PRINCIPLES OF MICROECONOMICS FINAL EXAM

unlimited wants exceed the limited resources available to fulfill those wants

systematically and purposefully do the best they can to achieve an objective

induces someone to act

small, incremental changes

law of decreasing small changes in pleasure

produce more of one good or service, means we need to produce less of another

highest valued alternative that must be given up to engage in activity; whatever must be given up to obtain some item; marginal benefit>marginal cost

government decides how economic resources will be allocated--communism

decisions of the household and firms interacting in markets that allocate resources--resources are allocated among households and firms with little to no government interference

when most economic decisions result from the interaction of buyers and sellers but the government plays a significant role in the allocation of resources

good or service is produced at the lowest possible cost

production is in in accordance with consumer preferences

curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology, positive tool -- "what is" -- shows trade-off curve between two quantities

to hold all else constant

opportunity cost of production in a good rises as society produces more of it

ability of one producers to make more than another producer with the same quantity of resources

ability of an individual, a firm, or country to produce a good or service at a lower opp cost than competitors

many buyers and sellers

amount of a good or service that a consumer is willing and able to purchase at a given price

given ceteris paribus quantity demanded falls when prices rise and QD rises when prices fall

change in QD of good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes

change in QD of good that results from the effect of a change in the goods price on consumer's purchasing power

1. changes in income
2. changes in prices of related goods
3. changes in taste
4. change in # of buyers
5. changes in expectations about the future

anything you consume more of the more money you makes ^ income-^demand

anything you buy less of the more money you make ^income-down demand

goods and services that can be used for the same purpose -- ^price pepsi- ^demand coke

^price of coffee - down demand for coffee creamer

amount of good or service that a firm is willing and able to supply at a given price

given ceteris paribus, increases in the price cause increases in the quantity supplied ^price-^QS and vice versa

1. change in inputs
2. change in technology
3. change in prices of related goods
4. changes in # of firms in market
5. change in expectations about the future
6. change in taxes and subsidies
7. change in weather

difference btw the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

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

the difference btw the lowest price a firm would be willing to accept and for a good or service and the price it actually receives PS= price-wta

additional cost to a firm of producing one more unit of a good or service

CS+PS when both demand and supply are happy

results in economically efficient level of output, marginal benefit=marginal cost

a legal minimum on the price a which a good can be sold--only work above equilibrium

a legal max on the price at which a good can be sold--only works when below price equilibrium

qd>qs

actual division of a burden of a tax btw buyers and sellers in a market

1. immediate impact of a tax levied on the sellers of that good ^tax-down profits for sellers-down supply
2. tax on the sellers raises the cost of production and selling that good
3. we now can find the new market equilibrium price and quantity

producer surplus + consumer surplus

reduction in economic surplus from a market not being in a competitive equilibrium

a measure of how much one economic variable responds to changes in another economic variable

responsiveness of the quantity demanded to a change in price

% change QD/% change price

1. Availability of close substitutes
2. Luxury vs. Necessity
3. Passage of time
4. Definition in Market
5. Share of a good in consumers budget

no close substitutes: inelastic demand
close substitutes: elastic demand

Necessity: inelastic demand
Luxury: elastic demand

takes some time for consumers to adjust their buying habits when prices change
short time period: inelastic-few sub.
long time period: elastic-more sub.

narrowly defined: elastic
widely defined: inelastic

small proportion: inelastic
large proportion: elastic

price x quantity

^price - ^total revenue

^price - down in total revenue

measures how a change in income affects spending

measures the responsiveness of the quantity demanded of a good to a change in the price of a related good

responsiveness of the quantity supplied to a change of price

% change QS/ % change price

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

proposes that although decision makers want a good outcome, either they aren't capable of performing the problem solving that theory suggests or they are not inclined to do so

tendency for people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be WTP to buy the good if they didn't already own it

individuals place more weight on avoiding costs/losses than attempting to realize gains

people want to maintain their current choices

cost that has already been paid and cannot be recovered

tendency to overvalue present decisions over future decisions

enjoyment, satisfaction, pleasure from consuming good and service

change in total utility a person receives from consuming one additional unit of a good or service

consumers experience diminishing additional satisfaction as they consumer more of a good or service

the limited amount of income available to consumers to spend on a good or service

change in total utility/change in quantity

additional output a firm produces as a result of hiring one more worker

at some point, adding more of a variable input, such as labor, to the same amount of fixed inputs, will cause the marginal product of the variable input

change in Q/change in labor

change in total cost/change in quantity

lowest cost at which a firm is able to produce a given quantity of output in long run

a firms long-run average total cost falls as it increases the quantity of output it produces

when long run average total cost increases as output it produces

output increases directly in proportion to an increase in all inputs

1. many buyers and sellers
2. homogeneous products
3. free entry and exit
4. price takers

revenue-explicit cost

revenue-explicit-implicit

1. many buyers and sellers in the market
2. free entry and exit
3. heterogeneous products
4. price makers

one more unit sold, increases the total revenue by the price at which the unit is sold

in order to sell that last unit, the firm must cut the market price on all units sold-decreases total revenue

small # of interdependent firms that compete
1. market has few sellers
2. barriers to entry
3. homogenous or heterogenous products
4. price makers

study of new ppl make decisions in situation in which attaining their goals depends on their interactions with others
decisions of firms in industries where profits of a firm depends on interactions with other firms

exclusive right to a product for a period of 20 years from the date the patent applications is filled with the government

agreement among firms to charge the same price or otherwise not compete

a table that shows the payoffs that each firm earns from every combo of strategies

a strategy that is best for a firm, regardless of what strategies the other firms use

a situation in which each firm chooses the best strategy given the strategy chosen by the other firms

1. one seller
2. high barriers to entry
3. heterogeneous
4. price makers

economies of scale are so large that one firm can supply the market at a lower average total cost than two or more firms-only monopolies in us that are legal

subtract the revenue lost as a result of the price cut from the revenue gained

merger btw firms in the same industry

btw firms at different stages of production of a good

1. market definition
2. measure of concentration
3. merger standards

transaction costs are low; private bargaining will result in an efficient solution to the problem of externalities

costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of G or S

1. private good
2. common resources
3. club good
4. public good

rival and excludable-cell phone, car, clothing

non-rival and excludable-education

rival and non-excludable- fish in the ocean

non-rival-non-excludable- military, public parks

one person's consumption of a unit of a good means no one else can consume it

anyone who doesn't pay for a good cannot consume it

tendency for common resources to be over used

someone receives a benefit without having to pay for it

Total revenue/quantity

made in 1890, prohibited price fixing and collusion

1914 prohibited buying stock in competitors firm

when a firm sells the same good at different prices to different groups of customers

1. perfect- ex) jobs
2. quantity bundling- ex) buying bulk
3. charging different to different people- ex) college student discounts

every resident is required to enroll either in one of many non-profit health insurance programs provided by national government

government owns most of the hospitals and employs most of the doctors
"elective" procedure have a year or more wait list

one party has more info than the other party

one party to a transaction takes advantage of knowing more than the other party to the transaction

actions ppl take after they have entered into a contract (transaction) that make the other party worse-off

agents pursuing their own interests rather than the principals who hired them

Doctor

product

1. individual mandate
2. state health insurance market places
3. employer mandate
4. regulation of health insurance
5. medicare and medicaid
6. taxes > $200K

given fixed costs + average variable cost

fixed cost/quantity

high income-low incomes

% of population that is poor according to the federal governments definition

a level of annual income equal to three times the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition

curve that shows the distribution of income by arraying incomes from lowest to highest on the horizontal axis and indicating the cumulative fraction of households on the vertical axis

A/A+B = area A/ whole triangle

a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

the fair distribution of economic benefits

something measurable that can have different values, such as the incomes of doctors

change in price/change in quantity

different slopes at different points

1/2 x base x height

points below ppf curve

points above ppf curve

the ability of the economy to increase the production of good or services

comparative advantage

factors of production

a table that shows the relationship between the price of a product and the quantity of the product demanded

a curve that shows the relationship between the price of a product and the quantity of the product demanded

When the price of a good falls, two effects take place:

change in quantity demanded

change in demand

A table that shows the relationship between the price of a product and the quantity of the product supplied

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

a situation in which quantity demanded equals quantity supplied -- intersection of supply and demand curve, you use this to find price and quantity equilibrium