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capital
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the tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services; 1/4 factors of production
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economics
answer
the social science that studies the CHOICES that individuals, businesses, governments, and entire societies make as they cope with SCARCITY and the INCENTIVES that influence and reconcile those choices; the subject has 2 parts
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efficiency
answer
achieved when available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit
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entrepreneurship
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the human resource that organizes land, labor. and capital; 1/4 factors of production
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equity
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fairness; a dimension of social interest
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factors of production
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economists' term for productive resources that produce goods and services; grouped into 4 categories (land, labor, capital, & entrepreneurship)
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globalization
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the expansion of international trade, borrowing and lending, and investment
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goods
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physical objects
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goods and services
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the objects that people value and produce to satisfy human wants
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human capital
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the knowledge and skill obtained from education, on-the-job training, and work experience that the quality of labor depends on; it expands over time
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incentive
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a reward that encourages an action or a penalty that discourages on (Ex. prices)
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labor
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work time and work effort (mental and physical) that people devote to producing goods and services; its quality depends on human capital; 1/4 factors of production
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land
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natural resources used to produce goods and services (can be renewable, recyclable, or nonrenewable); 1/4 factor of production
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macroeconomics
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the study of the performance of the national economy and the global economy
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microeconomics
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the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of goverments
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scarcity
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our inability to get everything we want; is universal
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self-interest
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a choice made because you believe it is the best one available for you
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services
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tasks performed for people
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social interest
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a choice that leads to an outcome that is the best for society as a whole; has two dimensions of efficiency and equity (fairness)
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monopolistic competition
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a common form of an industry (market) structure characterized by a large number of firms, no barriers to entry, and product differentiation
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product differentiation
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a strategy that firms use to achieve market power; accomplished by producing goods that differ from others in the market
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horizontal differentiation
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products differ in ways that make them better for some people and worse for others
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vertical differentiation
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a product difference that, from everyone's perspective, makes a product better than rival products
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behavioral economics
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a branch of economics that uses the insights of psychology and economics to investigate decision making
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commitment device
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actions that individuals take in one period to try to control their behavior in a future period
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payoff
answer
the amount that comes from a possible outcome or result
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expected value
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the sum of the payoffs associated with each possible outcome of a situation weighted by its probability of occuring
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fair game/fair bet
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a game whose expected value is zero
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diminishing marginal utility
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the more of any one good consumed in a given period, the less incremental satisfaction is generated by consuming a marginal or incremental unit of the same good
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expected utility
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the sum of the utilities coming from all possible outcomes of a deal, weighted by the probability of each occurring
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risk-averse
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refers to a person's preference of a certain payoff over an uncertain one with the same expected value
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risk-neutral
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refers to a person's preference for an uncertain deal over a certain deal with an equal expected value
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risk-loving
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refers to a person's preference for an uncertain deal over a certain deal with an equal expected value
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asymmetric information
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one of the parties to a transaction has information relevant to the transaction that the other party does not have
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adverse selection
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a situation in which asymmetric information results in high-quality goods or high-quality consumers being squeezed out of transactions because they cannot demonstrate their quality
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market signaling
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actions taken by buyers and sellers to communicate quality in a world of uncertainty
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moral hazard
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arises when one party to a contract changes behavior in response to that contract and thus passes on the costs of that behavior change to the other party
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mechanical design
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a contract or an institution that aligns the interests of two parties in a transaction. ex: a piece rate creates incentives for a worker to work hard, just as his or her superior wants; a co-pay in health care encourages more careful use of healthcare as insurance company wants
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externality
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actions of one party impose costs or benefits on a second party
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marginal social cost (MSC)
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the total cost to society of producing an additional unit of a good or service. ___ is equal to the sum of the marginal costs of producing the product and the correctly measured damage costs involved in the process of production
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marginal private cost (MPC)
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the amount that a consumer pays to consume an additional unit of a particular good
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marginal damage cost (MDC)
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the additional harm done by increasing the level of an externality-producing activity by one unit. if producing product X pollutes the water in the river, ___ is the additional cost imposed by the added pollution that results from increasing output by one unit of X per period
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coase theorem
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under certain conditions, when externalities are present, private parties can arrive at the efficient solution without government involvement
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injuction
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a court order forbidding the continuation of behavior that leads to damages
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liability rules
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laws that require A to compensate B for damages that A imposed on B
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public goods (social or collective goods)
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goods that are nonrival in consumption and their benefits are nonexcludable
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nonrival in consumption
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a characteristic of public goods: one person's enjoyment of the benefits of a public good does not interfere with another's consumption of it
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nonexcludable
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a characteristic of public goods: once a good is produced, no one can be excluded from enjoying its benefits
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free-rider problem
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a problem intrinsic to public goods: because people can enjoy the benefits of public goods whether or not they pay for them, they are usually unwilling to pay for them
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drop-in-the-bucket problem
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a problem intrinsic to public goods: the good or service is usually so costly that its provision generally does not depend on whether any single person pays
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optimal level of provision for public goods
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the level at which society's total willingness to pay per unit is equal to the marginal cost of producing the good
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tiebout hypothesis
answer
an efficient mix of public goods is produced when local land/housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods
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oligopoly
answer
form of industry (market) structure characterized by a few dominant firms. products may be homogenous or differentiated
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five forces model
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a model developed by Michael Porter that helps us understand the five competitive forces that determine the level of competition and profitability in an industry
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concentration ratio
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the share of industry output in sales or employment accounted for by the top firms
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contestable markets
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markets in which entry and exit are easy enough to hold prices to a competitive level even if no entry actually occurs
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cartel
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a group of firms that gets together and makes joint price and output decisions to maximize joint profits
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tacit collusion
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occurs when price- and quantity-fixing agreements among producers are implicit, as opposed to generally being explicit
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price leadership
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a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy
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duopoly (Cournot Model)
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a two-firm oligopoly
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game theory
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analyzes the choices made by rival firms, people, and even govts when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment
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dominant strategy
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in game theory, a strategy that is best no matter what the opposition does
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prisoner's dilemma
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a game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate
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Nash equilibrium
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in game theory, the result of all players' playing their best strategy given what their competitors are doing
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maximin strategy
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in game theory, a strategy chosen to maximize the minimum gain that can be earned
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tit-for-tat strategy
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a repeated game strategy in which a player responds in kind to an opponents play
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Celler-Kefauver Act
answer
extended the govts authority to control mergers
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Herfindahl-Hirschman Index (HHI)
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an index of market concentration found by summing the square of percentage shares of firms in the market
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imperfectly competitive industry
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an industry in which individual firms have some control over the price of their output
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market power
answer
an imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product
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monopoly
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an industry with a single firm in which the entry of new firms is blocked
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oligopoly
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an industry in which there is a small number of firms, each large enough so that its presence affects prices
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monopolistic competitors
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firms that differentiate their products in industries with many producers and free entry
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pure monopoly
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an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits
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natural monopoly
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an industry that realizes such large economies of scale that single-firm production of that good or service is most efficient
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patent
answer
a barrier to entry that grants exclusive use of the patented product or process to the inventor
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network externalities
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the value of a product to a consumer increases with the number of that product being sold or used in the market
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rent-seeking behavior
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actions taken by households or firms to preserve economic benefits
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government failure
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occurs when the govt becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of govt
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public choice theory
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an economic theory that the public officials who set economic policies and regulate the players act in their own self interest, just as firms do
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price discrimination
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charging different prices to different buyers for identical products
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perfect price discrimination
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occurs when a firm charges the maximum amount that buyers are willing to pay for each unit
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rule of reason
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criterion introduced by the SC in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within terms of the Sherman Act
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Clayton Act
answer
passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason , the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers
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Federal Trade Commission (FTC)
answer
created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law
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partial equilibrium analysis
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the process of examining the equilibrium conditions in individual markets and for households and firms separately
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general equilibrium
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the condition that exists when all markets in an economy are in simultaneous equilibrium
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efficiency
answer
the condition in which the economy is producing what people want at least possible cost
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pareto efficiency/optimality
answer
a condition in which no change is possible that will make some members of society better off without making some other members of society worse off
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consumer surplus (review)
answer
the difference between the maximum amount that buyers are willing to pay for a good and it's current market price
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producer surplus (review)
answer
the difference between the current market price of a good and the full cost of producing it; in a way it is a measure of profitability
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market failure
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occurs when resources are misallocated, or allocated inefficiently. the result is waste or lost value
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sources of market failure
answer
imperfect market structure or noncompetitive behavior; the existence of public goods; the presence of external costs and benefits; imperfect information
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public goods
answer
goods and services that bestow collective benefits on member of society; generally, no one can be excluded from enjoying their benefits; ex: national defense
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externality
answer
a cost of benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction
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imperfect information
answer
the absence of full knowledge concerning product characteristics, available prices, and so on
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breaking even
answer
the situation in which a firm is earning exactly a normal rate of return
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shutdown point
answer
the lowest point on the average variable cost curve. when price falls below the minimum point on AVC, TR is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs
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short-run industry supply curve
answer
the sum of the marginal cost curves (above AVC) of all the firms in an industry
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economies of scale
answer
an increase in a firm's scale of production leads to lower costs per unit produced
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constant returns to scale
answer
an increase in a firm's scale of production has no effect on costs per unit produced
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diseconomies of scale
answer
an increase in a firm's scale of production leads to higher costs per unit produced
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long-run average cost curve (LRAC)
answer
the "envelope" of a series of short run cost curves
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minimum efficient scale (MES)
answer
the smallest size at which the long-run average cost curve is at its minimum
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optimal scale of plant
answer
the scale of plant that minimizes average cost
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long-run competitive equilibrium
answer
when P=SRMC=SRAC=LRAC and profits are zero
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fixed cost
answer
any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no _____ costs in the long run.
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variable costs
answer
costs that depend on the level of production chosen
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total costs (TC)
answer
total fixed costs plus total variable costs (TFC+TVC)
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total fixed costs (TFC; aka.overhead)
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the total of all costs that do not change with output, even if output is zero
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average fixed costs (AFC)
answer
total fixed costs divided by the number of units of output; unit per unit measure of fixed costs
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spreading overhead
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the process of dividing total fixed costs by more units of output; AFC declines as quantity rises
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total variable costs (TVC)
answer
the total of all costs that vary with output in the short run
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total variable cost curve
answer
graph that shows the relationship between total variable cost and the level of a firm's output
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marginal cost (MC)
answer
the increase in total cost that results from producing 1 more unit of output; reflect changes in variable costs
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average variable cost (AVC)
answer
total variable costs divided by the number of units of output (TVC/q)
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average total cost (ATC)
answer
total cost divided by the number of units of output; or, AFC + AVC
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accounting costs
answer
out-of-pocket costs or costs as an accountant would define them; sometimes referred to as explicit costs
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economic costs
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costs that include the full opportunity costs of all inputs; include implicit costs
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perfect competition
answer
an industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have control over prices; new competitors can freely enter and exit the market
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homogenous products
answer
undifferentiated products; products that are identical to, or indistinguishable from, one another
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total revenue (TR)
answer
the total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce (P x q)
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marginal revenue (MR)
answer
the additional revenue that a firm takes in when it increases output by one additional unit; in perfect competition P=__
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MR curve
answer
identical to the demand curve
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profit maximizing output
answer
MR=MC, but MR=P, so P=MC
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MC curve
answer
the same as a firm's supply curve, with one exception
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production
answer
the process by which inputs are combined, transformed, and turned into outputs
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firm
answer
An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand.
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profit (economic profit)
answer
TR-TC
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total revenue (TR)
answer
amount received from the sale of the product (Q x p)
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total cost (TC)
answer
the total of a) out of pocket costs and b) opportunity costs of all factors of production
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economic profit
answer
profit that accounts for both explicit and opportunity costs
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normal rate of return
answer
a rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
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short run
answer
the period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
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long run
answer
That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
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optimal level of production
answer
method which minimizes costs for a given level of output
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production technology
answer
the quantitative relationship between inputs and outputs
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labor-intensive technology
answer
technology that relies heavily on human labor instead of capital
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capital-intensive technology
answer
technology that relies heavily on capital instead of human labor
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average product
answer
the average amount produced by each unit of a variable factor of production (total product/total units of labor)
question
breaking even
answer
the situation in which a firm is earning exactly a normal rate of return
question
shutdown point
answer
the lowest point on the average variable cost curve. when price falls below the minimum point on AVC, TR is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs
question
short-run industry supply curve
answer
the sum of the marginal cost curves (above AVC) of all the firms in an industry
question
economies of scale
answer
an increase in a firm's scale of production leads to lower costs per unit produced
question
constant returns to scale
answer
an increase in a firm's scale of production has no effect on costs per unit produced
question
diseconomies of scale
answer
an increase in a firm's scale of production leads to higher costs per unit produced
question
long-run average cost curve (LRAC)
answer
the "envelope" of a series of short run cost curves
question
minimum efficient scale (MES)
answer
the smallest size at which the long-run average cost curve is at its minimum
question
optimal scale of plant
answer
the scale of plant that minimizes average cost
question
long-run competitive equilibrium
answer
when P=SRMC=SRAC=LRAC and profits are zero
question
Scarcity
answer
Limited nature of society's resources.
question
Economics
answer
The study of how people allocate their limited resources to satisfy their nearly unlimited wants. The study of scarcity; how human beings respond to scarcity.
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Positive vs. Negative Incentives
answer
Both encourage action. Positive ex: bonuses to motivate workers. Negative ex: fear of receiving a ticket keeps people from driving too fast.
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Direct vs Indirect Incentives
answer
Direct incentive: if a gas station lowers its prices, it most likely will get business from customers who would not usually stop there. Indirect: might encourage customers to use more gas. Indirect incentive is basically an unintended consequence.
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Opportunity Cost
answer
The highest valued alternative that must be sacrificed in order to get something else.
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Thinking on the Margin (Marginal Thinking)
answer
Making choices by thinking in terms of the benefits and costs of a little bit more or less. Evaluating whether the benefit of one more unit of something is greater than its cost.
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Why do you think that researchers sometimes find a positive relationship between the unemployment rate and college enrollment rates?
answer
The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates.
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Efficiency
answer
An outcome is efficient if it's not possible to make one person better off without making someone worse off.
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Competitive Market
answer
One in which there are so many buyers and sellers that each has only a small impact on the market price and output, so much that it is negligible. "Price takers."
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Imperfect Market
answer
One in which either the buyer or the seller has an influence on the market price.
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Law of Demand
answer
All other things being equal, the quantity of demanded falls when the price rises, and the quantity demanded rises when the price falls.
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Market Demand
answer
The sum of all the individual quantities demanded by each buyer in a market at each price. Same with market supply.
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Shifts in the Demand Curve
answer
Changes in income: when your income goes up, you have more to spend. Will buy more normal goods and less inferior goods.
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Complements
answer
two goods that are used together. Demand of both goods are proportional.
question
Substitutes
answer
two goods that are used in place of each other. Demand of both are inversely proportional.
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Law of Supply
answer
All other things being equal, the quantity supplied increases when the price rises, and the quantity supplied falls when the price falls.
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Shifts in Supply
answer
The cost of inputs: Higher cost inputs=less supply. Lower costs=more supply.
question
Corky-Cola and Pripsy are substitute soft drinks. Which of the following would cause the demand curve for Pripsy to shift to the left?
answer
The price of Corky-Cola decreases.
question
In the oil market, an increase in the wages of oil workers will...
answer
Shift the supply curve of oil to the left.
question
Susan quits her administrative job, which pays $40,000 a year, to finish her four-year college degree. Her annual college expenses are $8,000 for tutition and $700 for books. She spends $500 a year for food. What is the opportunity cost of attending college for the year?
answer
$48,700
question
Producer Surplus
answer
The sum of (price-marginal cost) for each unit sold. Total net benefit to producers.
question
Consumer Surplus
answer
The sum of (marginal value-price) for each unit bought. Total net benefit to producers.
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Shortage
answer
When the quantity supplied is less than the quantity demanded.
question
Surplus
answer
When the quantity supplied is greater than the quantity demanded.
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The Invisible Hand Theorem
answer
The competitive equilibrium quantity maximizes total surplus. The market produces every unit for which the marginal value is greater than marginal cost. The competitive outcome is efficient.
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Elasticity
answer
Responsiveness to a change in market conditions.
question
Perfectly Inelastic Demand
answer
Straight vertical line.
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Perfectly Elastic Demand
answer
Straight horizontal line.
question
When is demand elastic?
answer
Lots of substitutes, few complements, large part of budget, luxuries, and mainly in the long run.
question
When is demand inelastic?
answer
Few substitutes, lots of complements, small part of budget, necessities, and in the short run.
question
If a one-of-a-kind Etruscan vase is offered for sale at an auction, which, if any, of the following correctly describes the supply curve for the vase?
answer
A vertical line.
question
Which of the following would not increase the demand (shift the curve to the right) for beer?
answer
A price war results in beer selling for $0.50 per bottle.
question
If the market demand for a good decreases, and the supply increases, then...
answer
Equilibrium price decreases.
question
If a new technological breakthrough in genetic engineering makes it possible to grow twice as much corn per acre as had been possible in the past, the most likely result will be:
answer
an increase (shift to the right) in the supply of corn, due to the reduced cost of production
question
The market for apples is in equilibrium. If the price of apples and the quantity of apples sold increase, which of the following most likely occurred?
answer
The demand curve for apples shifted to the right.
question
If Maria is willing to pay $50 for a sweatshirt, how much consumer surplus does she obtain if the market price for sweatshirts is $27.50 each, and she purchases one sweatshirt?
answer
$22.50
question
A decrease in income causes the demand to ___________ for a normal good, and an increase in income causes the demand to _______ for an inferior good.
answer
Decrease, decrease
question
If the cost per unit of producing a good increases, and all other factors remain the same as before, then
answer
The supply curve for the good will shift to the left.
question
Price Elasticity of Demand
answer
The responsiveness of quantity demanded to a change in price.
question
Price elasticity of demand with regards to time
answer
In the immediate run, there is no time for consumers to adjust their behavior, so demand is usually inelastic. In the short run, consumers can partially adjust their behavior, making demand more elastic, but still overall inelastic. In the long run, consumers have time to fully adjust to market conditions. The demand becomes elastic.
question
Cross-price elasticity of demand
answer
The responsiveness of the quantity demanded of one good to a change in the price of a related good.
question
Suppose that the supply of a certain good is perfectly inelastic. If the demand for that good increases, then
answer
The equilibrium price will rise, the equilibrium quantity will not change
question
If producers increase the price of soft drinks by 10 percent and the quantity demanded remains the same, which of the following must be true?
answer
The demand for soft drinks is perfectly inelastic
question
As income rises during economic upturns, consumption of potatoes declines, yet as income falls during economic downturns, consumption of potatoes rises. The most likely explanation is:
answer
negative income elasticity of demand
question
If the price of a good with elastic demand increases, the revenue will
answer
fall
question
If a theater increases the price of a movie ticket from $10 to $15 and the quantity of movie tickets demanded decreases from 4000 to 1000, then over this price range the demand schedule is
answer
elastic and total revenue will decrease
question
Suppose that the price of pumpkins in Austin has fallen by 10%, while total spending on pumpkins in Austin has gone up by 2%. Which of the following could explain those changes?
answer
Supply curve shifted out, demand curve remained the same, and demand is elastic
question
If the price elasticity of supply is 4, then when the price of Good X rises by 5%
answer
the quantity supplied of Good X rises by 20%
question
The per-unit cost of producing Tic Tac candy does not change with increases in production, which means that the:
answer
supply of Tic Tac candy is elastic
question
Price ceiling
answer
A legally established maximum price for a good or service, e.g. rent control
question
Results in lower producer surplus. Consumer surplus also decrease, but it is hard to calculate because there is a better price, but lower quality
answer
...
question
Black markets
answer
Illegal markets that arise when price controls are in place.
question
Nonbonding price ceilings
answer
A price ceiling that is above equilibrium price. Does not influence the market.
question
Binding price ceilings
answer
Below market price.
question
Price floor
answer
minimum price at which a good can be legally sold or bought
question
Fixed costs
answer
same regardless of output, e.g. rent on trailer, permits
question
Variable costs
answer
increases with output, e.g. ingredients, wages, utilities
question
Accounting costs
answer
payments to inputs
question
Economic costs
answer
accounting costs+opportunity costs of unpurchased inputs (own your trailer and use it yourself instead of renting to someone else)
question
Total cost
answer
fixed cost+variable cost
question
Marginal cost
answer
increase in total cost (variable) from producing one more unit
question
Elasticity in relation to tax
answer
The more elastic you are, the lower your share of the tax.
question
Higher elasticity causes a bigger decrease in quantity, so DWL is larger relative to direct burden.
answer
...
question
Explicit costs
answer
Tangible out of pocket expenses
question
Implicit costs
answer
opportunity costs of doing business. opportunity cost of capital and cost of the owner's labor
question
Accounting profit vs. economic profit
answer
Economic profit is always less than accounting profit. Accounting profit is calculated by subtracting only the explicit costs from total revenue. Does not take into account the implicit costs of doing business. Economic profit is total revenue minus explicit and implicit costs.
question
Factors of production
answer
labor, land and capital.
question
production function
answer
describes the relationship between the inputs a firm uses and the output it creates
question
marginal product
answer
change in output associated with one additional unit of an input
question
Diminishing marginal product
answer
the point at which successive increases in inputs are associated with a slower rise in output
question
Price taker
answer
has no control over the price set by the market
question
Characteristics of competitive firms
answer
many sellers, similar products, free entry and exit, and price taking
question
Starting from the long-run equilibrium, the city of Crullaire unexpectedly imposes a tax on doughnuts. In particular, doughnut shops must now pay the city a sales tax of $2 for every doughnut sold. In the short run, how will this tax affect the price of a doughnut? In the long run?
answer
Short run: no change; long run: price increases by $2.
question
A market is initially in long-run competitive equilibrium. Each active firm is producing 200 units at an average total cost of $90 per unit. Suppose that because of a decrease in demand, the market price falls to $80. In the short run, each firm has fixed costs of $1000. What should a firm do in the short run?
answer
Shut down
question
Farida is thinking of entering the pie industry by leasing a factory. The cost of leasing the factory is $1,000 per day. The profit maximizing quantity of pies is 1,000 pies a day. Each pie sells for $3 and cost only $2.10 to make (in addition to the cost of leasing the factory). Which of the following is a correct conclusion based on this information?
answer
Farida should not enter the industry.
question
You are the owner of a firm that sells vases. You must pay each worker you hire $19 per hour, and each worker can produce 1 vase every 2 hours. You have no other costs. Derive your total cost function: if output is Q, then total cost is
answer
38Q
question
You are the owner of a firm that sells vases. You must pay each worker you hire $19 per hour, and each worker can produce 1 vase every 2 hours. You have no other costs. Derive your average total cost function: if output is Q, then average total cost is
answer
38
question
Damine is a milk producer in a very competitive industry. The market price for a gallon of milk is $2. Damine's farm produces 400 gallons of milk a day. Damine's marginal revenue per gallon of milk is:
answer
$2
question
In an industry with a horizontal long-run supply curve, if there is a decrease in demand, then
answer
Prices decrease in the short run but return to initial level in the long run
question
Zero economic profit
answer
normal profit
question
Barriers to entry for a monopoly
answer
Legal restrictions, patents, copyrights, charters
question
Economies of scale
answer
production costs per unit continue to fall as the firm expands
question
natural monopoly
answer
When a single firm has lower costs than any potential smaller competitor
question
Which of the following correctly defines a monopoly that has economies of scale?
answer
A single firm which can supply the market at a lower cost than two or more firms.
question
Mark up
answer
the difference between the price the firm charges and the marginal cost of production
question
Apple Inc's iPod is the dominant product in the market for mp3 players. Suppose that a technology company Orange recently introduced an innovative mp3 player, which many consumers feel is a good substitute of the iPod. You would expect
answer
Apple would tend to decrease its markup for the iPod.
question
If the price of an input decreases, you would expect a monopolist to:
answer
decrease the price of its product and increase output.
question
Economic theory suggests that a natural monopoly should be:
answer
regulated to take advantage of economies of scale.
question
Oligopoly
answer
exists when a small number of firms sell a product in a market with significant barriers to entry
question
Nash equilibrium
answer
second-best outcome. occurs when an economic decision maker has nothing to gain by changing strategy unless it can collude. given the behavior of the other players, no single player wants to unilaterally change his/her own behavior
question
Collusion
answer
an agreement among rival firms that specifies the price each firm charges and the quantity it produces
question
Price effect
answer
When the price of a good or service is affected by the entrance of a rival firm in the market
question
Output effect
answer
When the entrance of a rival firm in the market affects the amount produced.
question
What is the definition of a good with a positive network externality?
answer
A good whose value to a user increases with the number of other users.
question
Most cartels do not result in the monopoly price and quantity because:
answer
Cartel members have incentive to "cheat" by selling more than the agreed amount.
question
Why does a monopolist charge a price higher than its marginal cost?
answer
The price effect of increasing price above marginal cost outweighs the output effect.
question
Which of the following is NOT a common feature of a market for network goods (i.e., goods with a positive network externality)?
answer
The first firm in the industry often faces a significant disadvantage.
question
tit-for-tat
answer
a long-run strategy that mimics the opponent's most recent action
question
Game theory
answer
Cartels tend to fall apart because cheating is a dominant strategy. One way to solve the problem is reputation.
question
Prisoner's dilemma
answer
when decision makers face incentives that make it difficult to achieve mutually beneficial outcomes
question
network good
answer
a good whose value to a consumer increases with the number of other consumers using it
question
coordination game
answer
no dominant strategy. applies in markets for network goods.
question
the winner's curse
answer
applies in common value auctions. each bidder bids according to own estimate of the value. the bidder with the highest estimate wins, but probably overestimated so overpays. does not apply in private value auctions
question
English auction"
answer
ascending first price open bid. antiques, art, government timber
question
Suppose a famous baseball player, Alex Rodriguez, hires a high school student to paint his house. Which of the following is most likely true?
answer
The opportunity cost of painting a house is higher for Alex Rodriguez than for the high school student.
question
What is the "value of marginal product of labor"?
answer
The value of the change in output associated with adding one more worker.
question
When does a backward-bending labor supply curve arise?
answer
When the income effect dominates the substitution effect.
question
Coarse theorem
answer
in the absence of negotiating costs, the market outcome in the presence of externalities is efficient, as long as property rights are well defined
question
Comparative advantage
answer
a country has a comparative advantage in a good if its opportunity cost of producing that good is lower than the other country's opportunity cost
question
Absolute advantage
answer
A country has an absolute advantage in a good if its resource cost of producing that good is lower than the other country's
question
How to make both parties gain from trade
answer
Specialize according to comparative advantage
question
Trade at a price in between the country's opportunity cost
answer
...
question
Adam Smith
answer
specializing according to absolute advantage creates gains from trade
question
David Ricardo
answer
great insight is that comparative advantage is what matters
question
Constant cost industry
answer
Industry uses a small portion of its inputs. Production easily replicated.
question
Increasing cost industry
answer
Industry uses a large portion of its inputs. To expand production, more costly means of extraction are necessary, e.g. petroleum.
question
Decreasing cost industry
answer
Extremely rare. Technological spillovers. Specialized suppliers to industry arise.
question
Vertical differentiation
answer
Superior quality. Real or perceived. Investment in actual quality. Leads to wasteful spending on advertising. Over investment in quality.
question
Horizontal differentiation
answer
Appeals to different segments of consumers.
question
N. campus vs. S. campus
answer
...
question
chunky vs. creamy
answer
...
question
Republican vs. Democrats
answer
...
question
Cartel
answer
group of firms that act jointly as a monopolist and split the profit. Each of N firms produces 1/N of the monopoly quantity.
question
Law of increasing relative cost
answer
the opportunity cost of producing a good rises as a society produces more of it
question
Nonexcludable
answer
A good is nonexcludable if people who don't pay cannot be prevented from using the goods
question
Nonrival
answer
A good is nontrivial if one person's use does not reduce anyone else's ability to use it
question
Private good
answer
rival and excludable
question
Public good
answer
nonrival and nonexcludable
question
Common resource
answer
rival and nonexcludable
question
Club good
answer
nonrival and excludable
question
Edgar's internal benefit from a flu shot is $15.00, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct?
answer
It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed $20.
question
College wage premium
answer
% diff in average earnings between college grads and non grads
question
Compensating differential
answer
difference in wages offered to offset undesirability/desirability
question
factors of production
answer
productive resources used to produce goods and services, grouped into four categories: land, labor, capital, enterpreneurship
question
land
answer
the gifts of nature that we use to produce goods and services; natural resources
question
capital
answer
the tools, equipment, buildings, and other constructions that businesses use to produce goods and services
question
labor
answer
the world time and work effort that people devote to producing goods and services
question
entrepeneurship
answer
the human resource that organizes the other three factors of production
question
human capital
answer
controls the quality of labor; is the knowledge and skill that people obtain from education, on the job training, and work experience
question
rent
answer
land earns
question
wages
answer
labor earns
question
interest
answer
capital earns
question
profit
answer
entrepeneurship earns
question
social interest
answer
if a choice leads to an outcome that is the best for society as a whole; has 2 dimensions: efficiency and equity
question
efficiency
answer
available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit
question
rational choice
answer
one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice
question
margin
answer
when a choice is made by comparing a little more of something with its cost
question
positive statement
answer
a statement about what is
question
normative statement
answer
a statement about what ought to be
question
economic model
answer
description of some aspect of the economic world that includes only those features that are needed for the purpose at hand
question
ceteris paribus
answer
if all other relevant things remain the same
question
production possibilities frontier
answer
boundary between those combinations of goods and services that can be produced and those that cannot; to illustrate it, we focus on two goods at a time and hold the quantities produced of all the other goods and services constant
question
production efficiency
answer
if we produce goods and services at the lowest possible cost
question
unused
answer
resources are _______ when they are idle but could be working
question
misallocated
answer
resources are _______ when they are assigned to tasks that they are not the best match
question
allocative efficiency
answer
when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit
question
marginal cost
answer
the opportunity cost of producing one more unit of a good
question
marginal benefit
answer
the benefit received from consuming one or more unit of a good
question
marginal benefit curve
answer
shows the relationship between the marginal benefit from a good and the quantity consumed of that good
question
principle of decreasing marginal benefit
answer
the more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit
question
economic growth
answer
the expansion of production possibilities (increases our standard of living but doesn't overcome scarcity and opportunity cost)
question
technological change
answer
the development of new goods and better ways of producing goods and services
question
capital accumulation
answer
the growth of capital resources, including human capital
question
comparative advantage
answer
if a person can perform an activity at a lower opportunity cost than anyone else
question
specialization
answer
producing only one good or a few goods
question
absolute advantage
answer
a person who is more productive than another
question
firm
answer
an economic unit that hires factors of production and organizes those factors to produce and sell goods and services
question
market
answer
any arrangement that enables buyers and sellers to get info and to business with each other, facilitate trade
question
property rights
answer
social arrangements that govern the ownership, use, and disposal of anything that people value
question
money
answer
any commodity or token that is generally acceptable as a means of payment
question
price distortion
answer
when info signals are weakened when prices are not set by the market but are set by individual companies, the government though subsidies, taxes, legislation, monopolies
question
competitive market
answer
a market that has many buyers and many sellers, so no single buyer or seller can influence the price
question
money price
answer
the number of dollars that must be given up in exchange for an object
question
relative price
answer
the ratio of one price to another, this is an opportunity cost
question
quantity demanded
answer
the amount that consumers plan to buy during a given time period at a particular price
question
law of demand
answer
other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded
question
substitution effect
answer
the effect of a change in price of a good or service on the quantity bought when the consumer remains indifferent between the original and the new consumption situations-that is, the consumer remains on the same indifference curve
question
income effect
answer
the effect of a change in income on buying plans, other things remaining the same
question
demand
answer
the entire relationship between the price of a good and the quantity demanded of that good
question
demand curve
answer
shows the relationship between the quantity demanded of a good and its price when all other influences on consumers' planned purchases remain the same
question
demand schedule
answer
lists the quantities demanded at each price when all other influences remain the same
question
change in demand
answer
when any factor that influences buying plans changes, other than the price of the good
question
substitute
answer
a good that can be used in place of another good
question
complement
answer
a good that is used in conjugation with another good
question
normal good
answer
one for which demand increases as income increases
question
inferior good
answer
demand decreases as income increases
question
quantity supplied
answer
the amount that producers plan to sell during a given time period at a particular price
question
law of supply
answer
other things remaining the same, the higher the price of a good, the greater is the quantity supplied, the lower the price of the good, the smaller is the quantity supplied
question
supply
answer
the entire relationship between the price of a good and the quantity supplied of it (illustrated by the supply curve)
question
supply curve
answer
shows the relationship between the quantity supplied of a good and its price when all other influences on producers' planned sales remain the same
question
change in supply
answer
when any factor that influences selling plans other than the price of the good changes
question
change in quantity supplied
answer
movement along the supply curve
question
equilibrium price
answer
the price at which quantity demanded is equal to quantity supplied
question
equilibrium quantity
answer
quantity bought and sold at equilibrium price
question
price elasticity of demand
answer
units free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same
question
perfectly inelastic demand
answer
QD remains constant when price changes and the price elasticity of demand is 0 (vertical demand curve)
question
unit elastic demand
answer
% change in QD=% change in price, price elasticity=1
question
perfectly elastic demand
answer
QD changes by an infinitely large % in response to a tiny price change, elasticity is infinite (horizontal demand curve)
question
elastic demand
answer
% change in QD exceeds % change in price, elasticity is greater than 1 (automobiles and furniture)
question
total revenue
answer
price of a good multiplied by the quantity sold
question
total revenue test
answer
a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same
question
cross elasticity of demand
answer
a measure of the responsiveness of the demand for a good to change in the price of a substitute or complement, other things remaining the same (positive for a substitute, negative for a complement)
question
income elasticity of demand
answer
a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same
question
elasticity of supply
answer
measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same
question
perfectly inelastic supply
answer
quantity supplied is constant regardless of the price (vertical supply curve)
question
unit elastic supply
answer
% change in price = % change in quantity
question
perfectly elastic supply
answer
if there is a price at which sellers are willing to offer any quantity for sale (horizontal supply curve)
question
momentary supply
answer
when the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good
question
short run supply
answer
the response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined by ________
question
long run supply
answer
the response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited is determined by ________
question
command system
answer
allocates resources by the order of someone in authority
question
individual demand
answer
the relationship between the price of a good and the quantity demanded by one person
question
market demand
answer
the relationship between the price of a good and the quantity demanded by all buyers
question
consumer surplus
answer
excess of the benefit received from a good over the amount paid for it
question
producer surplus
answer
the excess of the amount received from the sale of a good or service over the cost of producing it
question
total surplus
answer
sum of consumer surplus and producer surplus (when the efficient quantity is produced, this is maximized)
question
market failure
answer
a situation in which a market delivers an inefficient outcome; occurs because of over production or under production
question
deadweight loss
answer
the decrease in total surplus that results from an inefficient level of production
question
externality
answer
a cost or benefit that affects someone other than the seller or buyer (ex. coal emission)
question
public good
answer
good or service consumed simultaneously by everyone even if they don't pay for it (ex. national defense)
question
common resource
answer
owned by no one but available to be used by everyone (ex. atlantic salmon)
question
monopoly
answer
a firm that is the sole provider of a good or service
question
transactions costs
answer
the costs of the services that enable a market to bring buyers and sellers together
question
utilitarianism
answer
equality brings efficiency
question
big tradeoff
answer
tradeoff between efficiency and fairness
question
symmetry principle
answer
requirement that people in similar situations be treated similarly
question
price ceiling
answer
a government regulation that makes it illegal to charge higher than a specified level
question
rent ceiling
answer
when a price ceiling is applied to a housing market
question
search activity
answer
the time spent looking for someone with whom to do business
question
black market
answer
an illegal market in which the equilibrium price exceeds the price ceiling
question
price floor
answer
a government imposed regulation that makes it illegal to charge a price lower than a specified level
question
minimum wage
answer
a price floor applied to a labor market
question
tax incidence
answer
the division of the burden of a tax between buyers and sellers, depends in part on the elasticity of demand
question
benefits principle
answer
the proposition that people should pay taxes equal to the benefits they receive from services by the government
question
ability to pay principle
answer
proposition that people should pay taxes according to how easily they can bear the burden of tax
question
production quota
answer
an upper limit to the quantity of a good that may be produced in a specified period
question
subsidy
answer
a payment made by the government to a producer
question
budget line
answer
marks the boundary between those combinations of goods and services that a household can afford to buy those and it cannot afford
question
utility
answer
the benefit or satisfaction that a person gets from the consumption of goods and services
question
total utility
answer
the total benefit that a person gets from the consumption of all the different goods and services
question
marginal utility
answer
the change in total utility that results from a one unit increase in the quantity of a good consumed
question
diminishing marginal utility
answer
the tendency for marginal utility to decrease as the consumption of a good increases
question
consumer equilibrium
answer
a situation in which a consumer has allocated all of his or her available income
question
marginal utility per dollar
answer
the marginal utility from a good that results from spending one more dollar on it
question
real income
answer
income expressed as a quantity of goods that the household can afford to buy
question
indifference curve
answer
a line that shows combinations of goods among which a consumer is indifferent
question
marginal rate of substitution
answer
the rate at which a person will give up good y to get an additional unit of good x
question
diminishing marginal rate of substitution
answer
a general tendency for a person to be willing to give up less of good y to get one more unit of x, while remaining indifferent as the quantity of x increases
question
price effect
answer
the effect of a change in the price of a good on the quantity of the good consumed
question
Imperfectly competitive industry
answer
An industry in which individual firms have some control over the price of their output
question
Market power
answer
An imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product
question
Pure monopoly
answer
An industry with a single firm that produces a product for which there are no close substitutes an in which significant barriers to entry prevent other firms from entering the industry to compete for profits
question
Barriers to entry
answer
Factors that prevent new firms from entering and competing in imperfectly competitive industries
question
Natural monopoly
answer
An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient
question
Patent
answer
a barrier to entry that grants exclusive use of the patented product or process to the inventor
question
Network externalities
answer
The value of a product to a consumer increases with the number of that product being sold or used in the market
question
Rent-seeking behavior
answer
Actions taken by households or firms to preserve positive profits
question
Government failure
answer
Occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by the intervention of the government
question
Public choice theory
answer
An economic theory that the public officials who set economic policies and regulate the players act in their own self interest, just as firms do
question
Price discrimination
answer
Charging different prices to different buyers
question
Perfect price discrimination
answer
Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit
question
Rule of reason
answer
The criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal ("unreasonable") or legal ("reasonable") within the terms of the Sherman Act
question
Clayton Act
answer
Passed by Congress in 1914 to strengthen the Sherman Act and clarify the rule of reason, the act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers
question
Federal Trace Commission (FTC)
answer
A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of the antitrust law
question
Oligopoly
answer
A form of industry (market) structure characterized by a few dominant firms. Products may be homogenous or differentiated
question
Five Forces model
answer
A model developed by Michael Porter that helps us understand the five competitive forces that determine the level of competition and profitability in an industry
question
Concentration ratio
answer
The share of industry output in sales or employment accounted for by the top firms
question
Contestable markets
answer
Markets in which entry and exit are easy
question
Cartel
answer
A group of firms that gets together and makes joint price and output decisions to maximize joint profits
question
Tacit collusion
answer
Occurs when price and quantity fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit
question
Price leadership
answer
A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy
question
Duopoly
answer
A two-firm oligopoly
question
Game theory
answer
Analyzes the choices made by rival firms, people, and even governments when trying to maximize well-being while anticipating and reacting to the actions of others in their environment
question
Dominant strategy
answer
In game theory, a strategy that is best no matter what the opposition does
question
Prisoner's dilemma
answer
A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they would cooperate
question
Nash equilibrium
answer
IN game theory, the result of all players' playing their best strategy given what their competitors are doing
question
Maximin strategy
answer
In game theory, a strategy chosen to maximize the minimum gain that can be earned
question
Tit-for-Tat strategy
answer
A repeated game strategy in which a player responds in kind to an opponent's play
question
Celler-Kefauver Act
answer
Extended the government's authority to control mergers
question
Herfindahl-Hirschman Index (HHI)
answer
An index of market concentration found by summing the square of percentage shares of firms in the market
question
Monopolistic competition
answer
A common form of industry (market) structure in the United States, characterized by a large number of firms, no barriers to entry, and product differentiation
question
Product differentiation
answer
A strategy firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers' minds.
question
Horizontal differentiation
answer
Products differ in ways that make them better for some people and worse for others
question
Behavioral economics
answer
A branch of economics that uses the insights of psychology and economics to investigate decision making
question
Commitment device
answer
Actions that individuals take in one period to try to control their behavior in a future period
question
Vertical differentiation
answer
A product difference that, from everyone's perspective, makes a product better than rival products
question
Market failure
answer
Occurs when resources are misallocated or allocated inefficiently
question
Externality
answer
A cost or benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction
question
Marginal social cost (MSC)
answer
The total cost to society of producing an additional unit of a good or service. MSC is equal to the sum of the marginal costs of producing the product and the correctly measured damage costs involved in the process of production
question
Marginal private cost (MPC)
answer
The amount that a consumer pays to consume an additional unit of a particular good
question
Marginal damage cost (MDC)
answer
The additional harm done by increasing the level of an externality producing activity by 1 unit. If producing product X pollutes the water in a river, MDC is the additional cost imposed by the added pollution that results from increasing output by 1 unit of X per period
question
Coase theorem
answer
Under certain conditions, when externalities are present, private parties can arrive at the efficient solution without government involvement
question
Injunction
answer
A court order forbidding the continuation of behavior that leads to damages
question
Liability rules
answer
Laws that require A to compensate B for damages imposed
question
Public goods (social or collective goods)
answer
Goods that are nonrival in consumption and/or their benefits are nonexcludable
question
Nonrival consumption
answer
A characteristic of public goods: one person's enjoyment of the benefits of a public good does not interfere with another's consumption of it
question
Nonexcludable
answer
A characteristic of most public goods: once a good is produced, no one can be excluded from enjoying its benefits
question
Free-rider problem
answer
A problem intrinsic to public goods: because people can enjoy the benefits of public goods whether or not they pay for them, they are usually unwilling to pay for them
question
Drop-in-the-bucket problem
answer
A problem intrinsic to public goods: the good or service is usually so costly that its provision generally does not depend on whether any single person pays
question
Optimal level of provision for public goods
answer
The level at which society's total willingness to pay per unit is equal to the marginal cost of producing the good
question
Tiebout hypothesis
answer
An efficient mix of public goods is produced when local land/housing prices and taxes come to reflect consumer preferences just as they do in market for private goods
question
Social choice
answer
The problem of deciding what society wants. The process of adding up individual preferences to make a choice for society as a whole
question
Impossibility theorem
answer
A proposition demonstrated by Kenneth Arrow showing that no system of aggregating individual preferences into social decisions will always yield consistent
question
How to find Marginal Revenue Curve from Linear Demand Curve
answer
Marginal Revenue = (change in revenue)/(change in quantity)
question
At what output and price are monopoly profits maximized?
answer
Monopoly profits and outputs are maximized in the same way competitive markets are - where marginal revenue meets or exceeds marginal cost.
question
Rent
answer
return to a factor of production in strictly limited supply
question
Implications of rent-seeking behavior
answer
1) consumption of resources - lobbying and building barriers to entry is expensive
question
Give five examples of price discrimination.
answer
Airlines formerly priced tickets sold over weekends at much lower prices than weekday fares to target business travelers willing to pay higher fares.
question
The Sherman Act of 1890, section I, states that
answer
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared illegal.
question
The Sherman Act of 1890, section II, states:
answer
Every person who shall monopolize, or attempt to monopolize, or to combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States. Or with foreign nations, shall be deemed guilty of a misdemeanor and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.
question
The Clayton Act specifically outlaws three business practices. They are:
answer
tying contracts: forcing a customer to buy one product to obtain another
question
price discrimination
answer
charging different customers different prices for reasons other than changes in cost or matching competitor's prices. (This provision is rarely enforced)
question
What does the term "market power" mean?
answer
The ability to exercise control over the price of its output or the prices of the inputs it uses.
question
What is a patent troll?
answer
A law firm that collects patents from bankruptcy sales and then leverages them to collect fees from major firms who have unknowingly violated the patents.
question
How do you differentiate cartel behavior from tacit collusion?
answer
Cartel behavior occurs when a group of firms gets together and makes price and output decisions knowingly, whereas tacit collusion occurs when firms end up fixing prices without a specific agreement of when such agreements are implicit.
question
What is the price leadership model? Does it attain the monopoly price?
answer
A form of oligopoly in which one dominant firm sets prices and the smaller firms in the industry follow its pricing policy, but are constrained by their ability to supply the necessary demand, which a large firm can supplement. The price leadership model does not attain monopoly price, but hovers between monopoly price and competitive price.
question
How to calculate HHI
answer
square market shares and then add them
question
What are the updated HHI index guides?
answer
0-1500 = Unconcentrated; no challenge
question
What is the legal test for determining if a merger violates the Clayton Act?
answer
A examination of the HHI Index of premerger and post merger share concentration is conducted.
question
Who issues horizontal merger guidelines?
answer
The Department of Justice and the Federal Trade Commission
question
How is coordinated interaction related to tacit collusion?
answer
Coordinated interaction includes tacit collusion, which may or may not be lawful in and of itself.
question
What are the characteristics of a monopolistically competitive society?
answer
1) A large number of firms
2) No barriers to entry
3) Product differentiation
2) No barriers to entry
3) Product differentiation
question
What is the point of the Draeger's jam anecdote?
answer
While some choice is highly valued by people, too much choice can reduce purchases.
question
Why do people buy large containers of vitamins, but small containers of ice cream?
answer
Behavioral economics - people want to commit themselves to taking a vitamin every day, but only to occasionally eating ice cream.
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Production
answer
the process by which inputs are combined, transformed, and turned into outputs
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Firm
answer
An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand
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Profit
answer
the difference between total revenue and total cost
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Total Revenue
answer
The amount received from the sale of the product (q*P)
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Total Cost
answer
The total of (1) out-of-pocket costs and (2) opportunity cost of all factors of production
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Economic Profit
answer
Profit that accounts for both explicit costs and opportunity costs
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Normal Rate of Return
answer
A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk free firms, it should be nearly the same as the interest rate on risk free government bonds.
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Optimal Method of Production
answer
The production method that minimizes cost for a given level of output.
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Production Technology
answer
The quantitive relationship between inputs and outputs
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Labor-Intensive Technology
answer
Technology that relies heavily on human labor instead of capital.
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Capital-Intensive Technology
answer
Technology that relies heavily on capital instead of human labor.
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Marginal Product
answer
The additional output that can be produced by adding one more unit of a specific input, ceteris paribus
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Law of Diminishing Returns
answer
When additional units of variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.
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Fixed cost
answer
Any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
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Variable cost
answer
A cost that depends on the level of production chosen.
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Total cost (TC)
answer
Total fixed costs + total variable costs
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Total Fixed Cost/Overhead
answer
The total of all costs that do not change with output even if input is zero.
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Average Fixed Cost (AFC)
answer
Total cost divided by the number of units of output; a per-unit measure of fixed costs
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Spreading Overhead
answer
The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.
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Total Variable Cost (TVC)
answer
The total of all costs that vary with output in the short run.
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Total Variable Cost Curve
answer
A graph that shows the relationship between total variable cost and the level of a firm's output.
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Marginal Cost (MC)
answer
The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.
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Average Variable Cost (AVC)
answer
Total variable cost divided by the number of units of output.
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Average Total Cost (ATC)
answer
Total cost divided by the number of units of output
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Perfect Competition
answer
An industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter the market and old firms can exit.
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Homogeneous Products
answer
Undifferentiated products; Products that are identical to, or undistinguishable from, one another.
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Breaking Even
answer
The situation in which a firm is earning exactly a normal rate of return
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Shutdown Point
answer
the lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
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Short-Run Industry Supply Curve
answer
The sum of the marginal cost curves (above the AVC) of all the firms in an industry.
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Increasing Returns to Scale/Economies of Scale
answer
An increase in a firm's scale of production leads to lower costs per unit produced. Graph is a decreasing curve.
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Constant Returns of Scale
answer
An increase in a firm's scale of production leads to lower costs per unit produced.
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Constant Returns to Scale
answer
An increase in a firm's scale of production has no effect on costs per unit produced. The graph of this curve is a straight, horizontal line.
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Decreasing Returns to Scale or Diseconomies of Scale
answer
An increase in a firm's scale of production leads to higher costs per unit produced.
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Long-Run Average Cost Curve (LRAC)
answer
The "envelope" of a series of short-run cost curves.
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Minimum Efficient Scale (MES)
answer
The smallest size at which long-run average cost is at its minimum
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Optimal Scale of Plant
answer
The scale of plant that minimizes long-run average cost.
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Long-run competitive equilibrium
answer
When P= SRMC = SRAC = LRAC and profits are zero.
question
In antitrust law, explain the difference between the per se rule and the rule of reason. Also explain in which circumstances the per se rule is applied.
answer
The per se rule applies only to price fixing and other collusion conduct that falls under Section I of the Sherman Act. Under the per se rule, guilt or innocence is determined entirely by whether or not the conduct took place. No economic inquiry into the effects of the conduct is needed.
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