Econ Microeconomics - Assignment Essays

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Economics

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Study of scarcity and choice

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Market economy

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Decisions made by individuals with little government involvement

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Command economy

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Publicly owned with a central authority that makes decisions

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Property rights

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Establish ownership and grant individuals the right to trade with each other

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Marginal analysis

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Study of costs and benefits of doing more of one activity over another

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Resource

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Anything that can be used to produce something else

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Land

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All resources that come from nature

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Labor

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Effort of workers

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Capital

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Refers to manufactured goods used to make other goods and services

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Entrepreneurship

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Efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovation

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Scarce resource

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LIMITED and DESIRED

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Marginal benefit

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Gain from doing something one more time

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Marginal cost

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Cost of doing something one more time

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Four factors of production

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Land, labor, capital, entrepreneurship

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Opportunity cost

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What you must give up in order to do something (NOT ONLY MONEY)

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Calculating opportunity cost

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Ex. CAMS: # widgets given up/# cams produced (CHOOSE SMALLER FRACTION)

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Microeconomics

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Study of how people make decisions and how those decisions interact (or individual industries)

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Macroeconomics

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Overall ups and downs of the economy

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Economic aggregates

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Economic measures that summarize data across many markets (unemployment, inflation...)

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Positive economics

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ONLY FACT (economic analysis about how the economy works)

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Normative economics

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INCLUDES OPINION (economic analysis about how the economy should work)

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Graphing economics

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1) NOT INVOLVING PRICE: independent variable - x axis, dependent variable - y axis

2) INVOLVING PRICE: price - y axis

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Trade-offs

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When you have to give up something to have something else

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Production possibilities curve

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Illustrates trade-offs in an economy (max quantity of one good that can be produced for each possible quantity of the other good produced)

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Point inside production possibilities curve

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Feasible, but not efficient

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Point on production possibilities curve

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Feasible and efficient

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Point outside production possibilities curve

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Not feasible

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Law of increasing opportunity costs

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Greater and greater quantities of consumer goods must be given up to get more capital goods

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Economic rational of law of increasing opportunity costs

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Economic resources are not completely adaptable to alternative uses

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Specialization

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Each person specializes in the task that they are good at performing

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Prerequisite of specialization

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Having a convenient means of exchanging goods

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Comparative advantage

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If their opportunity cost of producing the good is lower

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Absolute advantage

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If they can produce more if it in a given amount of time and resources

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Demand schedule/curve

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Shows how much of a good or service consumers will be willing and able to buy at different prices

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Quantity demanded

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Actual amount of a good or service consumers are willing and able to buy at a specific price

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Law of demand

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Higher prices for goods and services leads people to demand a smaller quantity of that good or service

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Law of diminishing marginal utility

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As a person increases consumption of a product, there is a decline in the marginal utility (additional satisfaction) that person derives from consuming each additional unit of that product

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5 shifts in demand curve

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1) changes in price of related goods or services

2) changes in income

3) changes in tastes

4) changes in expectations

5) changes in number of customers

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Substitutes

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Rise in price of one of the goods leads to increase in demand for the other

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Complements

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Rise in price of one of the goods leads to decrease in demand for the other

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Normal good

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Rise in income increases demand for a good

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Inferior good

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Rise in income decreases demand for a good

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Shift along demand curve

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Change in price of good DOES NOT CHANGE DEMAND

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Quantity supplied

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Actual amount of a good or service producers are willing to sell at a specific price

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Supply schedule/curve

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How much of a good or service producers will supply at different prices

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Law of supply

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Price and quantity supplied of a good are positively related

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Shift along supply curve

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Change in price of good DOES NOT CHANGE SUPPLY

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5 shifts in supply curve

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1) changes in input prices

2) changes in price of related goods or services

3) changes in technology

4) changes in expectations

5) changes in the number of producers

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Input prices

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Price of anything used to produce a good or service (production cost)

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Equilibrium

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When quantity demanded equals quantity supplied

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Surplus

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Quantity supplied exceeds quantity demanded

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Shortage

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Quantity demanded exceeds quantity supplied

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Increase in supply

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Decrease in price, increase in quantity

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Decrease in supply

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Increase in price, decrease in quantity

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Increase in demand

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Increase in price, increase in quantity

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Decrease in demand

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Decrease in price, decrease in quantity

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Increase in supply and demand

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Indeterminate price, increase in quantity

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Decrease in supply and demand

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Indeterminate price, decrease in quantity

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Decrease in supply and increase in demand

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Increase in price, indeterminate quantity

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Increase in supply and decrease in demand

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Decrease in price, indeterminate quantity

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Midpoint formula

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Change in QD (P1 + P2) / Change in P (Q1 + Q2)

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Usually the top left of a PED graph is...

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Elastic (very price sensitive)

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Usually the bottom right of a PED graph is...

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Inelastic (not very price sensitive)

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Price elasticity of demand (time)

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High over long-term
Low over short-term

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Price controls

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Floors and ceilings that create a LOSS of efficiency

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Effect of price ceiling

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Creates a shortage

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Effect of price floor

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Creates a surplus

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PED

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Price elasticity of demand

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PED is greater than 1

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Elastic demand

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Unit elastic

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Percent increase is the same as percent decrease

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PED equals 1

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Unit elastic

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PED is less than 1

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Inelastic demand

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Change in price has no effect on revenue

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Unit elastic

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Income elasticity of demand (YED)

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Change % Qd / Change % income

If positive, NORMAL good
If negative, INFERIOR good

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Cross price elasticity of demand (XED) calculation

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Change % Qd A / Change % P B

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XED positive

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Substitutes

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XED negative

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Complements

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Utility

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Welfare of consumers (benefit)

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UTILs

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Units of happiness

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Marginal utility

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Increase in total utility resulting from the consumption of each additional unit of a good

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Marginal utility calculation

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Change in total utility / Change in quantity

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Marginal utility per dollar

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MU/$

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primary goal of firms is to...

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maximize profit

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Profit =

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Total Revenue - Total Cost (P = TR - TC)

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Total Revenue

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Price x Quantity (TR = P x Q)

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explicit costs

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costs that require money to be spent

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implicit costs

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value of benefits that are forgone (can include money like lost salaries)

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accounting profit

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Total Revenue - explicit costs (and depreciation)

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economic profit

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Total Revenue - implicit and explicit costs (or opportunity cost)

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positive economic profit

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current use is best use of resources

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negative economic profit

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there is a better alternative use for resources

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normal profit

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economic profit equal to zero (P just covers ATC or ATC is on MRDARP)

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profit maximization point

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Marginal Revenue = Marginal Cost (MR=MC)

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Marginal Revenue =

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🔺Total Revenue/🔺Quantity of output
(MR =🔺TR/🔺Q)

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Marginal Revenue

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change in total revenue generated by an additional unit of output (MARKET PRICE)

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market price

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same as marginal revenue

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Marginal Cost =

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🔺Total Cost/🔺Quantity of output
(MC =🔺TC/🔺Q)

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net gain

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Marginal Revenue - Marginal Cost (MR - MC)

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Marginal Cost curve

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shows the cost of producing one more unit (Nike swoosh)

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Marginal Revenue curve

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shows how marginal revenue varies as output varies (straight line)

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fixed input

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inputs that cannot be varied (land)

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variable input

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input whose quantity can vary at any time (labor)

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long run fixed and variable input

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all inputs are variable

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short run fixed and variable input

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at least one input is fixed

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Total Product curve

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quantity of output depending on quantity of labor

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Marginal Product of labor

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additional quantity of output from using one more unit of labor

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Marginal Product of labor =

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change in quantity of output/change in quantity of labor (MPL =🔺Q/🔺L)

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Marginal Product of labor curve

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decreases as each additional unit of labor produces less per unit of labor

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law of diminishing returns

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larger the output, greater the amount of variable input is required, leading to higher AVC & MC

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fixed cost

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costs that don't depend on quantity of output produced (rent, utilities)

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variable cost

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costs that depend on output quantity produced (labor, supplies)

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long run fixed and variable costs

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all costs are variable

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short run fixed and variable costs

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at least one input is fixed

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Total Cost

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fixed costs + variable costs (TC = FC + VC)

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Marginal Cost

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added cost of producing one more unit of output

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Marginal Cost =

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change in total cost/change in quantity of output (MC =🔺TC/🔺Q)

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reason for down sloping at beginning of Marginal Cost curve

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specialization

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reason for upward sloping at end of Marginal Cost curve

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diminishing returns

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Average Total Cost

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average total cost per unit of output

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Average Total Cost curve

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U-shaped that shows average total cost per unit of output

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Average Total Cost =

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Total Cost/Quantity of output (ATC = TC/Q)

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Average Fixed Cost

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fixed cost per unit of output

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Average Fixed Cost effect on ATC and AVC graphs

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start to approach each other because AFC decreases as quantity produced increases

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Average Fixed Cost =

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fixed cost/quantity of output (AFC = FC/Q)

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Average Variable Cost

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variable cost per unit of output (rises as output rises)

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Average Variable Cost curve

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U-shaped graph that shows variable cost per unit of output

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spreading effect

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larger output means a greater quantity over which fixed cost is spread, leading to lower AFC

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minimum cost output

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point where MC = ATC

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Long Run Average Total Cost curve

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includes lowest ATCs at each level of output

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economies of scale on U-shaped graph (left or right)

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left

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diseconomies of scale on U-shaped graph (left or right)

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right

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economies of scale

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LRATC declines as output increases

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diseconomies of scale

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LRATC increases as output increases

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perfectly competitive market

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consumers and producers are price-takers

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price-taker

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actions cannot affect the market price of the good

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perfectly competitive industry

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firms are price-takers

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optimal output rule

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produce until MR=MC (or right before that point)

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MR DARP

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straight line where MR=D=AR=P (marginal revenue, demand, average revenue, and price are equal)

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what determines whether a firm earns a profit or a loss?

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whether minimum ATC is more or less than the market price

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loss (in terms of price and ATC)

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P < ATC

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profit (in terms of price and ATC)

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P > ATC

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total profit =

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(P - ATC) x Q

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break-even price

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zero economic profit (MR = min ATC)

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shut-down price

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MR is below min AVC

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short run supply curve

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equal to points on MC greater or equal to AVC (equal to or above shut-down price)

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productive efficiency

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P = min ATC (most efficient use of land, labor, capital)

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allocative efficiency

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MC = P (society's most preferable output, ALWAYS TRUE in perfect competition)

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In the long run, supply adjusts so that a firm always...

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breaks even (has normal profit)

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long-run equilibrium point is ALWAYS...

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where MC = min ATC

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doubling inputs leads to MORE THAN DOUBLE outputs

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increasing returns to scale

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doubling inputs leads to DOUBLE outputs

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constant returns to scale

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doubling inputs leads to LESS THAN DOUBLE outputs

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decreasing returns to scale

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(pure) monopoly

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industry controlled by one producer of a unique product

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monopoly graph

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high barriers to entry

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pure monopoly: ease of entry

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substantial control over prices

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pure monopoly: control over prices

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laws that are intended to prevent monopolies (or from oligopolies from acting like monopolies)

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antitrust laws

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- control of a scarce resource
- economies of scale (firms with larger output have the advantage and drive other firms out: natural monopoly)
- technological superiority
- government created barriers (patents and copyrights)

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4 barriers to entry (monopoly)

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monopoly created by economies of scale (huge fixed costs, so firms with larger output have the advantage and drive other firms out: cable or water)

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natural monopoly

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industry with only a few (usually two) firms that sell similar products

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natural monopoly graph

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high barriers to entry

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oligopoly

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some control over prices

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oligopoly: ease of entry

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60%, 25%, and 15% market shares would be calculated by (60^2 + 25^2 + 15^2 = 4,450)

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oligopoly: control over prices

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industry where many producers sell differentiated products

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HHI index calculation

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long run

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monopolistic competition

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few barriers to entry

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monopolistic competition graph

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some control over prices

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monopolistic competition: ease of entry

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monopoly must cut prices on all units to sell

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monopolistic competition: control over prices

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MR=MC is quantity, then up that to the demand curve is price

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reason MR is below D on a monopoly graph

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change output produced

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monopoly: profit maximizing output and price

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point where MR = 0 is unit elastic (everything above is elastic, below is inelastic)

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if MR is above MC or below MC (monopoly)

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P=ATC

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how to tell if the graph is elastic or inelastic

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P=MC

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fair return/regulated price of a natural monopoly

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selling the same product to different people at different prices

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socially optimal output (allocative efficiency)

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monopolist charges each consumer the max they are willing to pay (no consumer surplus: all profit) P = MC

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price discrimination

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oligopolies: when the profit of one firm depends on the actions of the other

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perfect price discrimination

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when companies cooperate to raise profits

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interdependence

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when produces agree to limit output and increase price

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collusion

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each firm acting in its own interest

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cartel

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collusion

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noncooperative behavior

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best action for someone to take, regardless of what the other person does

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cooperative behavior

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result when each person chooses the action that maximizes their payoff given the actions of other people (there can be multiple)

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dominant strategy

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a firm attempts to influence the future behavior of other firms

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Nash equilibrium/noncooperative equilibrium

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playing cooperatively first, then following the other player's move

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strategic behavior

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limiting production and raising prices without communicating or working together

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tit-for-tat

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one firm setting a price so the other firms follow

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tacit collusion

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using advertising to increase sales

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price leadership

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demand/marginal revenue curve becomes more elastic and shifts left

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nonprice competition

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P=ATC

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effect of firms entering a monopolistically competitive market

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markets in which products used to produce goods and services are bought and sold

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long run monopolistic competition

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prices in factor markets

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factor/resource markets

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- labor
- land
- capital
- entrepreneurship

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factor prices

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work done by human beings

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four main types of factors of production

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resources provided by nature

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labor

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physical: manufactured resources like machines
human: improvement in labor created by education

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land

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risk-taking activities that bring together resources

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capital (physical and human)

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derived demand

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entrepreneurship

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derived from the demand for the output being produced

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demand in a factor/resource market

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division of total income among land, labor, capital, and entrepreneurship

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derived demand

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wages and salaries

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factor distribution of income

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owning stock in a company

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income from labor

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earning rent on land

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income from capital

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profits

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income from land

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earnings from labor (around 70%)

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income from entrepreneurship

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x axis - quantity of labor
y axis - wage rate

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largest source of income in the US

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inverse

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labeling axis of labor market graph

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law of diminishing marginal returns

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relationship between demand for labor and wage rate

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change in a firm's total revenue due to an additional worker OR MP x P

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reason for inverse relationship between demand for labor and wage rate

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most an employer would be willing to pay each worker (DEMAND FOR LABOR)

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marginal revenue product (MRP)

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demand (D)

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MRP is

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market price is the wage rate

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MRP =

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wage takers

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wage rate in perfectly competitive resource market

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wage makers

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firms in perfectly competitive resource markets - wage takers or wage makers

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wage is less than or equal to MRP

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firms in imperfectly competitive resource markets (monopsony) - wage takers or wage makers

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much more elastic

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determining wage in perfectly competitive resource market

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much more inelastic (because both price and marginal product are declining)

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demand for labor (perfectly competitive)

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- prices of goods in product market
- changes in supply of other resources (land, capital)
- changes in technology

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demand for labor (imperfectly competitive)

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- work vs. leisure
- higher income--income effect
- less leisure--substitution effect

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demand for labor shifters (3)

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- changes in preferences and social norms
- changes in population
- changes in opportunities
- changes in wealth

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supply of labor

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direct

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supply of labor shifters (4)

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change in total cost due to hiring another worker (WAGE)

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relationship between supply of labor and wage rate

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last dollar spent on labor yielded same output as last dollar spent on capital (MPL/PL = MPC/PC)

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marginal resource cost (MRC)

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MRC (wage) is less than or equal to MRP

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least cost combination of resources

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to attract more workers, an employer must raise wages for all workers

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profit maximization rule of employment

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MRC = MRP

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reason MRC is above supply in monopsony

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point down from MRC = MRP on the supply curve

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quantity of labor point

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Qs increases, Qd decreases, UNEMPLOYMENT

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wage of labor point

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more workers are hired

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effect of minimum wage on perfectly competitive labor market

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wage rate

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effect of minimum wage on monopsony labor market

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MRPx/MRCx = MRPy/MRCy = 1 (fire workers if MRP is lower than MRC, hire them if MRC is lower than MRP)

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MRC =

answer

marginal social cost

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profit maximizing rule for combining resources

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marginal private cost

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MSC

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marginal social benefit

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MPC

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marginal private benefit

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MSB

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two cost lines, deadweight loss in area between Qp and Qs, under MSC and above demand

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MPB

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two benefit lines, deadweight loss in area between Qp and Qs, under MSB and above supply

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negative externality graph

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tax that corrects negative externalities

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positive externality graph

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charge a tax equal to MEC (distance between MSC and MPC) to move supply to area where MSC = MSB

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Pigouvian tax

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charge subsidy equal to MEB (distance between MSB and MPB) to move supply to area where MSC = MSB

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how to solve negative externality

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between Qs and Qp, below MSC, above demand

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how to solve positive externality

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between Qp and Qs, below MSB, above supply

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deadweight loss (negative externality)

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adding an additional person adds an additional cost, one person using it stops another person from using it at the same time

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deadweight loss (positive externality)

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if someone doesn't pay for it, they can't use it

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rivalrous

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rivalrous, excludable

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exclusion

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not rivalrous, excludable

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private goods

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rivalrous, not excludable

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collective goods

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not rivalrous, not excludable

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common goods

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private, collective, public, common

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public goods

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measure of income equality/distribution

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(just to memorize) Q1 Q2 Q3 Q4

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A/(A+B)

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Gini coefficient

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(scale of 0-1) low is relatively equal, high is relatively unequal

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calculate Gini coefficient

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applied uniformly to all (sales tax)

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low Gini coefficient vs high Gini coefficient

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everyone pays the same percentage (property tax)

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regressive taxes

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higher income is taxed at a higher rate than low income (income tax)

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proportional taxes

answer

undefined

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progressive taxes

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undefined

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Lorenz curve

answer

undefined

1 of 256

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Economics

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Study of scarcity and choice

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Market economy

answer

Decisions made by individuals with little government involvement

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Command economy

answer

Publicly owned with a central authority that makes decisions

question

Property rights

answer

Establish ownership and grant individuals the right to trade with each other

question

Marginal analysis

answer

Study of costs and benefits of doing more of one activity over another

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Resource

answer

Anything that can be used to produce something else

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Land

answer

All resources that come from nature

question

Labor

answer

Effort of workers

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Capital

answer

Refers to manufactured goods used to make other goods and services

question

Entrepreneurship

answer

Efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovation

question

Scarce resource

answer

LIMITED and DESIRED

question

Marginal benefit

answer

Gain from doing something one more time

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Marginal cost

answer

Cost of doing something one more time

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Four factors of production

answer

Land, labor, capital, entrepreneurship

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Opportunity cost

answer

What you must give up in order to do something (NOT ONLY MONEY)

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Calculating opportunity cost

answer

Ex. CAMS: # widgets given up/# cams produced (CHOOSE SMALLER FRACTION)

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Microeconomics

answer

Study of how people make decisions and how those decisions interact (or individual industries)

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Macroeconomics

answer

Overall ups and downs of the economy

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Economic aggregates

answer

Economic measures that summarize data across many markets (unemployment, inflation...)

question

Positive economics

answer

ONLY FACT (economic analysis about how the economy works)

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Normative economics

answer

INCLUDES OPINION (economic analysis about how the economy should work)

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Graphing economics

answer

1) NOT INVOLVING PRICE: independent variable - x axis, dependent variable - y axis

2) INVOLVING PRICE: price - y axis

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Trade-offs

answer

When you have to give up something to have something else

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Production possibilities curve

answer

Illustrates trade-offs in an economy (max quantity of one good that can be produced for each possible quantity of the other good produced)

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Point inside production possibilities curve

answer

Feasible, but not efficient

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Point on production possibilities curve

answer

Feasible and efficient

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Point outside production possibilities curve

answer

Not feasible

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Law of increasing opportunity costs

answer

Greater and greater quantities of consumer goods must be given up to get more capital goods

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Economic rational of law of increasing opportunity costs

answer

Economic resources are not completely adaptable to alternative uses

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Specialization

answer

Each person specializes in the task that they are good at performing

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Prerequisite of specialization

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Having a convenient means of exchanging goods

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Comparative advantage

answer

If their opportunity cost of producing the good is lower

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Absolute advantage

answer

If they can produce more if it in a given amount of time and resources

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Demand schedule/curve

answer

Shows how much of a good or service consumers will be willing and able to buy at different prices

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Quantity demanded

answer

Actual amount of a good or service consumers are willing and able to buy at a specific price

question

Law of demand

answer

Higher prices for goods and services leads people to demand a smaller quantity of that good or service

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Law of diminishing marginal utility

answer

As a person increases consumption of a product, there is a decline in the marginal utility (additional satisfaction) that person derives from consuming each additional unit of that product

question

5 shifts in demand curve

answer

1) changes in price of related goods or services

2) changes in income

3) changes in tastes

4) changes in expectations

5) changes in number of customers

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Substitutes

answer

Rise in price of one of the goods leads to increase in demand for the other

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Complements

answer

Rise in price of one of the goods leads to decrease in demand for the other

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Normal good

answer

Rise in income increases demand for a good

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Inferior good

answer

Rise in income decreases demand for a good

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Shift along demand curve

answer

Change in price of good DOES NOT CHANGE DEMAND

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Quantity supplied

answer

Actual amount of a good or service producers are willing to sell at a specific price

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Supply schedule/curve

answer

How much of a good or service producers will supply at different prices

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Law of supply

answer

Price and quantity supplied of a good are positively related

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Shift along supply curve

answer

Change in price of good DOES NOT CHANGE SUPPLY

question

5 shifts in supply curve

answer

1) changes in input prices

2) changes in price of related goods or services

3) changes in technology

4) changes in expectations

5) changes in the number of producers

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Input prices

answer

Price of anything used to produce a good or service (production cost)

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Equilibrium

answer

When quantity demanded equals quantity supplied

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Surplus

answer

Quantity supplied exceeds quantity demanded

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Shortage

answer

Quantity demanded exceeds quantity supplied

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Increase in supply

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Decrease in price, increase in quantity

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Decrease in supply

answer

Increase in price, decrease in quantity

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Increase in demand

answer

Increase in price, increase in quantity

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Decrease in demand

answer

Decrease in price, decrease in quantity

question

Increase in supply and demand

answer

Indeterminate price, increase in quantity

question

Decrease in supply and demand

answer

Indeterminate price, decrease in quantity

question

Decrease in supply and increase in demand

answer

Increase in price, indeterminate quantity

question

Increase in supply and decrease in demand

answer

Decrease in price, indeterminate quantity

question

Midpoint formula

answer

Change in QD (P1 + P2) / Change in P (Q1 + Q2)

question

Usually the top left of a PED graph is...

answer

Elastic (very price sensitive)

question

Usually the bottom right of a PED graph is...

answer

Inelastic (not very price sensitive)

question

Price elasticity of demand (time)

answer

High over long-term
Low over short-term

question

Price controls

answer

Floors and ceilings that create a LOSS of efficiency

question

Effect of price ceiling

answer

Creates a shortage

question

Effect of price floor

answer

Creates a surplus

question

PED

answer

Price elasticity of demand

question

PED is greater than 1

answer

Elastic demand

question

Unit elastic

answer

Percent increase is the same as percent decrease

question

PED equals 1

answer

Unit elastic

question

PED is less than 1

answer

Inelastic demand

question

Change in price has no effect on revenue

answer

Unit elastic

question

Income elasticity of demand (YED)

answer

Change % Qd / Change % income

If positive, NORMAL good
If negative, INFERIOR good

question

Cross price elasticity of demand (XED) calculation

answer

Change % Qd A / Change % P B

question

XED positive

answer

Substitutes

question

XED negative

answer

Complements

question

Utility

answer

Welfare of consumers (benefit)

question

UTILs

answer

Units of happiness

question

Marginal utility

answer

Increase in total utility resulting from the consumption of each additional unit of a good

question

Marginal utility calculation

answer

Change in total utility / Change in quantity

question

Marginal utility per dollar

answer

MU/$

question

primary goal of firms is to...

answer

maximize profit

question

Profit =

answer

Total Revenue - Total Cost (P = TR - TC)

question

Total Revenue

answer

Price x Quantity (TR = P x Q)

question

explicit costs

answer

costs that require money to be spent

question

implicit costs

answer

value of benefits that are forgone (can include money like lost salaries)

question

accounting profit

answer

Total Revenue - explicit costs (and depreciation)

question

economic profit

answer

Total Revenue - implicit and explicit costs (or opportunity cost)

question

positive economic profit

answer

current use is best use of resources

question

negative economic profit

answer

there is a better alternative use for resources

question

normal profit

answer

economic profit equal to zero (P just covers ATC or ATC is on MRDARP)

question

profit maximization point

answer

Marginal Revenue = Marginal Cost (MR=MC)

question

Marginal Revenue =

answer

🔺Total Revenue/🔺Quantity of output
(MR =🔺TR/🔺Q)

question

Marginal Revenue

answer

change in total revenue generated by an additional unit of output (MARKET PRICE)

question

market price

answer

same as marginal revenue

question

Marginal Cost =

answer

🔺Total Cost/🔺Quantity of output
(MC =🔺TC/🔺Q)

question

net gain

answer

Marginal Revenue - Marginal Cost (MR - MC)

question

Marginal Cost curve

answer

shows the cost of producing one more unit (Nike swoosh)

question

Marginal Revenue curve

answer

shows how marginal revenue varies as output varies (straight line)

question

fixed input

answer

inputs that cannot be varied (land)

question

variable input

answer

input whose quantity can vary at any time (labor)

question

long run fixed and variable input

answer

all inputs are variable

question

short run fixed and variable input

answer

at least one input is fixed

question

Total Product curve

answer

quantity of output depending on quantity of labor

question

Marginal Product of labor

answer

additional quantity of output from using one more unit of labor

question

Marginal Product of labor =

answer

change in quantity of output/change in quantity of labor (MPL =🔺Q/🔺L)

question

Marginal Product of labor curve

answer

decreases as each additional unit of labor produces less per unit of labor

question

law of diminishing returns

answer

larger the output, greater the amount of variable input is required, leading to higher AVC & MC

question

fixed cost

answer

costs that don't depend on quantity of output produced (rent, utilities)

question

variable cost

answer

costs that depend on output quantity produced (labor, supplies)

question

long run fixed and variable costs

answer

all costs are variable

question

short run fixed and variable costs

answer

at least one input is fixed

question

Total Cost

answer

fixed costs + variable costs (TC = FC + VC)

question

Marginal Cost

answer

added cost of producing one more unit of output

question

Marginal Cost =

answer

change in total cost/change in quantity of output (MC =🔺TC/🔺Q)

question

reason for down sloping at beginning of Marginal Cost curve

answer

specialization

question

reason for upward sloping at end of Marginal Cost curve

answer

diminishing returns

question

Average Total Cost

answer

average total cost per unit of output

question

Average Total Cost curve

answer

U-shaped that shows average total cost per unit of output

question

Average Total Cost =

answer

Total Cost/Quantity of output (ATC = TC/Q)

question

Average Fixed Cost

answer

fixed cost per unit of output

question

Average Fixed Cost effect on ATC and AVC graphs

answer

start to approach each other because AFC decreases as quantity produced increases

question

Average Fixed Cost =

answer

fixed cost/quantity of output (AFC = FC/Q)

question

Average Variable Cost

answer

variable cost per unit of output (rises as output rises)

question

Average Variable Cost curve

answer

U-shaped graph that shows variable cost per unit of output

question

spreading effect

answer

larger output means a greater quantity over which fixed cost is spread, leading to lower AFC

question

minimum cost output

answer

point where MC = ATC

question

Long Run Average Total Cost curve

answer

includes lowest ATCs at each level of output

question

economies of scale on U-shaped graph (left or right)

answer

left

question

diseconomies of scale on U-shaped graph (left or right)

answer

right

question

economies of scale

answer

LRATC declines as output increases

question

diseconomies of scale

answer

LRATC increases as output increases

question

perfectly competitive market

answer

consumers and producers are price-takers

question

price-taker

answer

actions cannot affect the market price of the good

question

perfectly competitive industry

answer

firms are price-takers

question

optimal output rule

answer

produce until MR=MC (or right before that point)

question

MR DARP

answer

straight line where MR=D=AR=P (marginal revenue, demand, average revenue, and price are equal)

question

what determines whether a firm earns a profit or a loss?

answer

whether minimum ATC is more or less than the market price

question

loss (in terms of price and ATC)

answer

P < ATC

question

profit (in terms of price and ATC)

answer

P > ATC

question

total profit =

answer

(P - ATC) x Q

question

break-even price

answer

zero economic profit (MR = min ATC)

question

shut-down price

answer

MR is below min AVC

question

short run supply curve

answer

equal to points on MC greater or equal to AVC (equal to or above shut-down price)

question

productive efficiency

answer

P = min ATC (most efficient use of land, labor, capital)

question

allocative efficiency

answer

MC = P (society's most preferable output, ALWAYS TRUE in perfect competition)

question

In the long run, supply adjusts so that a firm always...

answer

breaks even (has normal profit)

question

long-run equilibrium point is ALWAYS...

answer

where MC = min ATC

question

doubling inputs leads to MORE THAN DOUBLE outputs

answer

increasing returns to scale

question

doubling inputs leads to DOUBLE outputs

answer

constant returns to scale

question

doubling inputs leads to LESS THAN DOUBLE outputs

answer

decreasing returns to scale

question

(pure) monopoly

answer

industry controlled by one producer of a unique product

question

monopoly graph

answer

high barriers to entry

question

pure monopoly: ease of entry

answer

substantial control over prices

question

pure monopoly: control over prices

answer

laws that are intended to prevent monopolies (or from oligopolies from acting like monopolies)

question

antitrust laws

answer

question

4 barriers to entry (monopoly)

answer

monopoly created by economies of scale (huge fixed costs, so firms with larger output have the advantage and drive other firms out: cable or water)

question

natural monopoly

answer

industry with only a few (usually two) firms that sell similar products

question

natural monopoly graph

answer

high barriers to entry

question

oligopoly

answer

some control over prices

question

oligopoly: ease of entry

answer

60%, 25%, and 15% market shares would be calculated by (60^2 + 25^2 + 15^2 = 4,450)

question

oligopoly: control over prices

answer

industry where many producers sell differentiated products

question

HHI index calculation

answer

long run

question

monopolistic competition

answer

few barriers to entry

question

monopolistic competition graph

answer

some control over prices

question

monopolistic competition: ease of entry

answer

monopoly must cut prices on all units to sell

question

monopolistic competition: control over prices

answer

MR=MC is quantity, then up that to the demand curve is price

question

reason MR is below D on a monopoly graph

answer

change output produced

question

monopoly: profit maximizing output and price

answer

point where MR = 0 is unit elastic (everything above is elastic, below is inelastic)

question

if MR is above MC or below MC (monopoly)

answer

P=ATC

question

how to tell if the graph is elastic or inelastic

answer

P=MC

question

fair return/regulated price of a natural monopoly

answer

selling the same product to different people at different prices

question

socially optimal output (allocative efficiency)

answer

monopolist charges each consumer the max they are willing to pay (no consumer surplus: all profit) P = MC

question

price discrimination

answer

oligopolies: when the profit of one firm depends on the actions of the other

question

perfect price discrimination

answer

when companies cooperate to raise profits

question

interdependence

answer

when produces agree to limit output and increase price

question

collusion

answer

each firm acting in its own interest

question

cartel

answer

collusion

question

noncooperative behavior

answer

best action for someone to take, regardless of what the other person does

question

cooperative behavior

answer

result when each person chooses the action that maximizes their payoff given the actions of other people (there can be multiple)

question

dominant strategy

answer

a firm attempts to influence the future behavior of other firms

question

Nash equilibrium/noncooperative equilibrium

answer

playing cooperatively first, then following the other player's move

question

strategic behavior

answer

limiting production and raising prices without communicating or working together

question

tit-for-tat

answer

one firm setting a price so the other firms follow

question

tacit collusion

answer

using advertising to increase sales

question

price leadership

answer

demand/marginal revenue curve becomes more elastic and shifts left

question

nonprice competition

answer

P=ATC

question

effect of firms entering a monopolistically competitive market

answer

markets in which products used to produce goods and services are bought and sold

question

long run monopolistic competition

answer

prices in factor markets

question

factor/resource markets

answer

- labor
- land
- capital
- entrepreneurship

question

factor prices

answer

work done by human beings

question

four main types of factors of production

answer

resources provided by nature

question

labor

answer

physical: manufactured resources like machines
human: improvement in labor created by education

question

land

answer

risk-taking activities that bring together resources

question

capital (physical and human)

answer

derived demand

question

entrepreneurship

answer

derived from the demand for the output being produced

question

demand in a factor/resource market

answer

division of total income among land, labor, capital, and entrepreneurship

question

derived demand

answer

wages and salaries

question

factor distribution of income

answer

owning stock in a company

question

income from labor

answer

earning rent on land

question

income from capital

answer

profits

question

income from land

answer

earnings from labor (around 70%)

question

income from entrepreneurship

answer

x axis - quantity of labor
y axis - wage rate

question

largest source of income in the US

answer

inverse

question

labeling axis of labor market graph

answer

law of diminishing marginal returns

question

relationship between demand for labor and wage rate

answer

change in a firm's total revenue due to an additional worker OR MP x P

question

reason for inverse relationship between demand for labor and wage rate

answer

most an employer would be willing to pay each worker (DEMAND FOR LABOR)

question

marginal revenue product (MRP)

answer

demand (D)

question

MRP is

answer

market price is the wage rate

question

MRP =

answer

wage takers

question

wage rate in perfectly competitive resource market

answer

wage makers

question

firms in perfectly competitive resource markets - wage takers or wage makers

answer

wage is less than or equal to MRP

question

firms in imperfectly competitive resource markets (monopsony) - wage takers or wage makers

answer

much more elastic

question

determining wage in perfectly competitive resource market

answer

much more inelastic (because both price and marginal product are declining)

question

demand for labor (perfectly competitive)

answer

- prices of goods in product market
- changes in supply of other resources (land, capital)
- changes in technology

question

demand for labor (imperfectly competitive)

answer

- work vs. leisure
- higher income--income effect
- less leisure--substitution effect

question

demand for labor shifters (3)

answer

- changes in preferences and social norms
- changes in population
- changes in opportunities
- changes in wealth

question

supply of labor

answer

direct

question

supply of labor shifters (4)

answer

change in total cost due to hiring another worker (WAGE)

question

relationship between supply of labor and wage rate

answer

last dollar spent on labor yielded same output as last dollar spent on capital (MPL/PL = MPC/PC)

question

marginal resource cost (MRC)

answer

MRC (wage) is less than or equal to MRP

question

least cost combination of resources

answer

to attract more workers, an employer must raise wages for all workers

question

profit maximization rule of employment

answer

MRC = MRP

question

reason MRC is above supply in monopsony

answer

point down from MRC = MRP on the supply curve

question

quantity of labor point

answer

Qs increases, Qd decreases, UNEMPLOYMENT

question

wage of labor point

answer

more workers are hired

question

effect of minimum wage on perfectly competitive labor market

answer

wage rate

question

effect of minimum wage on monopsony labor market

answer

MRPx/MRCx = MRPy/MRCy = 1 (fire workers if MRP is lower than MRC, hire them if MRC is lower than MRP)

question

MRC =

answer

marginal social cost

question

profit maximizing rule for combining resources

answer

marginal private cost

question

MSC

answer

marginal social benefit

question

MPC

answer

marginal private benefit

question

MSB

answer

two cost lines, deadweight loss in area between Qp and Qs, under MSC and above demand

question

MPB

answer

two benefit lines, deadweight loss in area between Qp and Qs, under MSB and above supply

question

negative externality graph

answer

tax that corrects negative externalities

question

positive externality graph

answer

charge a tax equal to MEC (distance between MSC and MPC) to move supply to area where MSC = MSB

question

Pigouvian tax

answer

charge subsidy equal to MEB (distance between MSB and MPB) to move supply to area where MSC = MSB

question

how to solve negative externality

answer

between Qs and Qp, below MSC, above demand

question

how to solve positive externality

answer

between Qp and Qs, below MSB, above supply

question

deadweight loss (negative externality)

answer

adding an additional person adds an additional cost, one person using it stops another person from using it at the same time

question

deadweight loss (positive externality)

answer

if someone doesn't pay for it, they can't use it

question

rivalrous

answer

rivalrous, excludable

question

exclusion

answer

not rivalrous, excludable

question

private goods

answer

rivalrous, not excludable

question

collective goods

answer

not rivalrous, not excludable

question

common goods

answer

private, collective, public, common

question

public goods

answer

measure of income equality/distribution

question

(just to memorize) Q1 Q2 Q3 Q4

answer

A/(A+B)

question

Gini coefficient

answer

(scale of 0-1) low is relatively equal, high is relatively unequal

question

calculate Gini coefficient

answer

applied uniformly to all (sales tax)

question

low Gini coefficient vs high Gini coefficient

answer

everyone pays the same percentage (property tax)

question

regressive taxes

answer

higher income is taxed at a higher rate than low income (income tax)

question

proportional taxes

answer

undefined

question

progressive taxes

answer

undefined

question

Lorenz curve

answer

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