Microeconomics Erhardt Midterm Exam 2

The total satisfaction a consumer derives from a consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption.

The change in total utility derived from a one-unit change in consumption of a good. (The derivative of total utility?)

The more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, o.t.c. (Example: Drinking)

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, the utility is maximized.

The dollar value of the marginal utility derived from consuming each additional unit of a good.

The difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays.

•The elderly and those on welfare
•State and federal taxpayers spend more than $750 billion a year
•Nearly 100 million Medicare and Medicaid recipients
•More than $7500 per beneficiary

•The largest and fastest growing spending category in most state budgets
•Beneficiaries pay only a tiny share of Medicaid costs
•Most services are free

•Consumed until marginal utility= 0
•Consumer surplus for the beneficiaries: entire area under the demand curve
•High marginal cost to taxpayers
•Possibility of waste, fraud, and abuse
•"Improper payments" to Medicare and Medicaid: $100 billion a year
•Less incentive for healthy behavior

•Reduce office visits by 8%
•Substantial consumer surplus
•Reduce cost to taxpayers

•By 10%: reduced visits by 10%
•By 10 minutes: visits dropped 40%

Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)

The number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process.

States that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines.

A graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

1. A particular indifference curve reflects a constant level of utility, so the consumer is indifferent about all consumption combinations along a given curve. Combinations are equally attractive.
2. If the total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward.
3.Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin.
4.Higher indifference curves represent higher levels of utility
5. Indifference curves do not intersect

Budget: $40. Multiply the movie rentals (10) by the price ($4)

Depicts all possible combinations of videos and pizzas, given their prices and your budget.

A consumer's utility is maximized by point e

...

Opportunity cost of resources employed by a firm that takes the form of cash payments

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment.

A firm's total revenue minus its explicit costs.

A firm's total revenue minus its explicit and implicit costs.

The accounting profit earned when all resources earn their opportunity costs.

Any resources that can be varied in the short run (3 months) to increase or decrease production.

Any resources that cannot be varied in the short run (3 months) to increase or decrease production.

A period during which at least one of a firm's resources is fixed.

A period during which all resources under the firm's control are variable.

The total output produced by a firm.

The relationship between the number of resources employed and a firm's total product.

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant.

The marginal product of variable resource increases as each additional unit of that resource is employed.

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could be negative.

Deriviative

Any production cost that is independent of the firm's rate of output

Any production cost that changes as the rate of output changes.

The sum of fixed cost and variable cost

Fixed Cost + Variable Cost

Variable cost divided by output

Variable cost / Quantity, or output

Total cost divided by output
Average Total Cost= Total Cost/ Quantity, or output

The sum of average fixed cost and average variable cost.
Average Fixed cost + Average Variable cost

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm, varies; also called the planning curve. SabL.

Forces that reduce a firm's average cost as the scale of operation increases in the long run.

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run.

Economics of scale in a large movie theatre is for their concessions, one box office, interchangeable labor, few restrooms, 10 movies at one time.
Diseconomics of scale: recognize only 3 movies, other 7 movies don't make money; More viewings, few people per viewing; parking space so viewings have to spread evenly.

A cost that occurs when over some range of output, long run average cost neither increases nor decreases with changes in firm size.

ATC5

Henry Ford

McDonald's is in trouble. In 1997, they realized the universal application of prices didn't work. They separated into 5 regions in the U.S. The South and Southwest would sell the McRib the best there.

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology. It can be presented as an equation, graph, or table.

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

1. Isoquants farther from the origin represent greater output rates.
2. Isoquants have negative slopes, because, a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed.
3. Isoquants do not intersect because each isoquant refers to a specific rate output.
4. Isoquants are usually convex, or bowed inward, to the origin.

The rate at which labor substitutes for capital without affecting output.

Identifies all combinations of capital and labor the firms can hire for a given total cost.

Rent

-w/r

The Line formed by connecting tangency points.

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition. Ex. Peanut Butter

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.

The change in total revenue from selling an additional unit; in perfect competition, this is also the market price.

Product Supply Line

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.

Total revenue divided by output, AR=TR/q; in all market structures, average revenue equals the market price.

A curve that shows the quantity a firm supply at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve.

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demanded.

An industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal. Example: Pencils

An industry that faces higher per-unit production costs as industry output expands in the long-run; the long-run industry supply curve slopes upward. Example: Oil

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.

The condition that exists when firms produce the output preferred by consumers; marginal benefits equals marginal cost. Example: Not Russia, & N. Korea.

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.

Any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms. Graph.

A legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed. [Pharmaceuticals: Drugs only have 10 years]

The process of turning an innovation into a marketable product.

Sometimes a monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long-run average cost curve. (Example: Electricity, utilities)
(Diamonds are forever: DeBeers controlled the world supply of uncut diamonds. Lost control of rough diamond supplies in Mid 90's. 1980 DeBeer's: 90%. 2012 DeBeer's: 40%. They innovated lenses to check for real diamonds. Settled with U.S. on $300mill lawsuit to sell in U.S.)

A firm that must find the profit maximizing price, when the demand curve for its output slopes downward. (p sub mp sub cbc=profit)(cm*b=loss from monopoly)

Net loss to society when a firm uses its market power to restrict output and increase the price.

Activities undertaken by individuals or firms to influence (lobbying) public policy in a way that will increase their incomes. The Mail Monopoly -- First-Class mail. FAQ's machines began to put USPS down. Technology advancements hit USPS more and more. USPS is also getting hit by Uber, drones.

Increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs.

A monopolist who charges a different price for each unit sold; also called the monopolist's dream.

A market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward; firm entry is relatively easy.

These types of firms are price makers.
Barriers to entry are low.
There are enough sellers that they behave competitively
They act independently or interdependently

Products differentiate themselves in four basic ways

Physical Differences
Location
Services
Product Image

The difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost. (Redbox took down BlockBluster's sales because of their one dollar movies)

A market structure characterized by a few firms whose behavior is interdependent (Airlines, Disney, cell phone providers)

An oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.

Economies of Scale - Keeping costs low with mass amounts of flights each day

An agreement among firms to increase economic profit by dividing the market or fixing the prices (less competition, more profits).

A group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.

A firm whose price is adopted by other firms in the industry.

The property of a good whereby a person can be prevented from using it.

The property of a good whereby one person's use diminishes other people's use.

Good that are both excludable and rival in consumption.

Goods that are neither excludable nor rival in consumption.

Goods that are rival in consumption but not excludable.

When a good is excludable, but not in consumption, it is an example of a good produced by a natural monopoly.

A person who receives the benefit of a good but avoids paying for it.

National Defense
Basic Research - created through research
Scientific Research - can be patented
General Knowledge
Gov't:
National Institutes of Health
The National Science of Foundation
... subsidize basic research in medicine, math, physics, chemistry, biology, and economics.
Congress funding the "black box" syndrome. They also fund the National Foundation for the Arts.
Temporary Assistance for Needy Families (Welfare)
Food Stamp program
Government housing programs

The study that compares the costs and benefits to society of providing a public good.

The Tragedy of the Commons- A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole.

Environmental degradation is a modern Tragedy of the Commons.

Public good or common resource

Rush hours, so charge higher tolls. Transponders (device emitting signal to pay tolls(?))

ecosystems haven't replenished around Cincy.

Can destroy commercially valuable marine populations

One of the least regulated common resources.

...

Pollution licenses for power plants.

Government action is sometimes necessary to improve upon market outcomes; the government can improve upon this.

Why do some markets fail to allocate resources efficiently?
How can government policies improve market allocation?
What kind of policies work best?

The uncompensated impact of one person's actions on the well-being of a bystander.

Adverse impact

Beneficial impact

Aluminum plants emit smoke which is a health risk.
For each unit of aluminum produced, the social cost includes the private costs of the aluminum producers plus the costs to those bystanders affected adversely by the pollution

Above the supply curve because it takes into account the external costs imposed on society by aluminum producers.

The difference between the two curve: the cost of pollution emitted.

Altering incentives so that people take account of the external effects of their actions.

A tax can internalize the externality.

Education - a better worker, higher wages, more informed voters; lower crime rates; uses of tech. Education is subsidized.

It is greater than the public good. The social value curve lies above the demand curve. Thus, the socially optimal quantity is greater than the quantity determined by the private market.

To get there requires a subsidy.

Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem, the government can internalize the externality by taxing goods

Technology spillover. An impact for other firms. Tech progress: a key to rising living standards.

Gov't: tax breaks; subsidies. Patents also encourage R&D.

Command-and-control policies regulate behavior directly.
Market-based incentives allow the market to solve their own problem.
Policies: Either a maximum limit or tech to reduce emissions

EPA (develops and enforces regulations)

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.