Term
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Definition
| the ability to produce a good at a lower opportunity cost than another producer |
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Term
| A person can have the comparative advantage in how many goods? |
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Definition
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Term
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Definition
| The ability to produce a good using fewer inputs than another producer |
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Term
| A person may have the absolute advantage in how many goods? |
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Definition
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Term
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Definition
| What must be given up to obtain some item |
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Term
| How to calculate opportunity cost |
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Definition
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Term
| Characteristics of Competitive Markets |
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Definition
Large number of buyers and sellers
No buyer or seller has control (price takers)
Good are identical
All goods are private |
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Term
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Definition
| An increase in price will reduce the quantity demanded |
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Term
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Definition
| In increase in price will increase the quantity supplied |
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Term
| Factors that shift Supply |
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Definition
| Input prices, Technology, Expectations, Number of sellers |
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Term
| Factors that shift Demand |
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Definition
| Income, Prices of substitutes or compliments, Tastes, expectations, number of buyers |
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Term
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Definition
| Measures how much the quantity demanded responds to a change in price; how willing consumers are to buy less of a good as the price of that good rises |
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Term
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Definition
| measures how much the quantity supplied responds to changes in price; depends on the flexibility of sellers to change the amount of the good they produce |
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Term
| Is supply normally elastic or inelastic in the long run? |
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Definition
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Term
| Income Elasticity of Demand |
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Definition
| a measure of how much the quantity demanded of a good responds to a change in a consumers income |
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Term
| What is the formula for Income Elasticity? |
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Definition
| % change in QD/ % change in income |
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Term
| What is the IE of a necessity? |
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Definition
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Term
| What is the IE of a luxury? |
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Definition
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Term
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Definition
| Measures how much the quantity demanded of a good responds to a change in the price of another good |
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Term
| If CPE is negative, the goods are ________. |
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Definition
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Term
| If CPE is positive, the goods are ______. |
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Definition
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Term
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Definition
| % change in QD of good 1/ % change in price of good 2 |
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Term
| If demand is elastic, TR _________ |
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Definition
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Term
| If demand is inelastic, TR _______ |
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
| The more specific something is the more _______ it will be. |
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Definition
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Term
| The more substitutes something has the more ________ it will be. |
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Definition
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Term
| What happens to consumer surplus when price increases? |
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Definition
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Term
| What happens to producer surplus when price increases? |
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Definition
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Term
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Definition
| the seller who would leave the market if prices were any lower |
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Term
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Definition
| the buyer who would leave the market is the price were any higher |
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Term
| If demand shifts, you are unsure about _________. |
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Definition
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Term
| If supply shifts, you are unsure about ________ |
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Definition
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Term
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Definition
| is the property of a resource allocation of maximizing the total surplus received by all members of society |
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Term
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Definition
| is the fairness of the distribution of well being among various buyers and sellers |
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Term
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Definition
| Things that are explicitly purchased |
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
| What if Economic Profit is negative? |
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Definition
| You're not doing as well as you could be and you should go with your other alternative |
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Term
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Definition
| Tells us the output the firm gets when they use a certain amount of capital and labor |
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Term
| Inputs in the short run and long run |
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Definition
SR - at least input is fixed
LR - all are variable |
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Term
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Definition
| the increase in quantity when one more worker is hired |
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Term
| Diminishing marginal product |
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Definition
| the point where MPL is no longer increasing, but actually decreasing |
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Term
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Definition
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Term
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Definition
| Costs that do not change with quantity; cost where Q = 0 |
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Term
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Definition
| costs that do change with quantity; ex. labor |
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
| LR ATC falls as production increases; input < output |
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Term
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Definition
| LR ATC rises as production increases; input > output |
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Term
| Constant Returns to Scale |
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Definition
| LR ATC stays the same as production increases; input = output |
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Term
| Characteristics of Competitive Markets |
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Definition
many firms/many buyers
identical products
no barriers to entry
everyone is well informed |
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Term
| How is price determined for firms in a competitive market? |
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Definition
| The market sets the price at the intersection of S and D, and the firm follows. |
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Term
| In a competitive market, price is.... |
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Definition
| equal to demand and is perfectly elastic (horizontal line) |
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Term
| In the long run, perfect competition will produce where? |
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Definition
| at the lowest point of the ATC curve |
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Term
| If D > AVC, should the firm stay open or shut down? |
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Definition
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Term
| If D < ATC, should the firm stay open or shut down? |
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Definition
| Shut down and exit in the LR |
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Term
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Definition
| Limit supply and charge a high price for their goods |
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Term
| Characteristics of Single Price Monopoly |
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Definition
Barriers to entry - earning them LR profits
No close substitutes
Controls a scarce resource |
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Term
| Where is Q set in a single price monopoly? |
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Definition
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Term
| Where is P set in a single price monopoly? |
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Definition
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Term
| What is a natural monopoly? |
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Definition
| when one firm can provide a service for a lower cost than two firms |
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Term
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Definition
| the amount of surplus lost because of underproduction; inefficiency |
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Term
| If P > MC = MR, what kind of market are we talking about? |
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Definition
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Term
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Definition
| when a firm charges different groups of customers different prices for the same good or service |
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Term
| Perfect Price discrimination |
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Definition
| when the firm knows each individuals WTP and charges them that amount |
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Term
| Characteristic of Monopolistic Competition |
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Definition
Lots of firms
No barriers to entry
Differentiated product
downward sloping D curve |
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Term
| Where is Q set in a monopolistic competition market? |
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Definition
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Term
| Where is P set in a monopolistic competition market? |
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Definition
| Where Q intersects D & ATC |
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Term
| What is the difference in the long run equilibrium for perfectly competitive markets and monopolistic competitive markets? |
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Definition
Perfect - produces at the minimum point of ATC
Monopolistic - does not produce at minimum point of ATC |
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Term
| The Product Variety Externality |
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Definition
| positive externality in a monopolistically competitive market; consumers acquire surplus when a new product is introduced |
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Term
| The Business-Stealing Externality |
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Definition
| a negative externality in a monopolistically competitive market; firms lose customers and profit when a new competitor enters the market |
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Term
| Advertising in a monopolistically competitive market |
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Definition
| Can delay NOT prevent a firm from shutting down/exiting the market |
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Term
| Characteristics of Oligopoly |
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Definition
Few firms
Medium Barriers to entry |
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Term
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Definition
| multiple oligopolies acting together as a monopoly to maximize profits (reduces total surplus) |
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Term
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Definition
| no player can make himself better off by changing only his own action; where there are two circles in the same square |
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Term
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Definition
| a player will change his decision based on the other person's decisions |
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Term
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Definition
| A player will do the same thing and be better off regardless of the actions of the rival |
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Term
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Definition
Each players has a dominant strategy
There is a single equilibrium
Both players are worse off in the equilibrium
conflict between individual gain and group gain |
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Term
| Production Function Inputs |
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Definition
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Term
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Definition
| a firm's demand for a factor of production is derived from its decision to supply a good in another market |
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Term
| As VMPL increases, the demand for that input ______ |
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Definition
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Term
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Definition
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Term
| If price increases, Demand (VMPL) _______ |
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Definition
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Term
| Competitive Profit Maximizing Firms: |
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Definition
| maximize profits where VMPL = equilibrium market wage |
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Term
| Factor that shift Labor Demand |
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Definition
| output price, technology, supply of other factors |
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Term
| Factors that shift labor supply |
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Definition
changes in tastes, changes in alternative opportunities,
immigration |
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Term
| The market for land is _______ |
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Definition
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Term
| The market for capital is ________ |
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Definition
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Term
| Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade, then.... |
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Definition
Germany will produce more cars than it would produce in the absence of trade
The two countries combined output of both goods will be higher than it would be in the absence of trade
Greece will produce more fish than it would produce in the absence of trade |
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Term
| Suppose an economy produces food and machines and it always operates ON the ppf. Last year it produced 50 units of food and 30 machines. This year is produced 55 units of food and 33 machines. Which of the following could NOT explain the increase in output: an improvement in technology, an increase in available labor, reduction in unemployment. |
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Definition
| A reduction in unemployment |
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Term
| If for two goods, the cross-price elasticity of demand is 1.25, then the two goods are _________ |
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Definition
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Term
| When demand is inelastic, a decrease in price will cause.... |
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Definition
| a decrease in total revenue |
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Term
| Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result.... |
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Definition
| the equilibrium quantity decreases, and the equilibrium price is unchanged |
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Term
| Computers and printer are compliments. An increase in the price of computers will cause.... |
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Definition
| a decrease in the demand for printers and a decrease in the quantity supplied of printers |
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Term
| In the long run, the quantity supplied of most goods can/cannot respond substantially to a change in price? |
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Definition
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Term
| If the wage of current workers a a bicycle plant increase by a dollar, then it is likely that.... |
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Definition
| the supply of bicycles will shift to the left |
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Term
| Assume that a 4% increase in income results in a 2% increase in the qty demanded of a good. The IE of demand for the good is.... |
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Definition
| positive and therefore the good is a normal good |
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Term
| Absolute advantage is found by comparing different producers' ______________ |
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Definition
| input requirements per unit of output |
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Term
| Two goods are substitutes when a decrease in the price of one good.... |
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Definition
| decreases the qty demanded of another good |
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Term
| "When the price of a good decreases, buyers purchase more of the good"....is a good representation of what? |
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Definition
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Term
| What would happen to the equilibrium price and qty of peanut butter is the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you? |
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Definition
| Price will rise and the effect on quantity is ambiguous.. |
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Term
| A market demand curve shows... |
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Definition
| how much of a good all buyers are willing and able to buy at each possible price. |
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Term
| A market where there are so many buyers and so many sellers that each has a negligible impact on the price of the product is what kind of market? |
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Definition
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Term
| The opportunity cost of obtaining more of one good is shown on the PPF as the ... |
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Definition
| amount of the other good that must be given up |
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Term
| If an economy is producing efficiently, on the PPF, then... |
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Definition
| there is no way to produce more of one good without producing less of another good |
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Term
| The demand for Neapolitan ice cream is likely quite elastic because... |
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Definition
| other flavors of ice cream are good substitutes for this particular flavor |
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Term
| For a particular good, a 12% increase in price causes a 3% decrease in qty demanded. What does this IE tell us? |
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Definition
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Term
| If Francis experiences a decrease in his income, then we would expect Francis's demand for... |
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Definition
| normal goods to decrease, and dmd for inferior goods to increase |
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Term
| If the price elasticity of supply for a good is equal to infinity, then.... |
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Definition
| the supply curve is horizontal |
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Term
| A supply curve slopes upward because... |
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Definition
| an increase in price gives producers an incentive to supply a larger quantity |
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Term
| When consumers face rising gasoline prices, they typically.... |
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Definition
| reduce their qty demanded more in the LR than in the SR |
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Term
| The flatter the D curve through a given point, the... |
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Definition
| greater the price elasticity of demand at that point |
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Term
| The particular price that results in QS being equal to QD is the best price because... |
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Definition
| it maximizes the combined welfare of buyers and sellers |
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Term
| In a market, the marginal buyer is the buyer... |
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Definition
| who would be the first to leave the market if prices were any higher |
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Term
| Diminishing marginal product suggests that the marginal... |
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Definition
| product of an extra worker is less than the previous worker's marginal product |
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Term
| The efficient scale of the firm is the qty of output that.. |
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Definition
| minimizes average total cost |
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Term
Which is an example of an implicit cost:
salaries paid to owners who work for the firm
interest on money borrow to finance purchases
foregone rent on office space owned/used by firm
cash payments for raw materials |
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Definition
| foregone rent on office space owned/used by firm |
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Term
Which of the following will cause an increase in producer surplus:
the price of a sub. increases
buyers expect the price of the good to be lower next month
income increases and buyers consider the good to be inferior
the imposition of a binding price ceiling in the mkt |
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Definition
| the price of a substitute increases |
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Term
| A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes... |
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Definition
| decreases, and the consumer surplus for red wine decreases |
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Term
| When marginal cost is less than ATC... |
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Definition
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Term
| Efficiency in a market is achieved when... |
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Definition
| the sum of producer surplus and consumer surplus are maximized |
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Term
| Willingness to pay measures... |
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Definition
| the value that a buyer places on a good |
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Term
| If a consumer places a value of $15 on a good and the selling price is $17, will he purchase the good? |
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Definition
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Term
| Economies of scale occur when a firm's... |
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Definition
| long run ATC are decreasing as output increases |
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Term
| Total surplus is represented by the area below the... |
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Definition
| demand curve and above the supply curve up to the equilibrium qty |
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Term
|
Definition
change in total cost/change in qty produced &
change in variable cost/change in qty produced |
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Term
| Economists normally assume that the goal of a firm is to... |
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Definition
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Term
| A natural monopoly occurs when... |
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Definition
| there are economies of scale over the relevant range of output |
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Term
| What happens when the prisoner's dilemma is repeated numerous times in an oligopoly market? |
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Definition
The firms may well reach the monopoly outcome.
Buyers of the oligopolists' product will likely be worse off as a result. |
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Term
| The profit maximization problem for a monopolist differs from that of a competitive firm in which way? |
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Definition
| A competitive firm maximizes profit at the point where AVG Revenue equals MC; a monopolist maximizes profit at the point where AVG Revenue exceeds MC |
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Term
| Each firm in a monopolistically competitive firm faces a downward sloping demand curve because.... |
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Definition
| the firm's product is different from those offered by other firms in the market. |
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Term
| A firm's marginal cost has a minimum value of $2, AVC of $4, and ATC of $5. The firm will shut down if the price of its product falls below what price? |
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Definition
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Term
| For a profit-maximizing monopolistically competitive firm, price exceeds MC in... |
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Definition
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Term
| The DWL associated with a monopoly occurs because the monopolist... |
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Definition
| produces an output less then the socially optimal level |
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Term
| In the LR both monopolistically competitive and perfectly competitive firms produce where P = ATC or where P = MC? |
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Definition
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|
Term
| What do the output and price effects have on a monopoly's revenue when it increases its output and sales? |
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Definition
| The output effect works to increase TR, and the price effect works to decrease TR |
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Term
| If firms in a monopolistically competitive market are earning economic profits, what is a change they should expect to see as the market adjusts to the long-run equilibrium? |
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Definition
| A decrease in demand for each firm |
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Term
| A monopolistically competitive firm: |
|
Definition
experiences a zero profit in a long-run equilibrium
is said to have excess capacity
has the usual DWL of monopoly pricing |
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Term
| 3 Rules of Profit Maximization Decisions |
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Definition
1) If MR < MC, the firm should decrease its output
2) If MR = MC the firm should continue producing its current level of output
3) If MR > MC, the firm should increase its output |
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Term
| A monopolistically competitive industry is characterized by... |
|
Definition
| many firms selling products that are similar but not identical. |
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Term
| For all competitive firms... |
|
Definition
| Average Revenue = Price of the good |
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Term
| What are necessary characteristics of a monopoly? |
|
Definition
The firm is the sole seller of its product.
The firm's product does not have close substitutes |
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Term
| The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses and many sellers have left the industry. Economic theory suggests that these conditions will.... |
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Definition
| cause the market supply to decline and the price of textiles to rise. |
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Term
| Resale Price Maintenance is... |
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Definition
| when a firm requires that a firm reselling its product do so at a specific price |
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Term
| To move the allocation of resources closer to the social optimum, policy makers should typically try to induce firms in an oligopoly to... |
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Definition
| compete rather then cooperate with each other. |
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Term
| A firm in a monopolistically competitive market is similar to a monopoly is which ways? |
|
Definition
1) they both face downward sloping demand curves
2) they both charge a price that exceeds marginal cost |
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Term
| In a competitive market, no single producer can influence the market price because... |
|
Definition
| many other sellers are offering a product that is essentially identical |
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Term
| Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash Equilibrium, it always in their best interest to... |
|
Definition
| leave their quantities supplied unchanged |
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Term
| A distinguishing feature of an oligopolistic industry is the tension between... |
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Definition
| cooperation and self-interest |
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Term
| When oligopolies collude, they are behaving as _______ |
|
Definition
|
|
Term
|
Definition
| Average Revenue = Marginal Revenue |
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Term
| If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by... |
|
Definition
| selling more units at a lower price per unit |
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Term
| As new firms enter a monopolistically competitive market, profits of existing firms... |
|
Definition
| decline, and product diversity in the market increases |
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Term
| The demand curve facing a competitive firm is _______, whereas the demand curve facing a monopolist is ________. |
|
Definition
| horizontal; downward sloping |
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Term
| The equilibrium quantity in markets characterized by oligopoly is... |
|
Definition
| higher than in monopoly markets and lower than in perfectly competitive markets |
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Term
| Critics of advertising argue that in some markets advertising may... |
|
Definition
| decrease elasticity of demand allowing firms to charge a lower markup over marginal cost |
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