Term
| What occurs in a free market economy? |
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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. |
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Term
| What are the scarce resources in the economy? |
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Definition
| Labor, capital, and natural resources |
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Term
| Flow of resources (four main interrelated flows) |
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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 |
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Term
| What should not decide resource allocation? |
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Definition
| Government regulation, because price controls, which are attempts to remedy perceived unfairness in the market, are usu. ineffective. |
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Term
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Definition
meets the same basic need or want as another commodity.
When price of commodity A increases, demand decreases and shifts to substitutes. |
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Term
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Definition
used together with another commodity.
When price of commodity A increases, demand decreases and for the commodity for which it is complementary. |
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Term
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Definition
| negatively sloped, with price on Y axis and quantity on X axis. As demand rises, quantity diminishes and price increases. |
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Term
| What does the demand curve represent? |
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Definition
| The impact the price has on the amount of product that will be purchased. |
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Term
| demand vs. quantity demanded |
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Definition
| demand change shifts the curve outward or inward. price change moves up or down the demand curve to reflect the change in Qd. |
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Term
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Definition
| point at which the demand curve meets the supply curve, where price = quantity. Anyone can buy and anyone can sell. |
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Term
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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. |
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Term
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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. |
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Term
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Definition
| measures the change in a market factor as a result of a change in another market factor. |
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Term
| elasticity of demand (Ed) |
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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. |
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Term
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Definition
| the degree to which quantity supplied changes as a result of the % change in price. |
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Term
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Definition
| satisfaction derived from the acquisition or use of a commodity |
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Term
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Definition
| satisfaction derived from each additional unit of a commodity |
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Term
| law of diminishing marginal utility |
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Definition
| with each additional unit of a commodity acquired, the utility provided goes down. |
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Term
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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. |
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Term
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Definition
| a single seller where there is no close substitute for the good(s) they sell. |
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Term
| 2 reasons for perfect monopoly |
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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. |
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Term
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Definition
| large number of sellers where the sellers sell differentiated products, and there are close substitutes for the products. |
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Term
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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. |
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Term
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Definition
| group of firms that conspire to fix prices. |
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Term
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Definition
| ability to produce at a lower cost than multiple producers due to a larger size/scale of operations. |
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Term
| Long-term profits are possible in monopolistic competition. True or false? |
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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. |
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Term
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Definition
| study of economic activity at the atomic level- actions of individual actors in the marketplace. |
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Term
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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. |
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Term
| quantity demanded (quantity supplied) |
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Definition
| amount that will be purchased (supplied) at a specific price during a period of time |
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Term
| IPPEN (determinants of demand) |
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Definition
Incomes of consumers (normal and inferior goods)
Preferences of consumers
Prices of related goods (substitutes vs. complements)
Expectations of consumers
Number of consumers |
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Term
| CNET (determinants of supply) |
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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) |
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Term
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Definition
| commodities for which demand is positively related to income |
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Term
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Definition
| commodities for which demand is negatively related to income |
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Term
| market demand (market supply) |
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Definition
| sum of the individual demand (supply) curves of all buyers (sellers) in the market |
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Term
| surplus (excess supply) vs. shortage (excess demand) |
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Definition
surplus: market price > equilibrium price
shortage: market price < equilibrium price |
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Term
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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 |
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Term
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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)] |
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Term
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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. |
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Term
| explicit/out-of-pocket costs |
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Definition
| require actual cash disbursements. Are accounting costs recognized in the books. |
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Term
| implicit/opportunity costs |
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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. |
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Term
| implicit/opportunity costs |
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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. |
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Term
| true hurdle for economic decisions |
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Definition
| The true hurdle for an economic decision is if it will cover both explicit and implicit (total) costs. Economic cost- total costs. |
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Term
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Definition
| book income > book expenses |
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Term
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Definition
| book income > book expenses and implicit costs |
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Term
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Definition
| time period so brief that a firm cannot vary its fixed costs |
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Term
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Definition
| time period long enough that all inputs, including those incurred through fixed costs, can be varied |
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Term
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Definition
| allows economic decisions to be made based on projecting the results of varying the levels of resource consumption and output production |
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Term
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Definition
| entire production of a good or service for a given time period |
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Term
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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. |
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Term
| law of diminishing marginal returns |
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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. |
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Term
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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. |
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Term
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Definition
| proper output level; profit is maximized where marginal revenue = marginal cost. Revenue and cost data are both needed to determine this. |
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Term
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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. |
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Term
| true hurdle for economic decisions |
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Definition
| The true hurdle for an economic decision is if it will cover both explicit and implicit (total) costs. Economic cost- total costs. |
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Term
| Average total cost (TC / Q) |
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Definition
| sum of average fixed costs (AFC = FC / Q) and average variable costs (AVC = VC / Q). |
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Term
| Increased fixed costs increase... |
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Definition
| FC, AFC, TC and ATC, while not affecting VC or AVC. |
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Term
| Does economies of scale occur for all big firms? |
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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. |
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Term
| constant returns to scale |
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Definition
| sometimes, increased production does not change avg. costs |
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Term
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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. |
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Term
| In pure competition, are firms price makers or price takers? |
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Definition
| All firms are price takers because they sell at the market price. |
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Term
| In pure competition, marginal revenue is... |
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Definition
| Marginal revenue = average revenue = market price. |
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Term
| In perfect competition, where should firms produce? |
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Definition
| Where it can earn profits or incur losses smaller than fixed costs, where marginal revenue = marginal cost. |
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Term
| Is operating at a loss ever a wise business move in pure competition? |
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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). |
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Term
| In pure competition, which firms survive in the long-run? |
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Definition
| Those with the lowest average total cost (ATC). |
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Term
| In perfect competition, where should firms produce? |
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Definition
| Where it can earn profits or incur losses smaller than fixed costs, where marginal revenue = marginal cost. |
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Term
| Is operating at a loss ever a wise business move in pure competition? |
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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). |
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Term
| In pure competition, which firms survive in the long-run? |
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Definition
| Those with the lowest average total cost (ATC). |
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Term
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Definition
| exist when economic or technical conditions permit only one efficient supplier |
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Term
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Definition
| sets prices as high as it likes b/c there is no competition |
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Term
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Definition
| does not set prices arbitrarily high but seeks the price that maximizes its profits |
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Term
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Definition
| (pure competition) sells at the market price because no one can influence the price in pure competition |
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Term
| What happens to marginal revenue in a monopoly? |
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Definition
| Marginal revenue decreases as output is raised. Past point where MR = $0, total revenue decreases. Demand curve is downward-sloping. |
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Term
| How does a monopolist maximize profits? |
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Definition
| Like everyone else, where MR = MC. |
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Term
| Does the monopolist earn long-term economic profits? |
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Definition
| Yes. The monopolist's revenue > than all book expenses and implicit costs. This is not the case in pure or monopolistic competition. |
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Term
| Are resources allocated efficiently in monopolies? |
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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. |
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Term
| e firms depend on each other for price, advertising, etc. In which forms of competition can price fixing occur? |
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Definition
| Monopolies and oligopolies. |
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Term
| What are barriers to entry for monopolistic competition? |
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Definition
| The cost of differentiation. |
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Term
| Economic profits in monopolistic competitions |
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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. |
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Term
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Definition
| firms will follow along with a price decrease by a competitor but not a price increase. |
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Term
| What are the hazards of the kinked demand theory? (SLMC) |
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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. |
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Term
| What do firms do to avoid kinked demand? |
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Definition
| To avoid the hazards of kinked demand, price leadership is typical- one major firm announces a price change and the others follow suit. |
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Term
| What are cartels? What are the effects of cartels? |
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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. |
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Term
| Importance of resource planning |
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Definition
| essential because profit maximization requires production of the optimal output at the least costs. |
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Term
| Can resource markets be structured in any of the same forms as are markets for the final products? |
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Definition
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Term
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Definition
| demand for inputs to the production process, or factors derived from the demand for the outputs of the process, or final goods |
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Term
| What are the factors affecting the demand for resources? |
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Definition
Demand for final product produced by that resource.
Productivity of the resource.
Prices of other resources (substitutes vs. complements) |
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Term
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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. |
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Term
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Definition
| If the price for resource A falls, then the demand for complementary resource C will increase. |
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Term
| elasticity of resource demand |
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Definition
| directly related to demand for final product, availability of substitutes, and the proportion of TC represented by the resource |
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Term
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Definition
| amount paid to the factors of production; relates to amounts paid per unit of time |
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Term
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Definition
| amounts paid and received |
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Term
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Definition
| actual purchasing power of nominal wages. |
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Term
| How are real wages determined? |
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Definition
| Real wages are determined by productivity (real output / hours worked) of labor. |
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Term
| How does productivity (real output / hours worked) affect wages and labor? |
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Definition
| As productivity increases, so does the demand for labor. Given a certain supply, greater demand will result in a higher average wage. |
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Term
| Are firms and workers price takers or price makers? Or do they have different functions in this regard? |
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Definition
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Term
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Definition
| total of the individual firms' demand curves (their marginal revenue product (MRP) curves). |
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Term
| Is the supply curve positive- or negative-sloping? |
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Definition
| Market supply curve has positive slope b/c firms must raise wages to hire additional workers. |
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Term
| Is the supply curve elastic or inelastic? |
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Definition
| Supply curve is perfectly elastic (horizontal) and marginal revenue cost (MRC) is the same for all amounts of labor hired. |
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Term
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Definition
| Only one employer; all sellers must sell to a single buyer. |
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Term
| What is the marginal revenue cost (MRC) for a monopsonist? |
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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. |
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Term
| How does a monopsonist maximize profits? |
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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. |
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Term
| How does a monopsonist fare in comparision to pure competition? |
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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. |
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Term
| When and by what law were minimum wage laws established? |
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Definition
| Established by Fair Labor Standards Act of 1938. |
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Term
| Economic effects of unemployment with regard to monopsonies |
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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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