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SU 2
Microeconomics
104
Accounting
Undergraduate 4
05/16/2015

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Term
What occurs in a free market economy?
Definition
Economic decisions are made by individuals, there is an interdependent relationship between consumers and businesses, and what get produced depends on the preferences of the end-user.
Term
What are the scarce resources in the economy?
Definition
Labor, capital, and natural resources
Term
Flow of resources (four main interrelated flows)
Definition
i. Individuals provide resources to businesses (people go to work)
ii. Businesses pay these individuals for these resources (employers pay workers)
iii. Businesses provide goods and services to consumers
iv. Individuals provide payment to businesses for these goods and services
Term
What should not decide resource allocation?
Definition
Government regulation, because price controls, which are attempts to remedy perceived unfairness in the market, are usu. ineffective.
Term
substitute commodity
Definition
meets the same basic need or want as another commodity.
When price of commodity A increases, demand decreases and shifts to substitutes.
Term
complementary commodity
Definition
used together with another commodity.
When price of commodity A increases, demand decreases and for the commodity for which it is complementary.
Term
demand curve
Definition
negatively sloped, with price on Y axis and quantity on X axis. As demand rises, quantity diminishes and price increases.
Term
What does the demand curve represent?
Definition
The impact the price has on the amount of product that will be purchased.
Term
demand vs. quantity demanded
Definition
demand change shifts the curve outward or inward. price change moves up or down the demand curve to reflect the change in Qd.
Term
market equilibrium
Definition
point at which the demand curve meets the supply curve, where price = quantity. Anyone can buy and anyone can sell.
Term
price ceiling
Definition
If the price for a good is fixed below market equilibrium because of a government mandate that it can go no higher, that will create excess demand/shortage because there is a price ceiling.
Term
price floor
Definition
If the price for a good is fixed above market equilibrium because of a government mandate that it can go no lower, that will create excess supply/surplus because there is a price floor.
Term
elasticity
Definition
measures the change in a market factor as a result of a change in another market factor.
Term
elasticity of demand (Ed)
Definition
the % change in quantity demanded as a result of the % change in the price. If the % price increase results in a greater % increase in Qd, then demand is elastic. Otherwise, demand is inelastic.
Term
elasticity of supply
Definition
the degree to which quantity supplied changes as a result of the % change in price.
Term
utility
Definition
satisfaction derived from the acquisition or use of a commodity
Term
marginal utility
Definition
satisfaction derived from each additional unit of a commodity
Term
law of diminishing marginal utility
Definition
with each additional unit of a commodity acquired, the utility provided goes down.
Term
perfect competition
Definition
large number of buyers and sellers, and so no single trader could have a significant impact on market prices. Demand curve would be perfectly horizontal. Products are standardized. No barriers to entry or exit. Perfect information.
Term
perfect monopoly
Definition
a single seller where there is no close substitute for the good(s) they sell.
Term
2 reasons for perfect monopoly
Definition
1. economies of scale- ability to produce at a lower cost than multiple producers due to a larger size/scale of operations.
2. Legal authority/control to produce the products.
Term
monopolistic competition
Definition
large number of sellers where the sellers sell differentiated products, and there are close substitutes for the products.
Term
oligopoly
Definition
In this type of market there are a small number of sellers, and these firms sell either similar or differentiated products. Thesr Entry to the market is restricted. Each seller in an oligopoly is large enough to influence market prices.
Term
cartel
Definition
group of firms that conspire to fix prices.
Term
economies of scale
Definition
ability to produce at a lower cost than multiple producers due to a larger size/scale of operations.
Term
Long-term profits are possible in monopolistic competition. True or false?
Definition
False. According to economic theory, in monopolistic competition long-term profits are not possible because if a firm is making profits in the short-run, more firms will enter the market until all firms are just breaking even.
Term
microeconomics
Definition
study of economic activity at the atomic level- actions of individual actors in the marketplace.
Term
demand (supply)
Definition
amounts of good/service that consumers are willing and able to purchase (producers are willing and able to supply) at various prices during a period of time.
Term
quantity demanded (quantity supplied)
Definition
amount that will be purchased (supplied) at a specific price during a period of time
Term
IPPEN (determinants of demand)
Definition
Incomes of consumers (normal and inferior goods)
Preferences of consumers
Prices of related goods (substitutes vs. complements)
Expectations of consumers
Number of consumers
Term
CNET (determinants of supply)
Definition
Costs of inputs (increased costs shifts supply curve leftward)
New technologies (rightward)
Expectations about price changes (rightward if expected increase)
Taxes and subsidies (rightward for T decrease or S increase)
Term
normal good
Definition
commodities for which demand is positively related to income
Term
inferior good
Definition
commodities for which demand is negatively related to income
Term
market demand (market supply)
Definition
sum of the individual demand (supply) curves of all buyers (sellers) in the market
Term
surplus (excess supply) vs. shortage (excess demand)
Definition
surplus: market price > equilibrium price
shortage: market price < equilibrium price
Term
point method
Definition
measures elasticity of demand (Ed) for a specific change in price
% change in Qd = (Qd after change – Qd before change) / Qd before change
Same with % change in P
Term
midpoint/arc method
Definition
measures Ed of a range for a specific price change; uses averages of the quantities and prices.
Ed = % change in Qd/ % change in P = [(Q1 – Q2) / (Q1 + Q2)] / [(P1 – P2) / (P1 + P2)]
Term
elasticity coefficient
Definition
If > 1, change in Qd > change in P, so demand is elastic.
If = 1, change in Qd > change in P, so demand is unitary elastic.
If < 1, change in Qd < change in P, so demand is inelastic.
Term
explicit/out-of-pocket costs
Definition
require actual cash disbursements. Are accounting costs recognized in the books.
Term
implicit/opportunity costs
Definition
not recognized in books; maximum benefit forgone by using a scarce resource for a given purpose instead of the next-best alternative. Normal profit is a crucial implicit cost.
Term
implicit/opportunity costs
Definition
not recognized in books; maximum benefit forgone by using a scarce resource for a given purpose instead of the next-best alternative. Normal profit is a crucial implicit cost.
Term
true hurdle for economic decisions
Definition
The true hurdle for an economic decision is if it will cover both explicit and implicit (total) costs. Economic cost- total costs.
Term
accounting profit
Definition
book income > book expenses
Term
economic/pure profit
Definition
book income > book expenses and implicit costs
Term
short-run
Definition
time period so brief that a firm cannot vary its fixed costs
Term
long-run
Definition
time period long enough that all inputs, including those incurred through fixed costs, can be varied
Term
marginal analysis
Definition
allows economic decisions to be made based on projecting the results of varying the levels of resource consumption and output production
Term
total product
Definition
entire production of a good or service for a given time period
Term
marginal product
Definition
additional output generated by adding one extra unit of input.
Also, MP = change in total output at a given level of input / change in inputs.
Term
law of diminishing marginal returns
Definition
As inputs are added, each additional unit of input leads to increased production. Past the point of diminishing marginal returns, the increase is smaller with each unit. Eventually, so many inputs are added that efficiency is compromised and total output actually begins to decrease.
Term
marginal revenue
Definition
additional/incremental revenue produced by generating one additional unit of output. Marginal revenue produces diminishing marginal returns as the seller must cut its price to sell additional units.
Term
maximum profit
Definition
proper output level; profit is maximized where marginal revenue = marginal cost. Revenue and cost data are both needed to determine this.
Term
marginal cost
Definition
additional/incremental costs incurred by generating one additional unit of output. Unit cost decreases as the process becomes more efficient. Past a certain point, efficiency decreases and unit cost increases.
Term
true hurdle for economic decisions
Definition
The true hurdle for an economic decision is if it will cover both explicit and implicit (total) costs. Economic cost- total costs.
Term
Average total cost (TC / Q)
Definition
sum of average fixed costs (AFC = FC / Q) and average variable costs (AVC = VC / Q).
Term
Increased fixed costs increase...
Definition
FC, AFC, TC and ATC, while not affecting VC or AVC.
Term
Does economies of scale occur for all big firms?
Definition
No. Economies of scale, where as production increases, avg. production costs decline occurs in some firms. For others, there are constant returns to scale and, for most, diseconomies of scale.
Term
constant returns to scale
Definition
sometimes, increased production does not change avg. costs
Term
diseconomies of scale
Definition
as most firms continue to expand output, the marginal cost of production tends to increase.
Usu. occurs b/c of the difficulty of managing a large-scale entity.
Term
In pure competition, are firms price makers or price takers?
Definition
All firms are price takers because they sell at the market price.
Term
In pure competition, marginal revenue is...
Definition
Marginal revenue = average revenue = market price.
Term
In perfect competition, where should firms produce?
Definition
Where it can earn profits or incur losses smaller than fixed costs, where marginal revenue = marginal cost.
Term
Is operating at a loss ever a wise business move in pure competition?
Definition
Operating at a loss may be preferred over shutting down when revenues cover all variable costs and some fixed costs (costs incurred even if the firm shuts down).
Term
In pure competition, which firms survive in the long-run?
Definition
Those with the lowest average total cost (ATC).
Term
In perfect competition, where should firms produce?
Definition
Where it can earn profits or incur losses smaller than fixed costs, where marginal revenue = marginal cost.
Term
Is operating at a loss ever a wise business move in pure competition?
Definition
Operating at a loss may be preferred over shutting down when revenues cover all variable costs and some fixed costs (costs incurred even if the firm shuts down).
Term
In pure competition, which firms survive in the long-run?
Definition
Those with the lowest average total cost (ATC).
Term
natural monopolies
Definition
exist when economic or technical conditions permit only one efficient supplier
Term
price maker
Definition
sets prices as high as it likes b/c there is no competition
Term
price searcher
Definition
does not set prices arbitrarily high but seeks the price that maximizes its profits
Term
price taker
Definition
(pure competition) sells at the market price because no one can influence the price in pure competition
Term
What happens to marginal revenue in a monopoly?
Definition
Marginal revenue decreases as output is raised. Past point where MR = $0, total revenue decreases. Demand curve is downward-sloping.
Term
How does a monopolist maximize profits?
Definition
Like everyone else, where MR = MC.
Term
Does the monopolist earn long-term economic profits?
Definition
Yes. The monopolist's revenue > than all book expenses and implicit costs. This is not the case in pure or monopolistic competition.
Term
Are resources allocated efficiently in monopolies?
Definition
Since output is restricted to MR = MC point, consumers have fewer goods and pay higher prices than under pure competition. Allocation of resources is inefficient because fewer resources are used in the production process than is justified by society's interests.
Term
e firms depend on each other for price, advertising, etc. In which forms of competition can price fixing occur?
Definition
Monopolies and oligopolies.
Term
What are barriers to entry for monopolistic competition?
Definition
The cost of differentiation.
Term
Economic profits in monopolistic competitions
Definition
If profit-maximizing price (Pmc) > minimum ATC, economic profit earned in the short-run and normal profit in the long-run since new entrants reduce economic profit to $0.
If profit-maximizing price (Pmc) < minimum ATC, loss incurred in the short-run and exit the industry in the long-run.
Term
kinked demand theory
Definition
firms will follow along with a price decrease by a competitor but not a price increase.
Term
What are the hazards of the kinked demand theory? (SLMC)
Definition
Small increase in price leads to a large decline in Qd (elastic portion).
Large price decrease is needed to generate even a modest increase in sales (inelastic portion).
Marginal revenue falls drastically upon the occurrence of a small price cut. Competitors must also reduce their prices so that the first firm gains no market share.
Term
What do firms do to avoid kinked demand?
Definition
To avoid the hazards of kinked demand, price leadership is typical- one major firm announces a price change and the others follow suit.
Term
What are cartels? What are the effects of cartels?
Definition
A cartel is a group of firms that colludes to set prices. This is illegal except in intl. markets. Economic effects similar to monopolies- restrict output, charge a higher price, and earn the maximum profit.
Each firm becomes a monopolist.
Term
Importance of resource planning
Definition
essential because profit maximization requires production of the optimal output at the least costs.
Term
Can resource markets be structured in any of the same forms as are markets for the final products?
Definition
Yes.
Term
derived demand
Definition
demand for inputs to the production process, or factors derived from the demand for the outputs of the process, or final goods
Term
What are the factors affecting the demand for resources?
Definition
Demand for final product produced by that resource.
Productivity of the resource.
Prices of other resources (substitutes vs. complements)
Term
substitution effect
Definition
substitution effect- if the price of resource A that can substitute for resource B falls, it will lead to a decrease in the demand for resource B and an increase in the demand for resource A.
Term
complement effect
Definition
If the price for resource A falls, then the demand for complementary resource C will increase.
Term
elasticity of resource demand
Definition
directly related to demand for final product, availability of substitutes, and the proportion of TC represented by the resource
Term
wage
Definition
amount paid to the factors of production; relates to amounts paid per unit of time
Term
nominal wages
Definition
amounts paid and received
Term
real wages.
Definition
actual purchasing power of nominal wages.
Term
How are real wages determined?
Definition
Real wages are determined by productivity (real output / hours worked) of labor.
Term
How does productivity (real output / hours worked) affect wages and labor?
Definition
As productivity increases, so does the demand for labor. Given a certain supply, greater demand will result in a higher average wage.
Term
Are firms and workers price takers or price makers? Or do they have different functions in this regard?
Definition
Both are price takers.
Term
market demand for labor
Definition
total of the individual firms' demand curves (their marginal revenue product (MRP) curves).
Term
Is the supply curve positive- or negative-sloping?
Definition
Market supply curve has positive slope b/c firms must raise wages to hire additional workers.
Term
Is the supply curve elastic or inelastic?
Definition
Supply curve is perfectly elastic (horizontal) and marginal revenue cost (MRC) is the same for all amounts of labor hired.
Term
monopsony
Definition
Only one employer; all sellers must sell to a single buyer.
Term
What is the marginal revenue cost (MRC) for a monopsonist?
Definition
For a monopsonist, the MRC exceeds the current rate for the resource b/c additional units of the resource can be obtained only by paying a higher rate for all resource units.
Term
How does a monopsonist maximize profits?
Definition
To maximize profits, a buyer of resources in a monopsony uses resources until MRP = MRC, just like MR = MC to maximize profits for all four forms of competition.
Term
How does a monopsonist fare in comparision to pure competition?
Definition
A monopsonist will pay a lower price, buy less of the resource and produce a lower output than when pure competition exists. This is great for employers/monopsonists and bad for employees.
Term
When and by what law were minimum wage laws established?
Definition
Established by Fair Labor Standards Act of 1938.
Term
Economic effects of unemployment with regard to monopsonies
Definition
Unemployment increases and the higher labor cost may drive some firms out of business, but it raises pay in monopsonies and may improve productivity and reduce employee turnover.
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