question
What is the basic problem facing consumers in the economy?
answer
-Scarcity, Unlimited wants meet resources
- this means we need to make a choice (so how do we choose what to consume)
- this means we need to make a choice (so how do we choose what to consume)
question
What is a budget constraint?
answer
-Limimted amount of income available to consumers to spend on goods and services
question
What is utility? Marginal Utility? The law of diminishing marginal utility?
answer
Utility: the enjoyment/ satisfaction that people obtain from consuming the extra unit of a good or service
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Marginal Utility:The amount by which total utility would change when consuming the extra unit of a good or service
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Law of diminishing Marginal utility: the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
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Marginal Utility:The amount by which total utility would change when consuming the extra unit of a good or service
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Law of diminishing Marginal utility: the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
question
How can using marginal utility per dollar help us understand consumer behavior?
answer
Marginal utility explains how to get the most "bang for your buck"
question
How then will the consumer allocate his/her resources?
answer
where they'll get the most satisfaction for their money
question
What are the two conditions for maximizing utility?What if we "disobey" them?
answer
1) satisfy the rule of equal marginal utility per dollar spend (MU divided by the price)
2) Exhaust your budget
-spend ll the $ in the budget on ____ in order to exhaust the budget
2) Exhaust your budget
-spend ll the $ in the budget on ____ in order to exhaust the budget
question
What if prices change?
answer
- income effect
-substitution effect
-you adjust your purchasing decision
you can think of adjustment in 2 ways
1) you can afford more/less than before: this is like having a higher or lower income
2) the item has become cheaper than another item you were buying as well - if the price decreases its an increase in your purchasing power
-substitution effect
-you adjust your purchasing decision
you can think of adjustment in 2 ways
1) you can afford more/less than before: this is like having a higher or lower income
2) the item has become cheaper than another item you were buying as well - if the price decreases its an increase in your purchasing power
question
what are 3 social influences that affect buyers?
answer
1)celebrity endorsements (heavily used in advertising): firms use celebrity advertisements regularly, they work
2)Network externalities: situations in which the usefulness of a product increases with the number of consumers who use it (EX: Facebook)
3) fairness: people like to be treated fairly and prefer to treat each other fairly even if it is bad for them financially
2)Network externalities: situations in which the usefulness of a product increases with the number of consumers who use it (EX: Facebook)
3) fairness: people like to be treated fairly and prefer to treat each other fairly even if it is bad for them financially
question
what is experimental economics?
answer
Economists perform laboratory experiments on human subjects to see how they would react to real world situations
question
what is behavioral economics?
answer
situations in which people make choices that do not appear to be economically rational
question
what are the 3 common mistakes consumers mae that do not appear to be economically rational?
answer
1)taking into account monetary costs but ignoring nonmonetart opportunity costs
2)failing to ignore sunk costs
3)being unrealistic about their future behavior
2)failing to ignore sunk costs
3)being unrealistic about their future behavior
question
what is an indifference curve? the marginal rate of subtitution?
answer
Indifference cuve: a curve showing the combinations of consumption bundles that give the consumer the same utility
Marginal Rate of substitution: the rate at which the consumer is willing to trade off one product for another while keeping the consumer, utility constant
Marginal Rate of substitution: the rate at which the consumer is willing to trade off one product for another while keeping the consumer, utility constant
question
what is the basic process of a firm? Technological change?
answer
- the basic activity of a firm is to use inputs, to produce outputs of goods and services
- technological change: a change on the ability of a firm to produce a given level of output with a given quantity of inputs
- technological change: a change on the ability of a firm to produce a given level of output with a given quantity of inputs
question
what is the long run? short run?
answer
Long run: the firm can vary all of its inputs, adopt new technology an increase or decrease the size of the physical plant
-period of time around a year or more, enough time to allow the firm to vary/ change all or some inputs (long enough period of time that anything can be changed)
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Short run: the period of time during which atlas one of a firms inputs is fixed (atlas 1 input)
-period of time around a year or more, enough time to allow the firm to vary/ change all or some inputs (long enough period of time that anything can be changed)
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Short run: the period of time during which atlas one of a firms inputs is fixed (atlas 1 input)
question
what do we mean by total costs? fixed costs? Variable costs?
answer
Variable costs: costs that change as outputs change
- all costs are variable in the long run since you have enough time to allow the firm to vary/ change all or some inputs
Fixed costs: costs that remain constant as the output changes (found in the short run)
- all costs are variable in the long run since you have enough time to allow the firm to vary/ change all or some inputs
Fixed costs: costs that remain constant as the output changes (found in the short run)
question
how might variable and fixed costs be reflected in a real business?
answer
- Explicit costs include payments towards things such as product(food), wages (workers), loans(to buy equipment), electricity, lease payment
- Implicit costs include forgone salary(the # she had before starting), forgone interest(the interest she lost from not putting her money in the bank and spending it on the business instead), economic depreciation (how much value the items have lost from when you bought them to now)
- Implicit costs include forgone salary(the # she had before starting), forgone interest(the interest she lost from not putting her money in the bank and spending it on the business instead), economic depreciation (how much value the items have lost from when you bought them to now)
question
what are explicit costs? Implicit costs?
answer
Explicit Cost: a cost that involves spending money (easy to identify, just look at what the firm spends money on ex: checks)
Implicit cost: a Nonmonetary opportunity cost (difficult to find, involves identifying the rec=sources used in the firm that could have been used for another beneficial purchase, ex: the time you spend running a business is part of the cost, still an opportunity cost if you are paid or not)
Implicit cost: a Nonmonetary opportunity cost (difficult to find, involves identifying the rec=sources used in the firm that could have been used for another beneficial purchase, ex: the time you spend running a business is part of the cost, still an opportunity cost if you are paid or not)
question
What might be an example of each for a business?
answer
o Explicit costs include payments towards things such as product(food), wages (workers), loans(to buy equipment), electricity, lease payment
o Implicit costs include forgone salary(the # she had before starting), forgone interest(the interest she lost from not putting her money in the bank and spending it on the business instead), economic depreciation (how much value the items have lost from when you bought them to now)
o Implicit costs include forgone salary(the # she had before starting), forgone interest(the interest she lost from not putting her money in the bank and spending it on the business instead), economic depreciation (how much value the items have lost from when you bought them to now)
question
what is average total cost? what happens to it over time for most businesses?
answer
Average total cost: divide the total cost of the product by the number produced ($$ total cost divided by output quantity)
question
what is the marginal product of labor?Average product of labor? Law of diminishing returns?
answer
Marginal Product of Labor: the additional output a firm produces as a result of hiring one more worker
Law of Diminishing returns: the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
Average product of labor : the total output produced by a firm divided by the quantity of workers
Law of Diminishing returns: the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
Average product of labor : the total output produced by a firm divided by the quantity of workers
question
what is marginal cost? How can we tell if its increasing or decreasing?
answer
Marginal cost: as the change in a firm cost from producing one more unit of a good or service (mc=total cost/ quantity)
question
What is average total cost? Average fixed cost?
answer
Average total cost: fixed cost divided by the quantity of output produced
Average variable cost: variable cost divided by the quantity of output produced
Average variable cost: variable cost divided by the quantity of output produced
question
What is oligopoly?
answer
A market structure in which a small number of interdependent firms compete, will require different tools to analyzze
question
what is a four-firm concentration ratio?
answer
the fraction of an industry total sales that is accounted for by the four largest firms
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a four-firm concentration ratio larger than 40% tends to indicate oligopoly
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a four-firm concentration ratio larger than 40% tends to indicate oligopoly
question
why do oligopolies exist?
answer
oligopolies often exist because of the barriers to entry
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if control of a key input is held by one or a small number of firms it will be difficult for additional firms to enter
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government might grant exclusive rights to some industry's to one or small number of firms
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if control of a key input is held by one or a small number of firms it will be difficult for additional firms to enter
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government might grant exclusive rights to some industry's to one or small number of firms
question
Why do we need a different tool to analyze this structure/ what is it called?
answer
Oligopolies are but analyzed using a specialized field of study called game theory
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Game theory is the study of how people make decisions in situations in which attain their goals depends on their interactions with others; in economies the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms
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Game theory is the study of how people make decisions in situations in which attain their goals depends on their interactions with others; in economies the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms
question
what is a dominant strategy?
answer
one that is the best for a firm no matter what strategies other firms use
question
Nash equilibrium
answer
A situation in which a firm chooses the best strategy given the strategy chosen by their opponents
question
What us Monopolistic competition?
answer
a Market structure in which barriers to entry are low and many firms compete by selling similar but not identical products
question
What Is non-cooperative equilibrium?
answer
an equilibrium in a game in which players do not cooperate but pursue their own self interest
question
what is a cooperative equilibrium?
answer
an equilibrium in a game in which players cooperate to increase mutual payoff
question
What is the prisoners dilemma?
answer
This is a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off
question
what are several ways an oligopolist can avoid price competition?
answer
Price leadership: a form of implicit collusion in which one firm in an oligopoly announces a price change and other firms in the industry match the change
-Price match garuntee
-Price match garuntee
question
What is a cartel?
answer
a group of firms that collude by agreeing to restrict output to increase prices and proift
question
What are sequential games and what technique do we use to analyze them?
answer
sequential games: one firm makes a decision and the other makes its decision having observed the first firms decision
-works with competitors and vendors
-you analyze them using a decision tree
-works with competitors and vendors
-you analyze them using a decision tree
question
Income effect?
answer
the change in the quantity demanded of a good that results from the effect of a change I price on consumer purchasing power, holding all other factors constant
question
2 reasons network externality may result in market failure?
answer
1) switching costs: when a product becomes established, consumers may find it to costly to a new product that has better technology
2)Path dependence: due to switching costs, the technology that was first valuable may have advantages over better technology that was developed later
2)Path dependence: due to switching costs, the technology that was first valuable may have advantages over better technology that was developed later
question
Ultimatum game
answer
experiment that tests whether fairness is important in consumer decision making
question
Endownment effect
answer
When people are unwilling to sella good they own even if a greater price than they paid for it is offered
question
What is market structure?
answer
an economic model of competition among businesses in the same industry
question
What are the 4 market structures?
answer
1)perfect competition
2)Monopolistic competition
3)oligopoly
4)Monopoly
2)Monopolistic competition
3)oligopoly
4)Monopoly
question
what is a perfectly competitive market?
answer
1) has many buyers and sellers
2)all firms selling identical products
3) no barriers to new firms entering the market
2)all firms selling identical products
3) no barriers to new firms entering the market
question
what is the firms goal in any market structure?
answer
economic profit/ revenue
question
revenue
answer
The income earned by a business over a period of time by the sales of their goods or services
question
Average revenue
answer
The total revenue divided by the quantity sold
question
Marginal revenue?
answer
The additional income from selling one more unit of good; sometimes equal to the price
question
features of a monopoly?
answer
-single seller
-strong barriers to entry
-can set price or quantity
-strong barriers to entry
-can set price or quantity
question
Monopolistic competitoin
answer
A market in which a large number of firms compete by making similar but slightly different products
question
price taker
answer
A firm that cannot influence the price of the good or service that ir produces
-firms in a perfect competition ar price takers
-firms in a perfect competition ar price takers
question
when will a firm shut down
answer
if its price is less than the minimum average variable cost
question
As output increases, total revenue and total cost increase..
answer
Because of decreasing marginal returns, total cost eventually increases faster than total revenue
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