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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
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
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
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
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
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)
(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)
(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)
- 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
- 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
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
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
- changes in supply of other resources (land, capital)
- changes in technology
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demand for labor (imperfectly competitive)
answer
- work vs. leisure
- higher income--income effect
- less leisure--substitution effect
- higher income--income effect
- less leisure--substitution effect
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demand for labor shifters (3)
answer
- changes in preferences and social norms
- changes in population
- changes in opportunities
- changes in wealth
- 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
answer
Qs increases, Qd decreases, UNEMPLOYMENT
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wage of labor point
answer
more workers are hired
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effect of minimum wage on perfectly competitive labor market
answer
wage rate
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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)
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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
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
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negative externality graph
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tax that corrects negative externalities
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positive externality graph
answer
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
answer
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
answer
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
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
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rivalrous
answer
rivalrous, excludable
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exclusion
answer
not rivalrous, excludable
question
private goods
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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
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progressive taxes
answer
undefined
question
Lorenz curve
answer
undefined