ECON 301, Tracy Stobbe - Assignment Essays

question

Incentive/goal alignment

answer

when an employee has enough information to make a good decision and the incentive to do so

question

Rational Actor Paradigm

answer

people act rationally, optimally, and self-interestedly

question

How wealth is created (and destroyed)

answer

Wealth is created when assets move from lower- to higher - valued uses

question

Value

answer

the amount someone is willing to pay for something

question

Taxes

answer

- Intended effect of a tax is to raise revenue for the government
- unintended consequence of a tax is that it deters some wealth-creating transactions

question

Subsidies

answer

- opposite of tax
- by encouraging low-value consumers to buy or high-value sellers to sell, they destroy wealth by moving assets from higher- to lower- valued uses- in exactly the wrong direction

question

Price Control

answer

regulation that allows trade only at certain prices

question

Two types of price control

answer

Price ceiling: costs that change as output level change
Price floors: which outlaw trade at prices below the floor

question

Variable costs

answer

Costs that change as output levels change

question

Fixed costs

answer

Costs that do not vary with output

question

Accounting costs

answer

costs that appear on the financial statements of a company

question

Relevant costs

answer

All costs that vary with the consequence of a decision

question

Implicit costs

answer

Additional costs that do not appear on the financial statements of a company
- ex. opportunity cost of capital

question

Sunk/Fixed-cost fallacy

answer

taking account for an irrelevant cost or benefit

question

Hidden-cost fallacy

answer

occurs when you ignore relevant costs, those costs that do vary with the consequences of your decision

question

Marginal analysis

answer

Analyzing the extent decision, breaking down the decision into small steps and compute the costs and benefits of taking another step

question

Marginal cost (MC)

answer

the additional cost incurred by producing and selling one more unit

question

Marginal revenue (MR)

answer

the additional revenue gained from selling one more unit

question

How to tell if you are selling the right amount

answer

- you are selling the right amount if MR = MC
- sell more if MR>MC
- sell less if MR<MC

question

NPV Rule

answer

If the net present value of the sum of all discounted cash flows is larger than zero, then the project earns more than the cost of capital - earns economic profit

question

Break-even quantity

answer

Q = F/(P-MC)
= fixed cost/(price-Marginal cost)

question

Post-investment hold-up

answer

An attempt by a trading partner to renegotiate the terms of trade after one party has made a sunk cost investment or investment specific to the relationship

question

Sunk costs

answer

costs that have already been incurred and cannot be recovered

question

Specific investment

answer

investments that are less valuable outside of a particular relationship. They are similar to sunk costs in that the costs are "sunk" in the relationship.

question

First law of demand

answer

consumer purchases more as price falls

question

Aggregate/market demand curve

answer

relationship between the price and the number of purchases made by this group of consumers

question

Elastic

answer

describes demand that is very sensitive to a change in price
- quantity changes more than price

question

Inelastic

answer

Describes demand that is not very sensitive to a change in price
- quantity changes less than price

question

Cross-price elasticity of demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good

question

Positive cross-price elasticity

answer

As the price of a substitute increases, demand increases

question

Negative cross-price elasticity

answer

As the price of a complement increase, demand decreases

question

Stay-even analysis

answer

Simple two-step procedure that tells you whether a given price increase

question

Law of diminishing marginal returns

answer

as you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines

question

Constant returns to scale

answer

If long run average costs are constant with respect to output

question

Decreasing returns to scale or diseconomies of scale

answer

exists when average costs fall as output increases

question

Increasing returns to scale or economies of scale

answer

exists when average costs fall as output increases

question

Learning curves

answer

current production lowers future costs

question

Economies of scope

answer

when the cost of producing two products jointly is less than the cost of producing those two products separately

question

Disecomonies of scope

answer

when the cost of producing two products together is higher than the cost of producing them separately

question

Movement along the demand curve

answer

change in quantity demanded in response to change in price

question

Shift of the demand curve

answer

a change in demand caused by any variable except price

question

Supply curves

answer

describe the behaviour of a group of sellers and tell you how much will be sold at a given price

question

Shift of the supply curve

answer

A change in supply caused by any variable except price

question

Market equilibrium

answer

the price at which quantity supplied equals quantity demanded

question

Perfect competitive industry

answer

- firms produce a product or service with very close substitutes, meaning demand is very elastic
- Firms have many rivals and no cost advantages
- the industry has no entry or exit barriers

question

Long-run equilibrium

answer

economic profit is zero

question

The indifference principle

answer

If an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes

question

Compensating wage differentials

answer

differences in wages that reflect differences in the inherent attractiveness of various professions or jobs

question

Risk premium

answer

the higher the risk, the higher the return required by the providers of money

question

Monopoly

answer

A market in which there are many buyers but only one seller

question

Michael Porter's Five Forces Model

answer

- Buyer power
- Supplier power
- Threat of entry (high barriers to entry)
- threat from substitutes
- levels of rivalry between existing firms

question

Direct price discrimination

answer

Identify members of the low-value group, charge them a lower price, and prevent them from reselling their lower priced good at the higher value group

question

Robinson-Patman Act

answer

part of a group of laws collectively called the antitrust laws governing competition in the Unites States

question

Arbitrage

answer

can defeat a price discrimination scheme if enough of those who purchase at low prices resell to high-value consumers

question

Indirect price discrimination

answer

When a seller cannot identify low- and high- value consumers or cannot prevent arbitrage between two groups

question

Sequential-move games

answer

players take turns, and each player observes what his or her rival did before having to move

question

Simultaneous-move game

answer

players move at the same time

question

Prisoners' dilemma

answer

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

question

Price discrimination dilemma

answer

by one firm its always profitable, competing against other firms price discrimination can become prisoners' dilemma

question

Free-riding dilemma

answer

When some members of a community fail to contribute their fair share to the costs of a shared resource

question

Game of chicken

answer

two equilibria

question

Strategic view of bargaining

answer

a view that focuses on how the outcome of bargaining games depends on the specific rules of the game, such as who moves first, who can commit to a bargaining position, or whether the other player can make a counteroffer.

question

Non-strategic view of bargaining

answer

does not focus on the explicit rules of the game to understand the likely outcome of the bargaining

question

Nash equilibria

answer

ask "are both players playing a best response to what their rivals are playing?"

1 of 64

question

Incentive/goal alignment

answer

when an employee has enough information to make a good decision and the incentive to do so

question

Rational Actor Paradigm

answer

people act rationally, optimally, and self-interestedly

question

How wealth is created (and destroyed)

answer

Wealth is created when assets move from lower- to higher - valued uses

question

Value

answer

the amount someone is willing to pay for something

question

Taxes

answer

- Intended effect of a tax is to raise revenue for the government
- unintended consequence of a tax is that it deters some wealth-creating transactions

question

Subsidies

answer

- opposite of tax
- by encouraging low-value consumers to buy or high-value sellers to sell, they destroy wealth by moving assets from higher- to lower- valued uses- in exactly the wrong direction

question

Price Control

answer

regulation that allows trade only at certain prices

question

Two types of price control

answer

Price ceiling: costs that change as output level change
Price floors: which outlaw trade at prices below the floor

question

Variable costs

answer

Costs that change as output levels change

question

Fixed costs

answer

Costs that do not vary with output

question

Accounting costs

answer

costs that appear on the financial statements of a company

question

Relevant costs

answer

All costs that vary with the consequence of a decision

question

Implicit costs

answer

Additional costs that do not appear on the financial statements of a company
- ex. opportunity cost of capital

question

Sunk/Fixed-cost fallacy

answer

taking account for an irrelevant cost or benefit

question

Hidden-cost fallacy

answer

occurs when you ignore relevant costs, those costs that do vary with the consequences of your decision

question

Marginal analysis

answer

Analyzing the extent decision, breaking down the decision into small steps and compute the costs and benefits of taking another step

question

Marginal cost (MC)

answer

the additional cost incurred by producing and selling one more unit

question

Marginal revenue (MR)

answer

the additional revenue gained from selling one more unit

question

How to tell if you are selling the right amount

answer

- you are selling the right amount if MR = MC
- sell more if MR>MC
- sell less if MR<MC

question

NPV Rule

answer

If the net present value of the sum of all discounted cash flows is larger than zero, then the project earns more than the cost of capital - earns economic profit

question

Break-even quantity

answer

Q = F/(P-MC)
= fixed cost/(price-Marginal cost)

question

Post-investment hold-up

answer

An attempt by a trading partner to renegotiate the terms of trade after one party has made a sunk cost investment or investment specific to the relationship

question

Sunk costs

answer

costs that have already been incurred and cannot be recovered

question

Specific investment

answer

investments that are less valuable outside of a particular relationship. They are similar to sunk costs in that the costs are "sunk" in the relationship.

question

First law of demand

answer

consumer purchases more as price falls

question

Aggregate/market demand curve

answer

relationship between the price and the number of purchases made by this group of consumers

question

Elastic

answer

describes demand that is very sensitive to a change in price
- quantity changes more than price

question

Inelastic

answer

Describes demand that is not very sensitive to a change in price
- quantity changes less than price

question

Cross-price elasticity of demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good

question

Positive cross-price elasticity

answer

As the price of a substitute increases, demand increases

question

Negative cross-price elasticity

answer

As the price of a complement increase, demand decreases

question

Stay-even analysis

answer

Simple two-step procedure that tells you whether a given price increase

question

Law of diminishing marginal returns

answer

as you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines

question

Constant returns to scale

answer

If long run average costs are constant with respect to output

question

Decreasing returns to scale or diseconomies of scale

answer

exists when average costs fall as output increases

question

Increasing returns to scale or economies of scale

answer

exists when average costs fall as output increases

question

Learning curves

answer

current production lowers future costs

question

Economies of scope

answer

when the cost of producing two products jointly is less than the cost of producing those two products separately

question

Disecomonies of scope

answer

when the cost of producing two products together is higher than the cost of producing them separately

question

Movement along the demand curve

answer

change in quantity demanded in response to change in price

question

Shift of the demand curve

answer

a change in demand caused by any variable except price

question

Supply curves

answer

describe the behaviour of a group of sellers and tell you how much will be sold at a given price

question

Shift of the supply curve

answer

A change in supply caused by any variable except price

question

Market equilibrium

answer

the price at which quantity supplied equals quantity demanded

question

Perfect competitive industry

answer

- firms produce a product or service with very close substitutes, meaning demand is very elastic
- Firms have many rivals and no cost advantages
- the industry has no entry or exit barriers

question

Long-run equilibrium

answer

economic profit is zero

question

The indifference principle

answer

If an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes

question

Compensating wage differentials

answer

differences in wages that reflect differences in the inherent attractiveness of various professions or jobs

question

Risk premium

answer

the higher the risk, the higher the return required by the providers of money

question

Monopoly

answer

A market in which there are many buyers but only one seller

question

Michael Porter's Five Forces Model

answer

- Buyer power
- Supplier power
- Threat of entry (high barriers to entry)
- threat from substitutes
- levels of rivalry between existing firms

question

Direct price discrimination

answer

Identify members of the low-value group, charge them a lower price, and prevent them from reselling their lower priced good at the higher value group

question

Robinson-Patman Act

answer

part of a group of laws collectively called the antitrust laws governing competition in the Unites States

question

Arbitrage

answer

can defeat a price discrimination scheme if enough of those who purchase at low prices resell to high-value consumers

question

Indirect price discrimination

answer

When a seller cannot identify low- and high- value consumers or cannot prevent arbitrage between two groups

question

Sequential-move games

answer

players take turns, and each player observes what his or her rival did before having to move

question

Simultaneous-move game

answer

players move at the same time

question

Prisoners' dilemma

answer

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

question

Price discrimination dilemma

answer

by one firm its always profitable, competing against other firms price discrimination can become prisoners' dilemma

question

Free-riding dilemma

answer

When some members of a community fail to contribute their fair share to the costs of a shared resource

question

Game of chicken

answer

two equilibria

question

Strategic view of bargaining

answer

question

Non-strategic view of bargaining

answer

does not focus on the explicit rules of the game to understand the likely outcome of the bargaining

question

Nash equilibria

answer

ask "are both players playing a best response to what their rivals are playing?"

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