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Demand schedule
answer
table showing relationship between price of product and quantity of product demanded
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quantity demanded
answer
amount of product a consumer is willing & able to purchase at a given price
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demand curve
answer
curve showing relationship between price of product & quantity demanded
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market demand
answer
demand by all consumers of a good or service
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law of demand
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holding everything else constant, when price of a product falls, quantity demanded will increase and vice versa
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substitution effect
answer
change in quantity demanded of a good that results in change in price making the good more or less expensive relative to other substitutes
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income effect
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change in quantity demanded of a good that results from effect of a change in price on the consumer's purchasing power
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ceteris paribus condition
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when analyzing relationship between two variables, all other variables must remain constant
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variables shifting demand curve
answer
1. income
2. population & demographics
3. tastes
4. expected future prices
5. prices of related goods
2. population & demographics
3. tastes
4. expected future prices
5. prices of related goods
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quantity supplied
answer
amount of good or service a firm is willing and able to supply at a given price
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law of supply
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holding everything else constant, increases in price cause increases in quantity supplied and vice versa
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variables that shift supply curve
answer
1. price of input
2. technological changes
3. price of substitute in production
4. number of firms in the market
5. expected future prices
2. technological changes
3. price of substitute in production
4. number of firms in the market
5. expected future prices
question
competitive market equilibrium
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a market equilibrium with many buyers and sellers
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price floor
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legally determined minimum price above equilibrium
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price ceiling
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legally determined maximum price below equilibrium
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consumer surplus
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the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price (benefit - amt paid)
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producer surplus
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the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price
(amt received - production costs)
(amt received - production costs)
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marginal benefit
answer
the additional benefit to a consumer from consuming one more unit of a good or service
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marginal cost
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the additional cost to a firm of producing one more unit of a good or service
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economic surplus
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the sum of consumer surplus and producer surplus
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economic efficiency
answer
- marginal benefit to consumers of the last unit produced is equal to its marginal cost of production
- sum of consumer surplus and producer surplus is at a maximum
- sum of consumer surplus and producer surplus is at a maximum
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deadweight loss
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the reduction in economic surplus resulting from a market not being in competitive equilibrium
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black market
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a market in which buying and selling take place at prices that violate government price regulations
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tax incidence
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the actual division of the burden of a tax between buyers and sellers in a market
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technology
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the processes a firm uses to turn inputs into outputs of goods and services
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technological change
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a change in the ability of a firm to produce a given level of output with a given quantity of inputs
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short term
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period of time where at least one input is fixed
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long run
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the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
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production function
answer
the relationship between quantity of inputs used to make a good and the quantity of output of that good
represents firm's technology
represents firm's technology
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law of diminishing returns
answer
adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline
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increase in marginal product of labor result from what?
answer
division of labor & specialization
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economies of scale
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the firm's long-run average costs falling as it increases the quantity of output it produces
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constant returns to scale
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A firm's long run average costs remain unchanged as it increases output
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minimum efficient scale
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the level of output at which all economies of scale are exhausted
minimum LRAC is reached
minimum LRAC is reached
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diseconomies of scale
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the situation in which a firm's long-run average costs rise as the firm increases output
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perfectly competitive industry
answer
many firms, identical products, easy entry
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monopolistic competition
answer
many firms, different products, easy entry
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oligopoly
answer
market structure where small number of interdependent firms compete
few firms, identical or differentiated products, low ease of entry
few firms, identical or differentiated products, low ease of entry
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monopoly
answer
firm that is the only seller of a good or service that doesn't have a close substitute
one firm, unique product, entry blocked
one firm, unique product, entry blocked
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price taker
answer
a buyer or seller that is unable to affect the market price
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sunk cost
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a cost that has already been paid and cannot be recovered
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shutdown point
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the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
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productive efficiency
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a situation in which a good or service is produced at the lowest possible cost
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allocative efficiency
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production represents consumer preferences until MB = MC
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concentration ratio
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states the fraction of each industry's sales accounted for by its 4 largest firms (>40% is oligopoly)
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barrier to entry
answer
anything that keeps new firms from entering an industry where firms are earning economic profits
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types of barriers to entry
answer
1. Economies of Scale
2. Government-Created Barriers
3. Control of a key input
2. Government-Created Barriers
3. Control of a key input
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game theory
answer
study of how people make decisions where their goals depend on their interactions with others
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business strategies
answer
actions that a firm takes to achieve a goal, such as maximizing profits
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collusion
answer
agreement among firms to charge the same price or not to compete
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dominant strategy
answer
a strategy that is the best for a firm, no matter what strategies other firms use
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nash equilibrium
answer
equilibrium where each firm chooses the best strategy given the strategies chosen by other firms
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cooperative equilibrium
answer
equilibrium in a game where players cooperate to increase mutual payoff
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noncooperative equilibrium
answer
equilibrium in a game where players don't cooperate but pursue their own self-interest
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prisoner's dillema
answer
pursuing dominant strategies results in noncooperation that leaves everyone worse off
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enforcement mechanism
answer
Guarantees that if either store fails to cooperate and charges the lower price, the competing store will automatically punish that store by also charging the lower price.
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price leadership
answer
form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
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five competition forces model
answer
1. competition from existing firms
2. threat from new entrants
3. competition from substitute goods or services
4: bargaining power of buyers
5. bargaining power of suppliers
2. threat from new entrants
3. competition from substitute goods or services
4: bargaining power of buyers
5. bargaining power of suppliers
question
monopolies come from
answer
1. govt blocks entry of >1 firm into a market
2. one firm has control of a key resource
3. important network externalities in supplying good or service
4. economies of scale large that one firm has a natural monopoly
2. one firm has control of a key resource
3. important network externalities in supplying good or service
4. economies of scale large that one firm has a natural monopoly
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network externalities
answer
usefulness of a product increases with number of consumers who use it
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virtuous cycle
answer
If a firm can attract enough customers initially, it can attract additional customers because the value of its product has been increased by more people using it, which attracts even more customers and so on.
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natural monopoly
answer
economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms
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market power
answer
ability of a firm to charge a price greater than marginal cost
(closer price to marginal cost, smaller deadweight loss)
(only perfectly competitive firms don't have)
(more likely to earn economic profit & research & development)
(closer price to marginal cost, smaller deadweight loss)
(only perfectly competitive firms don't have)
(more likely to earn economic profit & research & development)
question
competition act
answer
designed to prevent monopolies and collusion
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antitrust laws
answer
legislation aimed at eliminating collusion & promoting competition (1889)
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