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Microeconomics
ECON101 Saylor.org
70
Economics
Undergraduate 1
05/27/2015

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Term
free good
Definition
a good where the choice of one use does not require that we give up another
Term
Opportunity cost
Definition
the value of the best alternative forgone in making any choice.
Term
Monetary policy
Definition
involves policies that affect bank lending, interest rates, and financial capital markets, is conducted by a nation’s central bank.
Term
Fiscal policy
Definition
involves government spending and taxes, is determined by a nation’s legislative body.
Term
theory
Definition
a simplified representation of how two or more variables interact with each other.
Term
circular flow diagram
Definition
[image]
Term
market
Definition
an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses.
Term
comparative advantage
Definition
When one can produce a good at a lower opportunity cost than another
Term
absolute advantage
Definition
one uses fewer resources to produce that good than another
Term
marginal rate of transformation
Definition
represented by the slope of the production possibilities curve
Term
Normative v positive economics
Definition
Normative economics expresses an opinion while positive economics can be verified.
Term
Giffen good
Definition
A good which people consume more of as the price rises
Term
Veblen good
Definition
A good for which people's preference for buying them increases as a direct function of their price, as greater price confers greater status
Term
market clearing
Definition
assumption that the quantity supplied will consistently align with the quantity demanded.
Term
Say's Law
Definition
capital loses value over time, or that money is essentially perishable
Term
Pareto optimal
Definition
a situation in which the profit of one party cannot be increased without reducing the profit of another
Term
Excise taxes
Definition
fixed fee per unit, meaning that the government earns its revenue based on volume sold
Term
Ad valorem taxes
Definition
proportional to the price of the good, so the government earns revenue based on the value of the good or service being sold.
Term
Tax incidence
Definition
The effect a particular tax has on the two parties of a transaction, greater for the party responding to inelasticity
Term
Price elasticity
Definition
the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price.
Term
Cross-price elasticity of demand
Definition
the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.
Term
perfect in/elastiy graphed
Definition
Perfect inelasticity (E=0) is represented by a vertical line while perfect elasticity (E=inf.) is represented by horizontal line
Term
Backward-bending supply curve for labor
Definition
the situation of high-wage people who can earn so much that they respond to a still-higher wage by working fewer hours
Term
fungible
Definition
it has equal value to the individual, regardless of the situation, e.g. money
Term
income-compensated price change
Definition
an imaginary exercise in which we assume that when the price of a good or service changes, the consumer’s income is adjusted so that he or she has just enough to purchase the original combination of goods and services at the new set of prices
Term
budget line
Definition
the negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis, NOT rise over run
Term
Effect of price change on quant. demanded
Definition
includes the substitution effect and the income effect
Term
How to determine the marginal benefit of $1 spent on capital
Definition
Divide capital’s marginal product by its price: MPK/PK.
Term
Marginal Rate of Technical Substitution (MRTS)
Definition
Slope of Isoquants. MRTS =−dK/dL
Term
Economies of Scope
Definition
When producing more than one type of product that are closely linked, the cost is lower than producing them separately
Term
Product Transformation Curve
Definition
Shows various combinations of outputs that can be produced with a given set of inputs
Term
Assumptions of perfect competition
Definition
1. homogenous product, 2. low barriers of entry/exit, 3. perfect information, 4. buyers and sellers are price takers, and 5. large number of buyers and sellers
Term
The slope of a total revenue curve
Definition
MR, aka the price
Term
Constant-cost industry
Definition
When expansion of the industry does not affect the prices of factors of production
Term
Natural monopoly
Definition
A firm that confronts economies of scale over the entire range of outputs demanded in its industry
Term
If +MR, if -MR
Definition
then demand is price elastic, then demand is price inelastic
Term
Demand curve under perfect competition
Definition
Same as marginal revenue curve
Term
Summary statistic of how much market power a monopolist has
Definition
How much they can drive their price above marginal cost.
Term
Percent markup = p((p-MC)/p) =
Definition
Percent markup = p((p-MC)/p) = -1/epsilon
Term
When output can expand/decline regarding price discrimination
Definition
Output can be expanded when price discrimination is very efficient, but output can decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users.
Term
Two conditions are necessary for price discrimination
Definition
Companies must be able to identify market segments by their price elasticity of demand; They must be able to enforce the scheme.
Term
Types of Price Discrimination
Definition
First degree: every individual is charged the maximum s/he is willing to pay. Results in no deadweight loss; Second degree: customers self-organize into different levels of payment based on willingness to pay (e.g. first, business, coach class on air travel); Third degree: customers are segmented based on an attribute to distinguish willingness to pay (e.g. student and senior discounts); Fourth degree/reverse price discrimination: prices remain the same for different customers, even if organizational costs change (e.g. a customer that is charged the same for a vegetarian meal, even if it costs more)
Term
The characteristic that distinguishes monopolistic competition from perfect competition
Definition
differentiated products
Term
Long run economic profits in monopolistic competition
Definition
Zero, will be eliminated by entry or by exit
Term
Markets that have monopolistic competition are inefficient for two reasons
Definition
First, its optimum output, the firm charges a price that exceeds marginal cost; Second, excess capacity
Term
Three types of product differentiation
Definition
Simple: the products are differentiated based on a variety of characteristics; Horizontal: the products are differentiated based on a single characteristic, but consumers are not clear on which product is of higher quality; Vertical: the products are differentiated based on a single characteristic and consumers are clear on which product is of higher quality.
Term
Short run
Definition
The time period when one factor of production is fixed in terms of costs, while the other elements of production are variable.
Term
Long-run
Definition
The conceptual time period in which there are no fixed factors of production.
Term
Concentration ratio
Definition
Reports the percentage of output accounted for by the largest firms in an industry
Term
Herfindahl–Hirschman Index (HHI)
Definition
An alternative measure of concentration is found by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares
Term
Cartel
Definition
Firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms make up a cartel.
Term
Dominant strategy
Definition
When a player’s best strategy is the same regardless of the action of the other player
Term
Tit-for-tat strategy
Definition
When a firm responds to cheating by cheating, and it responds to cooperative behavior by cooperating
Term
Trigger strategy
Definition
Where a firm makes clear that it is willing and able to respond to cheating by permanently revoking an agreement
Term
risk compensation
Definition
[Sam] Peltzman Effect, where risky behavior increases when safety precautions are put into place (e.g. faster driving after seatbelts are installed)
Term
Cross price elasticity of demand for substitute and complement goods
Definition
Positive for substitute goods and negative for complement goods
Term
public good
Definition
A good for which the cost of exclusion is prohibitive and for which the marginal cost of an additional user is zero
Term
Gini Coefficient
Definition
a measure of inequality expressed as the ratio of the area between the Lorenz curve and a 45° line and the total area under the 45° line.
Term
[Max] Lorenz Curve
Definition
shows cumulative shares of income received by individuals or groups.
Term
Nash Equilibrium
Definition
State where holding others constant where no player can gain by changing strategy
Term
Cournot Model
Definition
Firms produce the same good, and they choose the pro- duction quantity simultaneously
Term
Stackelberg Model
Definition
Firms produce the same
Term
Bertrand Model
Definition
Firms produce the same good, and they choose the price
Term
Isoquants
Definition
Curves showing all possible combinations of inputs that yield the same output
Term
Marginal revenue product (MRP)
Definition
The amount that an additional unit of a factor adds to a firm’s total revenue during a period is called the marginal revenue product (MRP) of the factor. MRP=MR*MP[=D, given perfect competition]
Term
Complementary factors of production
Definition
When an increase in the use of one factor of production increases the demand for another
Term
Soft verse hard commodities
Definition
Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar; Hard commodities are mined, such as gold, rubber and oil.
Term
Value of marginal product (VMP) of capital
Definition
The marginal product of capital multiplied by its price. The firm's demand curve for capital is derived from the VMP of capital.
Term
Midpoint method for elasticity
Definition
[image]
Term
Rental rate
Definition
The price of capital
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