Econ Exam 3 Spring 2008

Front 1

economy of scale

Back 1

when an increase in a firm's scale of production leads to lower average costs

Front 2

diseconomies of scale

Back 2

when an increase in a firm's scale of production leads to higher average costs

Front 3

long run equilibrium in perfect competition

Back 3

keep moving to zero profit, P=SRMC=SRAC=LRAC, operating at most efficient scale

Front 4

derived demand for labor

Back 4

the demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce

Front 5

marginal revenue product

Back 5

additional revenue a firm earns by employing one additional unit of input= MP x P

Front 6

marginal productivity

Back 6

additional output provided by one additional unit of labor

Front 7

profit maximizing firm will...

Back 7

hire input until the MRP of the input=price of the input, *look at equation

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land in fixed supply

Back 8

price is determined by demand

Front 9

capital

Back 9

those good produced by the economic system that are used as inputs to produce other goods and services in the future

Front 10

depreciation

Back 10

decline in economic value over time

Front 11

interest rate

Back 11

a fee paid annually expressed as a percentage of the land or deposit

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physical or tangible capital

Back 12

material things Ex. structures, equipment, inventories

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inventories

Back 13

inputs or outputs that the firm has on hand or in storage Ex. finished product sitting around

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social capital or infrastructure

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provides service to the public Ex. roads, bridges, police, fire protection

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intangible capital

Back 15

nonmaterial things that contribute to the output of future goods and services

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human capital

Back 16

intangible, includes skills and knowledge that workers acquire

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capital stock

Back 17

for a single firm, the current market value of the firm's plant, equipment, inventories, and intangible assets

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investment

Back 18

new capital additions to a firm's capital stock

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capital market

Back 19

the market in which households supply their savings to firms that demand funds to buy capital goods

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bond

Back 20

a contract between a borrower and a lender in which the borrower agrees to pay the loan at some time in the future, along with interest payments along the way

Front 21

financial capital market

Back 21

part of the market in which savers and spenders interact

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capital income

Back 22

income earned on savings

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share of common stock

Back 23

a certificate that represents the ownership of a share of a business, almost always a corporation

Front 24

dividend

Back 24

profits that are paid directly to shareholders

Front 25

expected rate of return

Back 25

the annual rate of return that a firm expects to obtain through a capital investment

Front 26

expected rate of return and the marginal revenue product of capital

Back 26

keep investing new capital up to point at which the expected rate of return is equal to the interest rate, MRP=P

Front 27

present discounted value

Back 27

PV=R/(1+r)^t where r is the interest rate and t is years, the present discounting value of R dollars to be paid in t years in the future is the amount you need to pay today, at current interest rates, to ensure that you end up with R dollars t years from now

Front 28

partial equilibrium

Back 28

the process of examining the equilibrium conditions in individual markets and for households and firms separately

Front 29

general equilibrium

Back 29

the condition that exists when all markets in an economy are in simultaneous equilibrium, always moving toward this

Front 30

efficiency

Back 30

the condition in which the economy is producing what people want at the least possible cost, P=MC

Front 31

monopoly

Back 31

firm that produces a product in which there are no close substitutes and significant barriers to entry such as government franchise, patents, economies of scale, ownership of a scarce factor of production

Front 32

monopolists demand curve is the same as?

Back 32

market demand curve

Front 33

if a monopoly wants to sell more they must do what?

Back 33

lower price on all units sold

Front 34

the maximum price is equal to what?

Back 34

MR=MC

Front 35

cartel

Back 35

collusion, firms working together to limit competition and increase joint profits, acting as a single seller or a monopoly, illegal

Front 36

are monopolies efficient?

Back 36

NO! there is always an incentive to cheat

Front 37

natural monopolies

Back 37

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, Ex. gas companies

Front 38

Sherman Act

Back 38

passed by Congress in 1890, antitrust act

Front 39

Federal Trade Commission

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FTC, investigate behavior of the firms

Front 40

Antitrust Division (DOJ)

Back 40

act against violators of antitrust laws, decides which cases to prosecute and against whom to bring criminal chargers

Front 41

price discrimination

Back 41

charging different prices to different buyers

Front 42

perfect price discrimination or first degree

Back 42

changing maximum amount each buyer is willing to pay

Front 43

second degree price discrimination

Back 43

charge different prices based on observable consumer attributes Ex. cheaper movie tickets to students and elderly

Front 44

third degree price discrimination

Back 44

when firms charge different prices based on unobservable consumer attributes Ex. airline tickets

Front 45

monopolistic competition

Back 45

like perfect competition but with "differentiated" products, large number of firms and no barrier to entry

Front 46

case for product differentiation

Back 46

gives us variety

Front 47

case against product differentiation

Back 47

wasting money through advertising

Front 48

long run average profits are equal to?

Back 48

zero profit in the long run

Front 49

is monopolistic competition efficient?

Back 49

NO!

Front 50

slope of the demand curve in monopolistic competition

Back 50

slopes downward due to differentiation

Front 51

oligopoly

Back 51

a form of industry structure characterized by a few dominant firms, products may be homogenous or differentiated, the behavior of any one firm depends to a great extent on the behavior of others

Front 52

oligopoly will maximize profit at this point

Back 52

where MR=MC, demand curve must end up tangent to its average cost curve for profits to equal zero

Front 53

cartel/collusion model

Back 53

will produce only up to the point at which marginal revenue and marginal cost are equal, MR=MC, and price will be set above marginal cost

Front 54

tacit collusion

Back 54

when price and quantity fixing agreements among producers are explicit, tacit collusion occurs when such agreements are implicit

Front 55

price leadership model

Back 55

one dominant firm sets the price and all the smaller firms in the industry follow its pricing policy

Front 56

kinked demand curve model

Back 56

demand curve facing each individual firm has a "kink" in it that results from the assumption that competitor firms will follow if a single firm cuts price but will not follow if a single firm raises price

Front 57

cournot model

Back 57

model of a two firm industry (duopoly) in which a series of output adjustment decisions that leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly (just 2 firms, each firm takes output of other firm as given, both firms max profit)

Front 58

contestable markets

Back 58

entry and exit are costless, even large oligopolistic firms end up behaving like perfectly competitive firms, prices are pushed to long-run average cost by competition

Front 59

are oligopolies efficient?

Back 59

NO! for the same reason that monopolies aren't, they are likely to price above marginal cost and strategic behavior can lead to what is not the best for society

Front 60

Herfindanl-Hirschman Index

Back 60

calculated by expressing the market share of each firm in the industry as a percentage, squaring these figures, and adding, for example, in an industry in which 2 firms each control 50% of the market, the index is 50^2 + 50^2 = 2,500 + 2,500 = 5,000

Front 61

game theory

Back 61

in all games (conflict) there are decision makers (players), rules of the game (strategies), and payoffs (prizes), players choose strategies without knowing with certainty what strategy the opposition will use

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dominant strategy

Back 62

strategy that is best no matter what the opposition does

Front 63

nash equilibrium

Back 63

result of all players playing their best strategy given what competitors are doing

Front 64

maximum strategy

Back 64

one chosen by a player to maximize the minimum gain that it can earn, one who plays the maximum strategy assumes that the opposition will play the strategy that does the most damage

Front 65

tit for tat strategy

Back 65

lets a competitor know the company will follow the competitor's lead

Front 66

private cost

Back 66

cost of consumption of production paid by the consumer or firm

Front 67

social cost

Back 67

total cost to society of producing an additional unit of a good or service, equal to the sum of the marginal cost of producing the product and the correctly measured damage costs involved in the process of production

Front 68

negative externality

Back 68

marginal social cost exceeds marginal private cost

Front 69

marginal damage cost

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additional harm done by increasing the level of an externality producing activity by one unit, MPC+MDC=MSC

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regulation

Back 70

put legal limits on amount or type of externality produced Ex. dangerous gasses, usually political rather than economical

Front 71

taxes and subsidies

Back 71

government can tax the product, should be set equal to the marginal damage cost (MDC)

Front 72

private bargaining and negotiation

Back 72

assign property rights and let parties figure things out themselves

Front 73

coase theorem

Back 73

as long as property rights are clearly stated and bargaining costs are minimal, private parties can arrive at the efficient solution regardless of how property is assigned

Front 74

legal rules and procedures

Back 74

for coase theorem to work, we need laws to define what action can be taken when your property is damaged

Front 75

selling of auctioning pollution rights

Back 75

decide how much is acceptable and auction off "permits" that give the owner the right to pollute a certain amount

Front 76

public goods

Back 76

goods that are non-rival in consumption and/or their benefits are non-excludable

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non-rival

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s characteristic of public goods, one person's enjoyment of the benefits of a public good does not interfere with another's consumption of it Ex. national defense

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non-excludable

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a characteristic of most public goods, once a good is produced, no one can be excluded from enjoying its benefits Ex. public art and national defense

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free-rider problem

Back 79

people can get the benefit without paying for it

Front 80

drop in the bucket problem

Back 80

provision does not depend on any one person's payment

Front 81

imperfect information

Back 81

when the seller has more information about the product than the buyer Ex. buying a house or a used car

Front 82

adverse selection

Back 82

can occur when a buyer or seller enters into an exchange with another party who has more information Ex. lemons and cherries, insurance market

Front 83

moral hazard

Back 83

arises when one party to a contract passes the cost of its behavior on to the other party to the contract, inefficient-the cost to society is higher than the benefit

Front 84

Lorenz curve

Back 84

a widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis, distribution with more inequality are farther down to the right and shaded areas are larger, the Gini coefficient will be higher (max of 1)

Front 85

Gini coefficient

Back 85

a commonly used measure of inequality of income derived from a Lorenz curve, it can range from 0 to a max of 1

Front 86

wages

Back 86

differences in wages are often a result of differences in skill or differences in working conditions, risky jobs usually pay higher wages and highly desirable jobs usually pay lower wages

Front 87

property income

Back 87

income from the ownership of real property and financial holdings, it takes the form of profits, interest, dividends, and rents, it depends on how much property it owns and what kinds of assets it owns

Front 88

transfer payments

Back 88

payments by the government to people who do not supply goods or services in exchange, designed to provide income to those in need, the government is attempting to offset poverty

Front 89

economic income

Back 89

amount of money a household can spend during a given period with out increasing or decreasing its net assets Ex. wages, salaries, dividends. interest, income, etc

Front 90

money income

Back 90

measure of income used by the census bureau, less inclusive than "economic income"

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poverty line

Back 91

distinguishes the poor form the non-poor, 3 times the cost of the department of Agriculture's minimum food budget

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against redistribution of income

Back 92

believe that the market, when left to operate on its own, is fair

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in favor of redistribution of income

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a society as wealthy as the United States has a moral obligation to provide all its members with the necessities of life

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social security

Back 94

federal system of social insurance programs, 3 separate programs, is the largest program in the U.S., used for old age and survivors insurance, disability insurance, and health insurance

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welfare

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government transfer that provides cash benefits to families with dependent children whose incomes and assets fall below a very low level and people very poor regardless of whether or not they have children

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medicare and medicaid

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transfer programs that provide health and hospitalization benefits, medicare to the aged and disabled, and medicaid to people with low incomes

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unemployment compensation

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pays cash benefits for a certain period of time to laid-off workers who have worked for a specified period of time for a covered employer

Front 98

food stamps

Back 98

vouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores, only low income families and individuals are eligible