question
Derived Demand
answer
Demand that is the result of some other demand. For example, if the demand for computers rises, so does the demand for skilled computer workers.
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Marginal Revenue Product
answer
The additional revenue generated by employing an additional factor unit.
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MRP Equation
answer
MRP = change in TR / Change in the quantity of the Factor
or
MRP = MR x MPP
or
MRP = MR x MPP
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Value Marginal Product
answer
Is equal to the price of the product multiplied by the marginal physical product of the factor
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VMP Equation
answer
VMP = P x MPP
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Does MRP = VMP?
answer
Yes in perfectly competitive firms, but not for firms that are price searchers (ex. monopolist, monopolistic competitive, and oligopolistic firms). Those firms face downward-sloping demand curves for their products.
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Marginal Factor Cost
answer
The additional cost incurred by employing an additional factor unit.
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MFC Equation
answer
MFC = change in TC / change in quantity of the factor
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Factor Price Taker
answer
A firm that can buy all of a factor it wants at the equilibrium price. It faces a horizontal (flat, perfectly elastic) supply curve of factors.
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Least Cost Rule
answer
Rule that specifies the combination of factors that minimizes costs and so requires that the following condition be met: MPP₁/P₁=MPP₂/P₂=...=MPP₋/P₋, where the numbers stand for the different factors
question
When a perfectly competitive firm employs one worker, it produces 20 units of output, and when it employs two workers, it produces 39 units of output. The firm sells its product for $10 per unit. What is the marginal revenue product connected with hiring the second worker?
answer
MRP = MR x MPP. For a perfectly competitive firm, MR=P, so MR is $10. MPP in this case is 19 units. It follows that MRP=$190.
question
What is the difference between marginal revenue product (MRP) and value marginal product (VMP)?
answer
There is no price difference between MRP and VMP if the firm is perfectly competitive. In this situation, P=MR, and because MRP=MRxMPP and VMP=PxMPP, the two are the same. If the firm is a price searcher--monopolist, monopolistic competitor, or oligopolist-- P>MR; therefore, VMP>MRP.
question
What is the distinguishing characteristic of a factor price taker?
answer
A factor price taker can buy all it wants of a factor at the equilibrium price, and it will not cause factor price to rise. For example, if firm X is a factor price taker in the labor market, it can buy all the labor it wants at the equilibrium wage, and will not cause this wage to rise.
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How much labor should a firm purchase?
answer
It should buy the quantity at which MRP of labor equals MFC of labor.
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Elasticity of Demand for Labor
answer
The percentage change in the quantity demanded of labor divided by the percentage change in the wage rate.
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Marginal Production Theory
answer
Firms in competitive or perfect product and factor markets pay factors their marginal revenue products.
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Demand for Labor
answer
The market demand curve for labor is based of the MRP curves for labor of the individual firms in the market. What affects the components of MRP, MR and MPP is marginal revenue and marginal physical product of labor.
question
The demand for labor is a derived demand. What could cause the firm's demand curve for labor to shift rightward?
answer
The MPR curve is the firm's factor demand curve. MPR=PxMPP for a perfectly competitive firm; so if either the price of the product that the labor produces rises or the MPP of labor rises (reflected in a shift in the MPP curve), the factor demand curve shifts rightward.
question
Suppose the coefficient of elasticity of demand for labor is 3. What does this mean?
answer
It means that for every 1 percent change in the wage rate, the quantity demanded of labor change by 3 time this percentage. For example, if wage rates rise 10 percent, then the quantity demanded for labor falls 30 percent.
question
Why are wage rates higher in competitive market than in another? In short, why do wage rates differ?
answer
The short answer is because supply-and-demand conditions differ among markets.
question
Workers in labor market X do the same work as workers in labor market Y, but they earn $10 less per hour. Why?
answer
We can't answer this question specifically without more information. We know that under four conditions, wage rates would not differ: (1) the demand for every type of labor is the same; (2) the jobs have no special non pecuniary aspects; (3) all labor is ultimately homogenous and can costlessly be trained for different types of employment; (4) all labor is mobile at zero cost. For wages rate to differ, one or more of these conditions is not being met. For example, perhaps labor is not mobile at zero.
question
Under what four conditions do wage rates not differ?
answer
(1) the demand for every type of labor is the same; (2) the jobs have no special non pecuniary aspects; (3) all labor is ultimately homogenous and can costlessly be trained for different types of employment; (4) all labor is mobile at zero cost. For wages rate to differ, one or more of these conditions is not being met. For example, perhaps labor is not mobile at zero.
question
Accounting Profit Equation
answer
TR-EC (total revenue-eplicit costs)
question
Economic Profit Equation
answer
EP=TR-TC
question
Normal Profit
answer
TR=TC, 0 economic profits in the long run and it is the level necessary to keep resources employed
question
Short Run
answer
Fixed Costs
question
Long Run
answer
No fixed costs
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Marginal Physical Profit (MPP)
answer
(ΔQ/ΔL)
question
MPP in the Short Run
answer
MPP may increase but will eventually decrease
question
Law of Diminishing Returns
answer
As larger variable inputs are combined with fixed inputs, MPP of variable input will decline
question
Fixed Costs
answer
Costs are fixed input
question
Variable Costs
answer
Costs very and are associated with variable input
question
Total Cost
answer
Fixed costs and variable costs
question
Sunk Cost
answer
Should have no effect on decisions
question
Average Product of Labor, or Worker Productivity Equation
answer
Q/L
question
Average Fixed Costs Equation
answer
ΔFC/ΔQ
question
Average Variable Cost Equation
answer
ΔVC/ΔQ
question
Average Total Cost Equation
answer
TC/Q
question
Production and Costs in the Short Run
answer
There are FC and VC
question
Production and Costs in the Long Run
answer
There is only VC
question
Long Run Average Total Cost
answer
Lowest unit at which the firm can produce any given Q
question
Economies of Scale
answer
% output > % input, LRATC falls
question
Constant Returns to Scale
answer
% output=% input, LRATC constant
question
Diseconomies of Scale
answer
% input > % output, LRATC rises
question
A firm's cost will shift with...(3 items)
answer
Taxes, input prices, and technology
question
Market Structure
answer
Is the environment of a firm whose characteristics influence the firm's pricing and output changes
question
Perfect Competition
answer
Many sellers and buyers; each firm has the same (homogenous) product; buyers and sellers all have relevant information; easy exit and entry; market composed of of all buyers and sellers forms equilibrium price; and single, perfectly competitive firm faces horizontal, perfectly elastic demand curve
question
Price Taker
answer
(takes market price) A firms that accepts market price as a given and has no ability to influence price. Firms operating in perfect competition are price takers.
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Marginal Revenue
answer
Is the change in TR by producing additional unit of quantity. ΔTR/ΔQ. The demand curve is the MR curve. Profit maximized/loss minimized at MC=MR
question
Firm produces in Short Run...
answer
P>AVC
question
Firm is Shut Down in Short Run...
answer
P<AVC
question
Long Run Competitive Equilibrium is Equal to...
answer
P=MC=LRATC=SRATC
question
LRATC Stands For?
answer
Long Run Total Average Cost
question
SRATC Stands For?
answer
Short Run Total Average Cost
question
Zero Economic Profits When...
answer
TR=(EC+IC)
question
No Firm Changes Their Plant Size When...
answer
There is no incentive for entry or exit, no incentive for more or less output, no incentive for change in plant size
question
Product Efficiency Occurs When...
answer
Production of output is at the lowest possible unit cost
question
Monopoly
answer
One seller and many buyers; product has no clear substitute; hard entry and exit; typical economies of scale: LRATC falls; monopolists is a price searcher; no market so it can set prices; the monopolist firm is the industry and is guaranteed no profits. Profit>ATC=MC (downward sloping curve)
question
Consumer Surplus
answer
Price buyer is willing to pay actual price. CS greater in perfectly competitive firm
question
Dead Weight Loss of Monopoly Is..
answer
The net value of Qm-Qpc. The loss of not being a perfectly competitive firm. The output of PC> output of monopoly
question
Rent Seeking
answer
Is the act of searching for many personal gains instead of distributing income to others
question
X-Inefficieny
answer
Is the increase of costs and slack of the monopoly due to the lack of influence to push costs to lowest possible price
question
Perfect Price Discrimination
answer
Highest cost to all buyers highest offer
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Second Degree Price Discrimination
answer
Uniform price for one specific quantity with a lower price for each additional quantity
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Third Degree Price Discrimination
answer
Different prices for different markets and different populations
question
To Price Discriminate...
answer
The seller must must be a price searcher; must distinguish who would pay different prices; must be too costly to resell to another buyer; arbitrage must not exist
question
Arbitrage
answer
Buying good at lower price and selling them at a higher price
question
Monopolistic Competition
answer
Produces quantity at MC=MR at highest price per unit for quantity. Zero economic profits in long run due to easy entry; unlike monopoly and perfect competitive firm: PC does not equal MC- allocative efficiency. Excess capacity theory states monopolistic competitor produces output smaller than the total cost that minimizes production costs .
question
Excess Capacity Theory
answer
States monopolistic competitor produces output smaller than the total cost that minimizes production costs
question
Difference between Perfectly Competitive Firm and Monopolistic Competitor Utilizing Plant Size
answer
Under utilizes plant size, perfectly competitive firm operates at lowest unit, unlike monopolistic competitor. Monopolistic competitor does this due to downward slope curve that helps advertise different products produced.
question
Oligopoly
answer
Few sellers, many buyers; firms produce different or homogenous products; and significant barriers to entry (oligopolistic is a price searcher)
question
What Defines Oligopolistic Structure
answer
Concentration ratio defines Oligopolistic structure. Firms/sales; 4 firms concentration=% industry slaes for top 4 firms. Perfectly competitive firm has lower ratio and fewer stakes
question
Cartel
answer
Reduces output and increases price in order to increase profits. Operates jointly, like one firm and behaves like a monopoly firm. With cartels firms can earn long run
question
Problems with Cartels
answer
Formation of the actual cartel; policy formation; entry to industry; cheating leads to large profits
question
Factor Demand
answer
Is a derived demand
question
Result of Demand for Products that Inputs Produce
answer
Land, labor, capital, and entrepreneurship
question
Marginal Demand Profit
answer
The additional revenue from employment of additional worker. ΔTR/ΔQ; MRxMPP
question
MPP Curve
answer
Is the firm's factor demand curve
question
Value Marginal Product
answer
Show the value each additional worker adds to firm. Decides how many workers to hire:
VMP=price of good x MPP ...money measure of additional worker
VMP=price of good x MPP ...money measure of additional worker
question
MRP and VMP are the Same for?
answer
Perfectly competitive firm for P=MC
question
MRP Is Below Demand For...
answer
Monopoly, oligopoly, and monopolistic competitor
question
Price and MRP are Directly Related When?
answer
In perfectly competitive form
question
Marginal Factor Cost
answer
Is the additional cost incurred by hiring additional workers. MFC=ΔTC/ΔQw
question
A factor Price Taker Can...
answer
Hire as many workers as it wants at equilibrium (Horizontal, perfectly elastic supply of curve workers)
question
When Does a Firm Continue to Hire Workers?
answer
When MRP>MFC; optimal at MFC=MRP
question
When Does Price Equal MPC?
answer
Whenever price is constant
question
What do Higher Wages Result in?
answer
Higher costs and lower supply to rise in price
question
Market Supply of Labor
answer
Is the direct relationship between wage rate and quantity of labor supplied.
question
What shifts the Market Supply Curve of Labor?
answer
Wages and other labor markets, and non-money aspects of jobs
question
Market Failure Nears When...
answer
When the market does not provide optimal amount of good.
question
Externalities
answer
Side effects which charge well-being of third part. Negative: course cost felt by others, market output and produces socially optimal output. Positive: beneficial to third party, market output under produces
question
Externalities Can Be Internalized By?
answer
Persuasion, property rights, voluntary agreements, taxes subsidies
question
When considering actions and outcomes, economists refer to?
answer
Marginal social benefits/costs. MSB=MPB+MEB; MSC=MPC+MCC
question
Socially optimal output occurs when?
answer
When MSB=MSC-Efficient amount
question
Public Goods
answer
Are goods consumed that do not effect consumption by another person
question
Excludable
answer
Can be withheld from others after production; non excludable goods are not
question
Non-Excludable Goods
answer
Encounter free rider problem which occurs when supplier can't extract payment from good; market fails.
question
Pollution, is it good?
answer
Some pollution is better than none: utility found in pollution-cars.
question
When is environmentalism used? (to solve what>)
answer
Economists use market-environmentalism to solve: permits bought and sold at pollution standards.
question
Coase Theorem
answer
States that that if trade in an externality is possible and there are no transaction costs
question
Externalities
answer
Transaction spillover, is a cost or benefit that is not transmitted through prices. Externalities are internalized and provide a benchmark (an externality problem analysis).
question
Business Firm
answer
An entry that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, and the government
question
Market Coordination
answer
The process in which individuals perform tasks, such as producing certain quantities of goods, based on changes in market forces such as supply, demand and price
question
Shirking
answer
The behavior of a worker who is putting forth less than the agreed to effort
question
Monitor
answer
The behavior of a worker who is putting forth less than the agreed to behavior
question
Residual Claimants
answer
Persons who are in profits of a business firm
question
Profit
answer
The difference between total revenue and total cost
question
Explicit Cost
answer
A cost incurred when an actual (monetary) payment is made
question
Implicit Cost
answer
A cost that represent the value of resources used in production for which no actual (monetary) payment is made
question
Accounting Profit
answer
Difference between total revenue and explicit costs
question
Economic Profit
answer
Difference between total revenue and total costs, including both explicit and implicit costs
question
Normal Profit
answer
Zero economic profit. A firm that earns normal profit is earning revenue equal to its costs (explicit and implicit costs). This is the level of profit necessary to keep resources employed in the firm
question
Fixed Input
answer
An input whose quantity cannot be changed as output changes
question
Variable Input
answer
An input whose quantity can be changed as output changes
question
Short Run
answer
A period of time in which all inputs in the production process can be varied (no inputs are fixed)
question
Law of Diminishing Marginal Returns
answer
As even larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline
question
LRATC Curve
answer
A curve that shows the lowest (unit) cost at which the firm can produce any given level of output
question
Constant Returns to Scale
answer
The condition when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant
question
Minimum Efficient Scale
answer
The lowest out level at which average total costs are minimized.
question
Resource Allocative Efficiency
answer
The situation when firms produce the quantity of output at which price equals marginal cost: P=MC
question
Short-Run (firm) Supply Curve
answer
The portion of the firm's marginal cost curve that lies above the average variable cost curve
question
Short-Run Market (industry) Supply Curve
answer
The horizontal addition of all existing firms' short-run supply curve
question
Constant Cost Industry
answer
An industry in which average total costs do not change as (industry) output increases or decreases when firms enter or exit the industry, respectively
question
Public Franchise
answer
A right granted to a firm by government that permits the firm to provide a particular good or service and that excludes all others from doing so
question
Natural Monopoly
answer
The condition where economies of scale are are so pronounced that only one firm can survive
question
Price Discrimination
answer
A price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences
question
Concentration Ratio
answer
The % of industry sales accounted for by x number of firms in the industry
question
Contestable Market
answer
a market in which entry is easy and exit is costless, new firms can produce the product at the same cost as current firms, and exiting firms can easily dispose of their fixed assets by selling them
question
Will individuals form teams or firms in all settings?
answer
...
question
Suppose everything about two people is the same except that currently one person earns a high salary and the other person earns a low salary. Which is more likely to start his or her own business?
answer
...
question
Is accounting profit or economic profit larger? Why?
answer
...
question
When can a business owner be earning a profit but not have costs?
answer
...
question
If the short run is 6 months, does it follow that the long run is longer than 6 months? Explain answer.
answer
...
question
"As we add more capital to more labor, eventually the law of diminishing marginal returns will set in". What is wrong with this statement?
answer
...
question
Suppose a marginal cost curve falls when output is in the range of 1 unit to 10 units. Then it flattens out and remains constant over an output range of 10 units to 20 units, and then rises over a range of 20 units to 30 units. What does this have to say about the marginal physical product of the variable input?
answer
...
question
Identify two ways to compute average total cost (ATC)
answer
...
question
Would a business ever sell its product for less? Explain.
answer
...
question
Do changes in marginal physical product influence unit cost? Explain
answer
...
question
Give an arithmetical example to illustrate the economies of scale
answer
...
question
What would the LRATC curve look like if there were always constant returns to scale? Explain
answer
...
question
Firm A charged $4 per unit when it produced 100 units of good X, and it charged $3 per unit when it produced 200 units. Furthermore, the firm earned the same profit per unit in both cases. How can this happen?
answer
...
question
"If a firm is a price take, it does not have the ability to control the price of the product it sells." What does this statement mean?
answer
...
question
Why is a perfectly competitive firm a price taker?
answer
...
question
The horizontal demand curve for the perfectly competitive firm signifies that it cannot sell any of its product for a price higher than the equilibrium price. Why not?
answer
...
question
Suppose the firms in a real-world market do not sell a homogenous product. Does it necessarily follow that the market is not perfectly competitive?
answer
...
question
If a firm produces the quantity of output at which MR=MC, does it necessarily earn profits?
answer
...
question
In the short-run, if a firm finds that a price (P) is less than its average total costs (ATC), should it shut down its operation?
answer
...
question
The layperson says that a firm maximizes profits when a total revenue minus total cost is as large as possible and positive. The economists says that a firm maximizes profits, when it produces the level of output at which MR=MC. Explain how the two ways of looking at profit maximization are consistent.
answer
...
question
Why are market supply curves upward sloping?
answer
...
question
If firms in a perfectly competitive market are earning positive economics profits, what will happen?
answer
...
question
If firms in a perfectly competitive market want to produce more output, is the market in the long run equilibrium?
answer
...
question
If a perfectly competitive market in the long-run equilibrium witness an increase in demand, what will happen to price?
answer
...
question
Two firms produce computer software; firm A employs a software genius at the same salary as firm B employs a mediocre software engineer. Will the firm that employs the software genius earn higher profits than the other firm, ceteris paribus?
answer
...
question
In a perfectly competitive market, do higher costs mean higher prices?
answer
...
question
If you see a product advertised on TV, does it follow that the product cannot be produced in a perfectly competitive market?
answer
...
question
"There are always some close substitutes for the product any firm sells; therefore the theory of monopoly (which assumes no close substitutes) cannot be useful". Comment
answer
...
question
How do economies of scale act as a barrier to entry?
answer
...
question
How is a movie stars life like a monopoly?
answer
...
question
Why does the monopolist's demand curve lie above its marginal revenue curve?
answer
...
question
Is a monopolist guarenteed to earn profits?
answer
...
question
Is a monopolist resource allocative efficient?
answer
...
question
Why do you think a monopolist is called a price searcher? What is it searching for?
answer
...
question
What are some of the costs, or shortcomings of monopoly?
answer
...
question
What is the deadweight loss of monopoly?
answer
...
question
Why must a seller be a price searcher (among other things) before he can price discriminate?
answer
...
question
"Firms have an incentive to form cartel, but, once it is formed, they have an incentive to cheat". What is the specific incentive to form the cartel? What is the incentive to cheat on the cartel?
answer
...
question
Is an oligopolistic firm a price taker or price searcher? Explain
answer
...
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