of its output.
Term
total cost:
 Definition
the market value of the inputs a firm uses in production.
Term
profit:
 Definition
total revenue minus total cost.
Term
opportunity cost:
 Definition
all of those things that must be forgone to acquire that item.
Term
explicit costs:
 Definition
input costs that require an outlay of money by the firm.
Term
implicit costs:
 Definition
imput costs that do not require an outlay of money by the firm.
Term
economic profit:
 Definition
total revenue minus total cost, including both explicit and implicit costs.
Term
accounting profit:
 Definition
total revenue minus total explicit cost.
Term
production function:
 Definition
the relationship between quantity of inputs used to make a good and the quantity of output of that good.
Term
marginal product:
 Definition
increase in output that arises from an additional unit of output.
Term
diminishing marginal product:
 Definition
the property whereby the marginal product of an input declines as the quantity of the input increases.
Term
fixed costs:
 Definition
costs that do not vary with the quantity of output produced.
Term
variable costs:
 Definition
costs that vary with the quantity of output produced.
Term
average total cost:
 Definition
total cost divided by the quantity of output.
Term
average fixed cost:
 Definition
fixed cost divided by the quantity of output.
Term
average variable cost:
 Definition
variable cost divided by the quantity of output.
Term
marginal cost:
 Definition
the increase in total cost that arises from an extra unit of production.
Term
average total cost=
 Definition
total cost/quantity
Term
marginal cost=
 Definition
change in total cost/change in quantity
Term
efficient scale:
 Definition
the quantity of output that minimizes average total cost.
Term
Whenever marginal cost is less than average total cost,
 Definition
average total cost is falling, and vice versa.
Term
The marginal cost curve crosses the average total cost curve at it's....
 Definition
 minimum.
Term
Marginal cost eventually rises/falls with the quantity of output.
 Definition
rises
Term
What shape is the average total cost curve?
 Definition
U-shaped
Term
The marginal cost curve crosses the average total cost curve at the minimum/maximum of average total cost.
 Definition
minimum
Term
economies of scale:
 Definition
the property whereby long-run average total cost falls as the quantity of output increases.
Term
diseconomies of scale:
 Definition
the property whereby long-run average total cost rises as the quantity of output increases.
Term
constant returns to scale:
 Definition
the property whereby long-run average total cost stays the same as the quantity of output changes.
Term
total cost=
 Definition
FC+VC
Term
average fixed cost=
 Definition
FC/Q
Term
ATC=
 Definition
TC/Q
Term
AVC=
 Definition
VC/Q
Term
MC=
 Definition
change in TC/ change in Q
Term
competitive market:
 Definition
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
Term
characteristics of a competitive market
 Definition

1. Many buyers and sellers in the market.

2. The goods offered by various sellers are largely the same.
Term
average revenue:
 Definition
total revenue divided by the quantity sold.
Term
marginal revenue:
 Definition
the change in total revenue from an additional unit sold.
Term
marginal cost=
 Definition
change in TC/ change in Q
Term
change in profit=
 Definition
MR-MC
Term
characteristics of marginal cost curves:
 Definition

1. upward sloping

2. U-shaped

3. crosses the average-total-cost curve at the minimum of average total cost.
Term
For a competitive firm, the firm's price equals:
 Definition
both it average revenue and its marginal revenue.
Term
3 rules for profit maximization:
 Definition

1. If marginal revenue is greater than marginal cost, the firm should increase its output.

2. If marginal cost is greater than marginal revenue, the firm should decrease its output.

3. At the profit-maximizing level of output, marginal revenue and marginal costs are exactly equal.
Term
shutdown:
 Definition
a short run decision not to produce anything during a specific period of time because of current market conditions.
Term
exit:
 Definition
a long-run decision to leave the market.
Term
A firm that shuts down still has to pay its ...
 Definition
fixed costs.
Term
You should shutdown if: (3 things)
 Definition

1. TR<VC

2. TR/Q<VC/Q

3. P<AVC
Term
The competitive firm's short-run supply curve is the portion of it's marginal cost curve that lies above...
 Definition
average variable cost.
Term
sunk cost:
 Definition
a cost that has already been committed and cannot be recovered.
Term
You should exit if: (3 things)
 Definition

TR<TC

TR/Q<TC/Q

P<ATC

 
Term
You should enter if: (4 things)
 Definition

P>ATC

TR>TC

TR/Q>TC/Q

P>ATC
Term
The competitive firm's long-run supply curve is the portion of its marginal cost curve that lies above:
 Definition
average total cost.
Term
profit=
 Definition

TR-TC

(TR/Q-TC/Q)xQ

(P-ATC)xQ
Term
At the end of entry and exit, firms that remain in the market must be making _____ economic profit.
 Definition
zero
Term
The process of entry and  exit ends when price and average total cost are _________.
 Definition
driven to equality
Term
In the long run equilibrium of a competitive market with free entry and exit, firms must be ___________.
 Definition
operating at their efficient scale.
Term
marginal firm:
 Definition
the firm that would exit the market if the price was any lower.
Term
Because firms can enter and exit more easiliy in the long run than in the short run, the long-run supply curve is typically more elastic than the short-run supply curve. (blank)
 Definition
Term
monopoly
 Definition
a firm that is the sole seller of a product without close substitutes.
Term
monopoly resources:
 Definition
a key resource required for production is owned by a single firm.
Term
government regulation:
 Definition
the government gives a single firm the exclusive right to produce some good or service.
Term
the production process:
 Definition
a single firm can produce output at a lower cost than can a larger number of producers.
Term
natural monopoly:
 Definition
arises because a single firm can supply a good or service to an entire market at a smaller cost than could 2 or more firms.
Term
The key difference between a competitive firm and a monopoly is....
 Definition
the monopoly's ability to influence the price of its output.
Term
A monopolist's marginal revenue is always less/more than the price of its good.
 Definition
less
Term
Monopoly's effects on total revenue: (2 things)
 Definition

1. output effect- more output is sold, so Q is higher, which tends to increase total renevue.

2. price effect- the price falls, so P is lower, which tends to decrease total revenue.
Term
profit maximizing quantity is where on a graph?
 Definition
intersection of marginal revenue curve and marginal cost curve.
Term

For a competitive firm, P=MR=MC.

For a monopoly firm, P>MR=MC

(blank)

 Definition
Term
profit=
 Definition

TR-TC

 
Term
The socially efficient quantity of a graph is found:
 Definition
where the demand curve and the marginal cost curve intersect.
Term
A monopolist produces less than the _________ quantity of output.
 Definition
socially efficient
Term
price discrimination:
 Definition
the business practice of selling the same good at different prices to different customers.
Term
perfect price discrimination:
 Definition
a situation in which the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.
Term
How policymakers respond to monopolies: (4 things)
 Definition

Make monopolized industries more competitive.

Regulate behavior of monopolies.

Turn same private monopolies into public enterprises.

Nothing at all.
Term
imperfect competition:
 Definition
when many industries fall somewhere between the polar cases of perfect competition and monopoly.
Term
oligopoly:
 Definition
only a few sellers offer similar or identical products.
Term
concentration ratio:
 Definition
the percentage of total output in the market supplied by the four largest firms.
Term
monopolistic competition:
 Definition
many firms sell products that are similar but not identical.
Term
many sellers in a monopoly:
 Definition
there are many firms competing for the same group of customers.
Term
product differentiation in a monopoly:
 Definition
each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve.
Term
free entry and exit in a monopoly:
 Definition
firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero.
Term
How is an oligopoly different than a monopoly?
 Definition
In an oligopoly, there are only a few sellers and less competition. Monopoly, many sellers and somewhat different products.
Term
A monopolistically competitive firm has a downward sloping demand curve. (blank)
 Definition
Term
Perfectly competitive firm faces a horizontal demand curve at market price. (blank)
 Definition
Term
When firms are making profits...
 Definition
new firms have an incentive to enter the market, so demand is increased.
Term
When firms are making losses...
 Definition
firms in the market have an incentive to exit, increase demand.
Term
In a monopolistically competitive market... (2 things)
 Definition

1. Price exceeds marginal cost. This is because profit maximization requires marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price.

2. As in a competitive market, price equals average total cost. This conclusion arises because free entry and exit drive economin profit to zero.

 
Term
game theory:
 Definition
the study of how people behave in strategic situations.
Term
duopoly
 Definition
an oligopoly with just two members
Term
collusion
 Definition
an agreement among firms in a market about quantities to produce or prices to charge.
Term
cartel:
 Definition
a group of firms acting in unison.
Term
Nash Equilibrium:
 Definition
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.
Term
When an oligopolist doesn't form a cartel, there are two effects: (2 things)
 Definition

output effect: price is above MC, so selling more will raise profit.

 

price effect: raising production will lower the price of water and lower profit on all other gallons sold.
Term
As the number of sellers in an oligopoly grows larger, an olopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level. (blank)
 Definition
Term
prisoner's dilemma:
 Definition
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
Term
dominant strategy:
 Definition
a strategy that is best for a player in a game regardless of the strategies chosen by other players.
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