Principles of Microeconomics Fall Exam

by observing a few industry characteristics, we can predict pricing and output behavior

a market structure in which a large number of firms all produce the same product

a buyer or seller that is unable to affect the market price

the additional income from selling one more unit of a good; sometimes equal to price

all firms maximize profit by producing where MR = MC
when price (MR) > MC, the firm should increase production
when price (MR) < MC, the firm should decrease production

occurs if average revenue is below average variable cost at the profit-maximizing positive level of output
by not producing, the firm loses only the fixed costs

a supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve

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

an industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs

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

the nature and degree of competition among firms operating in the same industry

perfect competition, monopolistic competition, oligopoly, monopoly

a market structure in which many companies sell products that are similar but not identical

a market structure in which a few large firms dominate a market

a market in which there are many buyers but only one seller

firm faces a perfectly elastic demand curve for its product
- If a firm tried to sell above this set price then it will sell nothing as buyers know the market price and no there is no quality difference
- Firms can sell as much output as it likes at that price - so there is no incentive to set a price lower

the short run marginal cost curve represents the firms' short run supply curve = It shows the quantity of output that the firm would supply at any given price
- The SRSC is the MC curve above the point where it cuts AVC

P=MR=MC

1. find MR=MC
2. find optimal quantity where MR=MC
3. find optimal price (already given)
4. find the average total cost at the optimal Q
5. find the profit (P-ATC) * Q

when P < AVC: the firm shuts down immediately
when AVC < P <ATC: the firm operates in the short run to minimize loses but exists the industry in the long run
when P > ATC: the firm is earning economic profit

in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits
this is because there are no barriers to entry and because there is perfect knowledge
the effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted
if firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits

short-run profits and losses are eliminated in the long run
short-run profits encourage new firms to enter, shifting industry supply to the right and decreasing the price until profits return to zero
short-run losses encourage inefficient firms to exist, shifting industry supply to the left and increase the price until losses are eliminated

when profit-maximizing firms in perfectly competitive markets combine with utility-maximizing consumers, the resulting quantities of outputs of goods and services demonstrate both

shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

business practices or conditions that make it difficult for new firms to enter the market

a market that runs most efficiently when one large firm supplies all of the output

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes

the divergence of a firm's observed behavior in practice, influenced by a lack of competitive pressure, from efficient behavior assumed or implied by economic theory

the business practice of selling the same good at different prices to different customers

when a seller charges each consumer the maximum price he/she is willing to pay; does not charge a single price
in this case, monopolist captures all of the consumer surplus so CS=0

practice of charging different prices per unit for different quantities of the same good or service

practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group

a rule that sets price equal to marginal cost to achieve an efficient output

a rule that sets price equal to average total cost to enable a regulated firm to avoid economic loss

a regulation that sets the price at a level that enables a firm to earn a specified target rate of return on its capital

maximum price at which a regulated firm can sell its product
they are often flexible enough to allow for changing cost conditions

legislation to prevent new monopolies from forming and police those that already exist

the share of industry output in sales or employment accounted for by the top firms

an index of market concentration found by summing the square of percentage shares of firms in the market

markets in which entry and exit are easy enough to hold prices to a competitive level even if no entry actually occurs

control over a significant fact of production, economies of scale, government protection

occurs when a company owns a significant share of its key ingredient or input in production

patents and copyrights that provide an exclusive right to sell a product

1. find MR=MC
2. find optimal quantity where MR=MC
3. find optimal price associated with the optimal quantity as determined by the demand curve
4. find average total cost math e optimal Q
5. find the profit (P-ATC) * Q

a monopoly produces a smaller quantity, charges a higher price, and earns profits in long-run equilibrium, unlike firms in perfect competition

1. firm must have market power (cannot be a price taker)
2. market can be segmented into different consumer groups
3. seller must be able to prevent arbitrage

perfect (first-degree), second-degree, third-degree

looks like a monopoly but does not act like one because of the threat of entry keeps prices low
small airlines that serve unique routes still offer low prices if they fear entry by larger airlines

a positioning strategy that some firms use to distinguish their products from those of competitors

large number of firms, each with insignificant market share
little to no barriers to entry and exit
products sold but firms are similar but differentiated
limited market power and ability to set prices

location, quality, style, design, features, advertisting

a shared sense that individuals or groups need each other in order to achieve common goals

a formal organization of producers that agree to coordinate prices and production

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

the study of how people behave in strategic situations

players pick their actions at the same time

games in which players make moves one at a time, allowing players to view the progression of the game and to make decisions based on previous moves

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

action is taken contingent on your opponent's past decisions

a trigger strategy that rewards cooperation and punishes defections
if your opponent lowers its price, you do the same
if your opponent returns to a cooperative strategy, you do the same

players, strategies, payoffs, information, outcomes

collusion, repeated games

secret agreement or cooperation, illegal in most cases

a series of simultaneous games among the same set of economic actors

perfectly elastic

perfect competition

MR is the change in total revenue divided by the change in quantity sold.
in a perfectly competitive market, MR equals the market price.
MR helps to determine the profit-maximizing output for a firm.

NOT:
MR is the total revenue divided by the quantity sold

above the AVC curve

can expect to see about the same amount of competition in the future

consumer surplus is maximized
the industry achieves productive efficiency
the industry achieves allocative efficiency

NOT:
firms earn positive economic profit

some monopolists to earn economic profits in the long run

less than the market price

faces a downward-sloping demand curve, while the perfect competitor faces a horizontal demand curve

you upgrade your monthly data plan from 5GB to 10GB for an additional $10/month.

consumers are charged one price for the first bundle of purchases and a different price for the next bundle of purchases

allows the firm to earn a normal rate of return on investment, while marginal cost pricing will lead to economic losses

average cost pricing

product differentiation, easy exit from the market, easy entry into the market

NOT:
one seller

information on the degree of product differentiation in each market

have numerous competitors

monopolistic competition

price equals average total cost, and MR=MC

price is greater than marginal cost

monopolistic competition

mutual interdependence

raising prices and reducing output in the market

mutual interdependence

cartel

players, the outcome, strategies

NOT:
a judge

it is a noncooperative game
there is no communication between players
there will be inferior results for both players

NOT:
it is a sequential game

an outcome exists that is better for both players

one person's consumption does not interfere with another person's consumption

As a good is consumed, the quantity available does fall

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

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

the typical system of regulation whereby government tells business how to reach certain goals, checks that these commands are followed, and punishes offenders

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

owned by the community, individuals overuse and overexploit
rival but nonexcludable

consumers chose to forgo paying for insurance etc but still rely on others too
characteristic of public goods

the sum of all that is supplied each period by all producers of a single product

a situation in which a country does not trade with other countries

goods produced abroad and sold domestically

goods produced domestically and sold abroad

larger number of each product
the ability to produce a good using fewer inputs than another producer
non excludable

we give up / if we make
the ability to produce a good at a lower opportunity cost than another producer
excludables

the ratio at which a country can trade its exports for imports from other countries

tax on imports

a limit placed on the quantities of a product that can be imported

an industry in the early stages of development

selling goods in another country below market prices

a situation in which all countries can benefit even if some benefit more than others

before trade, prices charged for one good may be different in two countries
lower price exports
greater demand for good pushes prices higher
country with higher price imports
lesser demand pushes prices lower
market forces push prices toward equilibrium under free trade

the difference between total revenue and total expenses when total expenses are greater

a line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices

a theoretical framework underlying consumer decision making. This approach assumes that satisfaction can be measured and that consumers maximize satisfaction when the marginal utilities per dollar are equal for all products and services

ability or capacity of a good or service to be useful and give satisfaction to someone

the total amount of satisfaction obtained from consumption of a good or service

satisfaction or usefulness obtained from acquiring one more unit of a product

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

equating the ratio of the marginal utility of a good to its price for all goods

the study of situations in which people make choices that do not appear to be economically rational

a cost that has already been committed and cannot be recovered

a framing effect in which people make decisions about a current situation based on what they have previously invested in the situation

the tendency of decision makers to be influenced by the way a situation or problem is presented to them

unselfish regard for the welfare of others

sum of marginal utility

Mu = (%change Total Utility) / (%change Quantity)

the consumer must get the same amount of utility from the last dollar spent on each good
MUx/Px = MUy/Py

an organization that uses resources to produce a product, which it then sells

a business owned by one person

a business in which two or more persons combine their assets and skills

a business owned by stockholders who share in its profits but are not personally responsible for its debts

total revenue minus total cost

fixed costs plus variable costs

explicit costs + implicit costs
the payment that must be made to obtain and retain the services of a resource

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
input costs that do not require an outlay of money by the firm

total revenue minus total explicit cost

total revenue minus total cost, including both explicit and implicit costs

the accounting profit earned when all resources earn their opportunity cost

the process of creating goods and services

the increase in output that arises from an additional unit of input

the average amount produced by each unit of a variable factor of production

a level of production in which the marginal product of labor increases as the number of workers increases

a level of production in which the marginal product of labor decreases as the number of workers increases

costs that do not vary with the quantity of output producedTotal production costs — (Variable cost per unit * Number of units produced)

costs that vary with the quantity of output producedCost Per Unit x Total Number of Units

fixed cost divided by the quantity of output

total cost divided by the quantity of output

the cost per unit of producing each quantity of output in the long run, when all inputs are variable

factors that cause a producer's average cost per unit to fall as output rises

the property whereby long-run average total cost stays the same as the quantity of output changes

the property whereby long-run average total cost stays the same as the quantity of output changes

the property whereby long-run average total cost rises as the quantity of output increases

savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology

explicit costs

subsidies, taxes, regulation

either one of the parties has a well-defined property right

on third parties

a new driver fails to consider the external costs of his using the roads

nontrivial and excludable

nonexcludable and nonrival

cost is reduced

tradable permits, emission taxes, wastewater user chargers

a focus on the choices that are available, the preferences of individuals, the present value of benefits and costs that will be incurred by today's people and future generations

workers in industries with a comparative disadvantage lose their jobs

higher; lower

foreign companies in countries with cheap labor can pay their workers pennies an hour and flood the us market with low-cost products

false

true

false

is fairly accurate for most cases

Carson will be temporarily in a state of disequilibrium and thus go to fewer concerts and more musicals in order to maximize his marginal utility per dollar

equal for all goods

all else constant, Joni would prefer to drink a glass o water than watch tv

a sunk cost fallacy

a sunk cost fallacy

framing bias

a sunk cost fallacy

profits

sunk

long run

ford asks its workers to work overtime

the cost of labor

$45,000

variable cost divided by the quantity of output

the additional utility from spending one more dollar on that good or service
marginal utility/price

the study of how individuals, businesses, and societies make decisions to maximize their well-being given limited resources
making decisions, studies how individuals, firms, and societies make decisions to maximize their well-being given limitations

choices with limited resources, trade offs/opp. costs, specialization, people respond to incentives, rational behavior requires think on the margin, markets are efficient (free markets), economic goals don't always co-exist, human creativity helps the wealth of nations

a challenge with benefits and rickets, tradeoffs, societal befall regarding restrictions and regulations, and costs

people must make choices given the resource limitations faced

factors (positive and negative) which influence decisions

stylized models used to analyze an issue

holding all other things constant

how well a business uses resources to achieve objectives

goods produced at lowest cost

individuals who desire a product must obtain the goods and services

describes an allocation in which the only way to make any individual or group of individuals better off would require making at least one other person worse off

fairness

can be answered by available information or facts

involve societal beliefs on what should or should not be done

focuses on the workings of an economy as a whole

making choices with limited resources, when making decisions one must take into account tradeoffs and opp costs, specialization leads to gains for all involved, people respond to good and bad incentives, rational behavior requires thinking on the margin, markets are usually efficient and gov can correct profits and prices, economic growth low unemployment and low inflation don't coincide, institutions and human creativity help explain wealth of nations

an institution that enables buyers and sellers to interaction and transact with one another
an exchange of money for product

uses monetary prices as a message system to facilitate exchanges between buyers and sellers

buying shows demand
willing to pay
the goods and services people are willing and able to buy during a certain period of time
negative relationship btw price and quantity demanded

the maximum amount that a buyer will pay for a good

as price increases, demand falls
substitution effect and income effect

a graph of the relationship between the price of a good and the quantity demanded

tastes/preferences, income, prices of related goods, number of buyers, and expectations regarding future prices

occurs whenever 1 or more determinants of demand change and curve shifts

the maximum amount of product producers are willing/able to offer

a graph of the relationship between the price of a good and the quantity supplied

a shift of the supply curve, which changes the quantity supplied at any given price

a situation in which quantity demanded equals quantity supplied

the price that balances quantity supplied and quantity demanded

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
WTP-Pb
MB-PB
D-PB
over to qP

the amount a seller is paid for a good minus the seller's cost of providing it
Ps-WTS
Ps-MC
Ps-Supply
over to Qs

total surplus is maximized

shortages and surpluses are nonexistent

consumer surplus + producer surplus

consumer surplus shrinks due to customers not purchasing and consumers pay more
(pink and blue = total reduction in consumer surplus from the higher price)
deadweight loss
when price falls below equilibrium the opposite occurs

no purchase causes a loss in producer surplus (equal to yellow) but is offset by additional money earned from consumers who buyout a higher price (pink) transfer of surplus to producers

loss of consumer surplus and producer surplus caused by market not being efficient *no one gets

competitive markets are left to determine equilibrium price and output

a maximum price established by government for a product or service
increases the quantity demanded

occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market

government imposed limits on how low a price can be charged
minimum wage is set higher than the equilibrium wage causes a surplus of labor
agricultural industry's price floors are common and used to smooth out incomes of farmers

occurs when people who are not part of a marketplace interaction benefit from it or pay part of its costs

lack of competition, externalities, public goods, income inequality, mismatch of info

occurs when one party to a transaction has significantly better information than another party

climate change, health care, education

the responsiveness of one variable to change in another

a measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded divided by the percentage change in price
negative value

(Pnew-Pold)/Poldx100

the percentage change in quantity demanded is greater than the percentage change in price
greater than 1
ex.) no branded product
small price change = large change in demand
1<ed<infinity

the percentage change in quantity demanded is greater than the percentage change in price
less than 1
when people buy regardless of increase in price
ex.) drugs for life-threatening diseases
0<ed<1

products with elasticity demand coefficient
ed=1

ed=infinity

ed=0

substitutes, percentage of income, necessity versus luxury and time to react to price change
midpoints are used to derive consistent estimates of if a price rises or falls

tr=q*p

along a negatively sloped linear demand curve because the percentage change in p and q vary along the curve

when changes in the price of one product affect the demand for another item

how responsive quantity demanded is to change in income
% change in quantity demanded / % change in income

two goods for which an increase in the price of one leads to an increase in the demand for the other
when a and b are substitutes, their cross elasticity of demand is positive
Eab>0

two goods that are bought and used together
when a and b are compliments, their cross elasticity of demand is negative
Eab<0

measures the responsiveness of quantity demanded to changes in income
ey=% change in quantity demanded/% change in income

normal, luxury, or inferior

one whose income elasticity is positive but less than 1
0<Ey<1
most products

products with an income elasticity greater than 1
Ey>1
as income rises, quantity demanded at any given price grows faster than income

goods for which demand tends to fall when income rises
Ey<0

the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price
Es=% change in quantity supplied/% change in price

short, output and the # of firms in an industry are fixed

the period of time during which plant capacity and the number of firms in the industry cannot change

a period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

a tax in which those with higher incomes pay a higher average tax rate

a tax that is constant proportion of one's income

a tax in which those with higher incomes pay a lower average tax rate
lump tax

a fixed amount of tax regardless of income

a tax placed on the purchase of a specific type of good

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses

analysis concerned with what is

analysis concerned with what ought to be

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

monetary cost

monetary and non monetary cost

explicit (monetary) and implicit (nonmonetary)

something that induces a person to act

costs that have already been incurred and cannot be recovered

small incremental adjustments to a plan of action

systematically and purposefully doing the best you can to achieve your objectives

the additional benefit to a consumer from consuming one more unit of a good or service

the cost of producing one more unit of a good

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

public schools: provides a level of education, it can if done correctly
workplace safety regulations: gov. sets regulations, OSHEA gov can improv regulations
public highways: gov. uses funds to let everyone pass, yes so they are maintained
patent laws: gov. gives monopoly powers, people have access to drugs

uses monetary prices as a message system to facilitate exchanges between buyers and sellers

tastes, income, other goods, expectations, number of buyers

a good that consumers demand more of when their incomes increase

a good that consumers demand less of when their incomes increase

Qd = a - (bP)

a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price

tendency of suppliers to offer more of a good at a higher price

the demand by all the consumers of a given good or service

the process of adding, at each price, the individual quantities demanded to find the market demand curve for a good

minimum price the seller would voluntarily accept for the good.

the change in amount offered for sale in response to a change in price

the quantity supplied and the quantity demanded at the equilibrium price

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

a situation in which quantity demanded is greater than quantity supplied

a situation in which quantity supplied is greater than quantity demanded

when a market is capable of producing output high enough to meet consumer demand

an economic system in which prices are determined by unrestricted competition between privately owned businesses.

the practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives

a communist economic system in which the state explicitly allocates resources by planning what should be produced and in what amounts, the final prices of goods, and where they should be sold

a minimum price for a good or service

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

a situation in which an increase or a decrease in price will not significantly affect demand for the product

[q2-q1/(q2+q1)/2]/[p2-p1/(p2+p1)/2]

the smaller the price elasticity of demand
less elastic

the greater the price elasticity of demand
more elastic

the burden of taxation on the party who pays the tax through higher prices

the manner in which the burden of a tax is shared among participants in a market

a side effect of an action that affects a third party other than the buyer or seller

the harm, cost, or inconvenience suffered by a third party because of actions by others

amount by which the value of the objective function would change with a one-unit change in the RHS value of a constraint

beneficial side effect that affects an uninvolved third party

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

the extra cost to society of producing an additional unit of output, including both the private cost and the external costs
when there's a negative externality

the extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits
when there's a positive externality

the benefit from an additional unit of a good or service that the consumer of that good or service receives

goods, such as clean air and clean water, that everyone must share

the idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good

goods or services characterized by the fact that one person's enjoyment of the good or service reduces the quantity available for others' enjoyment

characteristic of a public good: if the good is available to one actor to consume, then other actors cannot be prevented from consuming it as well

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

government intervention that fails to improve economic outcomes

an economic system in which the government makes all economic decisions

provide incentives so that private decision makers will choose to solve the problem on their own

a tax on a good with external costs

factors other than price that determine the quantities supplied of a good or service

idea that government should play as small a role as possible in economic affairs

% change in quantity / % change in price

1/2 base times height

how should a society achieve full employment?

which job to take

profits for some manufacturing firms fell in 2009.
salaries of top executives fell in 2009.
competitive markets promote efficiency.

NOT:
the unemployment rate in the United States rose to 10% in 2009.

energy policy

simplified by using assumptions

influence all economic decisions

water is polluted by a paper company located by the river.
air is polluted by a manufacturing firm.
consumers must buy water from one local water utility.

NOT:
competition leads firms to provide products at the lowest possible price.

weighing the impact of one additional activity

scarcity exists for everyone.
people face economic incentives on a regular basis.
information is important to producers and consumers.

NOT:
irrational behavior requires thinking at the margin

all of these are incentives
(tax deductions for individual retirement accounts, investment tax credits for businesses, tax deductions for education saving accounts)

a neighborhood lemonade stand
ticket scalping
New York Stock Exchange

NOT:
painting one's own house

decrease; increase

shift in the demand curve to the left

an improvement in automobile manufacturing technology
a labor strike in the steel industry
a subsidy for struggling automobile manufacturers

NOT:
higher interest rates for new car financing

an increase in the number of sellers in the yogurt market

surplus; downward

shortage

be indeterminate

$1

$4 and a producer surplus of $2

maximum price the buyer

the same as it would be without the price floor

buyers have inadequate information about products

a 10% increase in the price of bread causes a 5% decline in its quantity demanded

gold sales will decrease by 80%

consumers respond to a change in price

increase in quantity demanded; decrease in price

increases total revenue

positive because of the law of supply

substitutes

seller; buyer

owners of toxic waste disposal companies

buyer; small

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