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Intro to Econ Keyterms: Test 2
Key terms for Intro to Econ: Test 2
25
Economics
Undergraduate 1
10/13/2010

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Term
Marginal Cost
Definition
the increase in total cost that arises from an extra unit of production

MC function is identical to supply function

MC=price firms pays for an input/MP
Term
Marginal Revenue
Definition
the change in total revenue from an additional unit sold
Term
Marginal Product
Definition
the increase in output that arises from an additional unit of input
Term
Marginal Utility
Definition
a measure of happiness or satisfaction a consumer experiences when purchasing a product

MU function is identical to demand function
Term
Perfectly Competitive Market Firm
Definition
1. Marginal Costs (MC) are equal to Marginal Benefits (MB) or Marginal Utility (MU) on graph

2. Normal profits are earned, meaning only enough profit to keep firm in business

3. Average Total Cost (ATC) is minimized, meaning the firm's productivity is 100% efficient

Firms prices in a perfectly competitive market are perfectly elastic, meaning firms can't change their prices, only quantity supplied.

Marginal Revenue is equal to Demand as opposed to in Monopolistic Functions.
Term
Monopolistic Firm
Definition
1. Products will be produced at a non-optimal level of output-instead level of output will be at which Marginal Revenue (MR) will be equal to Marginal Costs (MC)

2. Above normal profits will be earned by the firm due to the lack of firms to compete with this one

3. Firm isn't as productively efficient as it could be, meaning more products could be coming to the market where the MB outweighs the MC, but these products aren't being produced

Prices have inelasticity, but are not quite perfectly inelastic because of certain constraints. Demand does change based on price.

The Marginal Revenue function is more steeply sloped than the Demand function, meaning that Marginal Revenue always (besides at the start of the graph) is less than Demand.
Term
Negative Externalities
Definition
Costs unaccounted for by a firm and as a result paid by the community, not the firm

Means too much production is occurring and that supply function is further right that otherwise would be

Quantity being supplied is a quantity at which social marginal costs are greater than social marginal benefits
Term
Free Riding
Definition
When consumers have access to a product without having to pay for it

Too little production is occurring, meaning the supply function is further left than it otherwise would be
Term
Downwardly Stick Wages
Definition
Perfectly competitive market model states that when there is a set price for labor and supply exceeds demand in the labor market, workers will compete by bidding the price down. This concept, however, does not occur in real life.
Term
Wage
Definition
Cost of unit of labor
Term
Average Total Cost
Definition
Costs of production that take into account three factors:

1. Variable Cost

2. Fixed Cost

3. Opportunity Cost

ATC can be calculated by combining variable costs, fixed costs, and opportunity costs and then dividing by quantity (level of output).

ATC is minimized when it is equal to MC.
Term
Variable Cost
Definition
Cost subject to change due to various inputs

Summation of the marginal costs

Most often labor
Term
Fixed Cost
Definition
Costs that occur because the firm exists

Costs are not subject to change
Term
Opportunity Cost
Definition
Costs that are foregone by the existence of the firm (could be earning money elsewhere, but aren't because of present firm)
Term
Diminishing Returns
Definition
Malthus' theory that economic growth will inevitably fall due to the growing population and limited amount of land available. Diminishing Returns has set in as soon as Marginal Product decreases, meaning that level of output will not increase but in fact decrease as a result of hiring new units of labor. This means that it costs more for a firm to hire an extra unit of labor than to not, proof that Marginal Costs will rise as a result of Diminishing Returns.
Term
Big Firms
Definition
Better able to introduce technology than smaller firms, shifting the supply function to the right (long run).

When big firms are subjected to diminishing returns, scarcity will occur (short run).
Term
"Cleared" Market
Definition
When supply equals demand
Term
Externalized Cost
Definition
Difference between what a firm pays for its production and what society must pay as a result of production
Term
Unemployment
Definition
Includes those in the labor market seeking work, but are unable to find it.

If unemployment can't be solved due to sticky wages, alternative is to undertake gov. policy that shifts the demand function to the right (create need for public jobs).
Term
Types of Market Failure
Definition
1. Negative Externalities

2. Free Riding

3. Monopolistic Disadvantages

4. Downwardly Sticky Wages
Term
Public Goods
Definition
Goods that are accessible to the public without paying for them
Term
Scarcity
Definition
Fundamental problem of economics

Satisfying material wants or needs of people-can't be done

Lack of materials or unsatisfied wants is scarcity

2 ways to solves scarcity:
Economic Development (Markets)
An institutionalized mechanism whereby what’s available is allocated or distributed to the population (communism)
Term
Demand Function
Definition
Downwardly sloped function (in PCM and Monopolies) that determines the want or demand of a product.

Identical to the Marginal Utility or Marginal Benefits function.

Determined by:
1. Tastes and Preferences

2. Distribution of Income

3. Prices of Other Goods
Term
Supply Function
Definition
Function that determines how much a firm will supply based on costs.

Identical to Marginal Cost Function.
Term
Most Efficient Level of Production
Definition
ATC=MC
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