# Shared Flashcard Set

## Details

Econ 1a Final (Stanford)
Study cards for a Stanford Econ 1a final (I suck at econ, so bear with me).
62
Economics
03/21/2012

Term
 Marginal Principle
Definition
 maximization means equating returns at the margin
Term
Definition
 voluntary exchange benefits both parties
Term
 Basic Competitive Model
Definition
 assumes competitive markets, rational consumers, profit maximizing firms
Term
 Price Elasticity of Demand
Definition
 percentage change in quantity divided by percentage change in price -> minus sign is implicit, is unit free, is not the same as slope
Term
 Two reasons for downward sloping demand
Definition
 Income Effect and Substitution Effect
Term
 Income Effect
Definition
 lower prices means your real income has increased (you can afford to consume more)
Term
 Substitution Effect
Definition
 lower relative price induces a shift from other goods to this one
Term
 Market Demand Curve
Definition
 horizontal sum of individual demand curves (literally add up the quantities on the individual graphs to calculate the market curve)
Term
 Market Supply Curve
Definition
 horizontal sum of firm supply curves (add up the quantities and graph the summed points to construct the market curve)
Term
 Price Ceilings
Definition
 fixed 'highest price' charged for an item -> creates shortages, dead weight loss, Qs < Qd
Term
 Price Floors
Definition
 fixed 'lowest price' charged for an item -> creates surpluses, dead weight loss, Qd > Qs
Term
 Total Cost
Definition
 sum of fixed costs and variable costs
Term
 Fixed Costs
Definition
 do not vary with output (ex. buying a factory)
Term
 Variable Costs
Definition
 vary with output (ex. paying a higher water bill if you use more water)
Term
 Marginal Cost
Definition
 change in total cost due to one unit change in quantity produced -> curve goes through minimum of Average Cost curve
Term
 Firm's level of production (competitive)
Definition
 where price equals marginal cost -> if this is a competitive market, price = market price since the firm is a price taker
Term
 Profit
Definition
 = (price - average total cost) * quantity
Term
 Short run supply curve
Definition
 shifts as new firms enter -> slides show that short term produces a higher quantity than before for a higher price and then tends to an even higher quantity for a slightly lower price over the long run
Term
 Long run competitive equilibrium
Definition
 zero profit for a firm because P = ATC, market tends toward competitive equilibrium
Term
 Pareto Efficiency
Definition
 not possible to make someone better off without making someone else worse off
Term
 Pareto Efficiency Conditions
Definition
 1. Marginal Benefit = Marginal Cost2. Marginal cost is equal for every producer3. Marginal benefit is equal for every consumer
Term
 Monopoly
Definition
 price setter rather than price taker -> sets production quantity where marginal cost = marginal revenue, produce less for a higher price and create deadweight loss
Term
 Natural Monopoly
Definition
 situation in which the fixed or start up costs are extraordinarily high (high barriers to entry) and it is most efficient (lowest long run average cost) for production to be concentrated in one firm
Term
 Price Discrimination
Definition
 charging different prices to different groups of customers
Term
 Price Discrimination Rule
Definition
 equalize marginal revenue in all markets -> the less elastic the demand, the higher the price
Term
 Monopolistic Competition
Definition
 many differentiated products, free entry and exit into industry
Term
 Oligopoly
Definition
 few large firms, aware of interaction with rivals, barriers to entry, less product differentiation
Term
 Cartel
Definition
 when firms act jointly (collude) to maximize joint profits -> creates an incentive for them to cheat, since P > MC while they are underproducing
Term
 Reasons for Market Failure
Definition
 imperfect information, externalities, public goods
Term
 Externalities
Definition
 when private and social costs diverge (create deadweight loss) -> negative externalities cause oversupply, positive cause undersupply (surplus and shortage)
Term
 Four types of goods
Definition
 Private - E and R, Common - NE and R, Club - E and NR, Public - NE and NR -> E = excludable, R = rivalrous
Term
 Free-Rider problem
Definition
 nonexcludability means that people have no reason to pay
Term
 Labor Supply and Demand
Definition
 graphs wage v. quantity of labor with labor supply and labor demand. Market wage and quantity are the same as equilibrium elsewhere
Term
 Marginal Revenue Product of Labor
Definition
 change in total revenue from one more unit of labor -> for competitive firm, MRP = P*MPl, for firm with market power, MRP = MR*MPl
Term
 Labor Supply
Definition
 choice between work and leisure (meaning all other activities)
Term
 Labor Supply Curve
Definition
 is backward bending -> at bottom, substitution effect dominates and people work more for more pay; at middle, sub. and income effects balance and people work the same for more pay; at top, income effect dominates and people work less for more pay
Term
 Profit Max. in Monopsony
Definition
 Occurs where marginal expenditure on labor equals marginal revenue product of labor (MEl = MRPl), MEl curve is above the wage curve (both are supply lines and MRPl is demand line)
Term
Definition
 as quantity of capital stock issued goes up, price goes down -> long-run equilibrium equals the cost of production (I don't understand this graph, tbh)
Term
 Present Discounted Value
Definition
 PDV = R/(1+i) + R/(1+i)^2 + ... + R/(1+i)^n + F/(1+i)^n -> n = num periods, i = yield (market interest rate), R = coupon value, F = face value
Term
 Risk/Return relationship
Definition
 higher risk should correlate to higher return -> the graph is an upward sloping line, with risk on x axis and return on y. when points are off the risk/return line they tend to move towards it by shifting their price
Term
Definition
 when one country has a lower opportunity cost for making a good than another
Term
Definition
 factor abundance (applies especially to exports), technology, specialization (increasing returns - has intraindustry trade written here)
Term
 Factor Price Equalization
Definition
 the relative prices for two identical factors of production in the same market will eventually equal each other because of competition
Term
 S&D in Small Country Imports
Definition
 if Pworld is lower than Peq -> domestic consumption, quantity increase, price decreases, domestic production decreases but imports fill the gap
Term
 S&D in Small Country Exports
Definition
 if Pworld > Peq -> domestic consumption decreases, price increases to Pworld, domestic production increases, starts to export good
Term
 Effects of Tariff (Small Country)
Definition
 new price = Pworld + tariff, domestic production increases, imports decrease, consumption decreases
Term
Definition
Term
 Arguments for Protection
Definition
 national security, gov't revenue, infant industry, wage standards, environment, unfair practices, open foreign markets, terms of trade, job creation, strategic industries with spillovers
Term
 S&D for Large Country Imports
Definition
 effects look the same as small country...I really don't get this part...
Term
 Returns on capital
Definition
 they diminish
Term
 Growth rate of Y/L (yield over labor)
Definition
 = growth rate of T (technology) + 1/3 * growth rate of K/L (capital over labor)
Term
 Catch up theory
Definition
 those countries with lower Real GDP per capita should have higher growth rates because they benefit more from increased capital investment (so people invest more there)
Term
 Circular Flow
Definition
 spending = income
Term
 Nominal v. Real GDP
Definition
 Real GDP is calculated in terms of prices according to some base year, nominal GDP is calculated according to current prices
Term
 Actual v. Potential GDP
Definition
 actual is the actual GDP. potential is what you would get if everything was utilized perfectly efficiently
Term
 Real v. Nominal Interest Rates
Definition
 Real i (interest rate) = i - expected inflation
Term
 Labor Market Indicators
Definition
 Unemployment Rate (14/150), Labor-Force Participation Rate (150/300), Employment-Population Ratio (135/300)
Term
 Types of Unemployment
Definition
 seasonal, frictional, structural, cyclical (zero at the natural rate -> means the number of unemployed workers exceeds the number of job vacancies)
Term
 Efficiency Wage policies
Definition
 screening, effort levels
Term
 Long-Term Attachments
Definition
 insiders v. outsiders, the invisible handshake
Term
 Spending Approach to GDP
Definition
 Y = C + I + G + (X-M), consumption investment gov't exports imports
Term
 Income Approach to GDP
Definition
 labor income + capital income (profits, rent, interest, NOT capital gains) + indirect taxes + depreciation
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