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186 Cards in this Set
- Front
- Back
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ability to produce a good using fewer inputs than another producer
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absolute advantage
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absolute advantage measures the cost of a good in terms of the
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inputs required to produce it
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the ability to produce a good at a lower opportunity cost than another producer
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comparative advantage
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if two countries have an absolute advantage in one good and specialize in that good then
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both countries can gain from trade
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when two countries specialize in a good in which it has a comparative advantage,
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total production in all countries is higher, the worlds economic pie is bigger, and all countries gain from trade
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group of buyers and sellers of a particular product
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market
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a market with many buyers and sellers, each has a negligible effect on price
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competitive market
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market with all goods exactly the same, buyers and sellers so numerous that no one can affect the market price (each is a price taker)
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perfectly competitive
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the amount of the good that buyers are willing and able to purchase
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quantity demanded
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claim that the qty demanded of a good falls when the price of the good rises (all other things equal)
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law of demand
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table showing the price of a good and the qty demanded
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demand schedule
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sum of qty demanded of all buyers at each price
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qty demanded in the market
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demand curve shifters
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# of buyers
income price of substitutes/complements change in tastes/preferences |
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comes from behavior of sellers
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supply
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according to the law of supply, the qty supplied of a good rises when the price of the good
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rises, all other things equal
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table that shows relationship between the price of a good and the qty supplied
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supply schedule
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4 supply curve shifters
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# of sellers
input prices technology expectations |
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in increase in income for a normal good shifts the demand curve
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right
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an increase in income for an inferior good shifts the demand curve
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left
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an increase in the price of pizza shifts the demand for hamburgers
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to the right
bc they are substitutes |
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if price of computers rises, the demand for software shifts
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left
bc they are complements |
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a fall in input prices shifts the demand curve
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right
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an increase in the number of sellers shifts the supply curve
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right
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a firm expects the price of a good to rise in the future, this would shift the supply curve
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leftward
the firm would reduce supply now to save some of its inventory to sell later at the higher price |
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price occurs where
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qty supplied = qty demanded
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qty supplied > qty demanded
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surplus
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qty demanded > qty supplied
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shortage
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facing a shortage, sellers __ the price
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raise
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facing a surplus, sellers __ the price
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lower
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movement along a fixed D & S curves
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change in qty demanded
change in qty supplied occur when price changes |
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measure of how much the qty demanded of a good responds to a change in the price of the good
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price elasticity of demand
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elasticity is measured in __ terms
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%
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4 determinants of the price elasticity of demand
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availability of close substitutes
necessities vs. luxuries definition of the market time horizon |
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price elasticity is __ when close substitutes are available
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higher
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price elasticity is ___ for luxuries than for necessities
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higher
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price elasticity is ___ for broadly defined goods than narrowly defined ones
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lower
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examples of narrowly defined good vs. broadly defined
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blue jeans
vs. clothing |
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price elasticity is __ in the long run than in the short run
why |
higher
gas: not much ppl can do in short run besides carpool in long run, buy more fuel efficient cars |
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price elasticity of demand equation
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% change in qty demanded/
% change in price |
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qty demanded does not respond to price changes
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perfectly inelastic
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qty demanded does not respond strongly to price changes
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inelastic demand
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price elasticity of demand is <1
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inelastic demand
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qty demanded responds strongly to changes in price
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elastic demand
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price elasticity of demand >1
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elastic demand
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qty demanded does not respond to price changes
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perfectly inelastic
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qty demanded changes infinitely with any change in price
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perfectly elastic
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qty demanded changes by same percentage as the price
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unit elastic
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price elasticity of demand is/is not the same as the slope
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is not
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amount paid by buyers and received by sellers of a good
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total revenue
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total revenue equation
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TR= price of good x qty sold
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measures how much the qty demanded of a good responds to a change in consumer's income
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income elasticity of demand
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income elasticity of demand equation
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% change in qty demanded/
% change in income |
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higher income __ the qty demanded for normal goods but __ the qty demanded for inferior goods
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raises; lowers
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necessities are income ___, while luxuries are income ___
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inelastic; elastic
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measure of how much the qty demanded of one good responds to a change in the price of another good
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cross- price elasticity of demand
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complements have a __ cross price elasticity where substitutes have a __ cross price elasticity
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negative; positive
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cross-price elasticity of demand equation
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% change in qty demanded of good1/
% change in price of good2 |
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measure of how much the qty supplied of a good responds to a change in the price of that good
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price elasticity of supply
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price elasticity of supply and its 2 determinants
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ability of sellers to change amount of good they produce (beach front property is inelastic--cant make more beach)
time period (supply is more elastic in long run) |
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price elasticity of supply equation
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% change in qty supplied/
% change in price |
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measures how much a buyer values a good
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willingness to pay
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consumer surplus equation
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WTP of a buyer- price buyer actually pays
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where is consumer surplus located on demand curve
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area under demand curve, above the price from 0 to Q
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area of triangle
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1/2bh
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producer surplus equation
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amount a seller is paid for a good- the seller's cost
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producer surplus on supply curve
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area above supply curve, under the price, from 0 to Q
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the fairness of the distribution of well-being among the various buyers and sellers
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equity
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a social planner cares about
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market efficiency and equity
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economic goal of a firm is to
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maximize profits
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the market value of the inputs a firm uses in production
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total cost
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profit equation
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total revenue- total cost
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input costs that require a direct outlay of money by the firm
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explicit costs
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input costs that do not require an outlay of money by the firm
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implicit
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foregone interest you could have earned
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implicit cost
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economic profit equation
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total revenue- total cost
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accounting profit equation
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total revenue- explicit costs
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shows relationship between qty inputs used to make a good and the qty of output of that good
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production function
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slope of a production function measures the ___ of an input
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marginal product
when the marginal product declines, the production function becomes flatter |
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fixed costs are costs that don't vary with __
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qty of output produced
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cost of each typical unit of product
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average cost
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increase in total cost that arises from an extra unit of production
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marginal cost
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marginal cost equation
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change in total cost/
change in qty |
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at low levels of output, ATC is high because
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fixed cost is spread over only a few units
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ATC __ as output increases
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declines
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where does the bottom of a U-shaped ATC curve occur?
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qty that minimizes ATC
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whenever marginal cost is less than ATC, ATC is
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falling
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whenever marginal cost is greater than ATC, ATC is
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rising
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in the short run, __ costs are fixed, in the long run __ costs __
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some
all; become variable costs |
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property whereby long-run ATC falls as the qty of output increases
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economies of scale
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property whereby long-run ATC rises as the qty of output increases
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diseconomies of scale
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property whereby long-run ATC stays the same as the qty of output increases
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constant returns to scale
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market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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competitive market
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market with many buyers and sellers, goods are largely the same, free entry/exit
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perfectly competitive market
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in perfect competition, the price of the good equals
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average revenue
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average revenue equation
for perfect competition |
P x Q/
Q =price |
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in a competitive market, price of good equals
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marginal revenue
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in a competitive firm, goal is to maximize profit meaning they will want to produce qty that maximizes the difference between __ and __
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total revenue
total cost |
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profit maximization occurs at the QTY where __ =__
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marginal revenue= marginal cost
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when MR > MC, __ Q
when MR<MC, __ Q when MR=MC, ___ |
increase
decrease profit is maximized |
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when will a firm shut down
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TR < VC
TR/ Q < VC/Q P< AVC |
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firm considers sunk cost when __ but ignores them when __
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deciding to exit
deciding to shutdown |
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where is a competitive firm's short run supply curve located?
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on the marginal cost curve that lies above AVC
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when will a firm exit the market?
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TR<TC
P < ATC |
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3 equations for profit
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tr- tc
(tr/q - tc/q) x q (p-atc) x q |
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where is profit located on graph for competitive firm
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area between price and ATC, up to Q
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where does a competitive firm's long-run supply curve lie?
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portion of marginal-cost curve that lies above ATC
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in the long run in a competitive market, price = ___. Supply curve is __ at this price.
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minimum of ATC
horizontal |
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at the end of the process of entry and exit, firms that remain are making 0 ___
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economic profit
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process of entry and exit ends when __ and __ are driven to equality
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price
ATC |
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market with firm that is sole seller of a product and the product does not have close substitutes
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monopoly
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3 barriers to entry for a monopoly
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ownership of a key resource
gov't gives single firm exclusive right to produce some good costs of production make a single producer more efficient than other producers |
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a single firm can supply a good to an entire market at a smaller cost than could two or more firms
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natural monopoly
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monopolies face a __ demand curve, while competitive firms face a __ demand curve
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downward-sloping-- monopoly
horizontal curve-- competitive |
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a monopoly's marginal revenue is always ___ the price of its good
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less than
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when a monopolist drops the price to sell one more unit, the revenue received from the previous units ___
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also decreases
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2 effects on total revenue when a monopoly increases the amount it sells
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output effect
price effect |
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more output sold, Q is higher
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output effect
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price falls, so P is lower
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price effect
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monopoly maximizes profit where
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MR= MC
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for a competitive firm, price __. for a monopoly, price __
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competitive:
p= mr= mc monopoly: p > mr=mc |
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which profit-maximizing firms set mr=mc
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all
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wedge in monopoly between the consumer's WTP and the producer's cost
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deadweight loss
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why does a monopoly incur deadweight loss?
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bc it sets its price above marginal cost
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4 ways gov't responds to monopoly
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make more competitive
regulate behavior turn private into public do nothing |
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2 effects of price discrimination on a monopoly
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increase monopolist's profits
reduce deadweight loss |
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when a monopolist uses perfect price discrimination...
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consumer surplus and deadweight loss are converted into profit
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2 types of imperfectly competitive markets
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monopolistic competition
oligopoly |
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many firms selling products that are similar but not identical
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monopolistic competition
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only a few sellers, each offering a similar or identical product to the others
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oligopoly
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3 attributes of monopolistic competition
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many sellers
product differentiation free entry and exit |
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when short-run economic losses encourage firms to exit the market, what happens to remaining firms' demand curves?
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shift right
and increase firms' profits |
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excess capacity in long-run:
monopolistic competition perfect competition |
monopolistic competition DOES have excess capacity in long-run
perfect DOES NOT |
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efficient scale of firm: output
monopolistic competition perfect competition |
monopolistic competition:
output is less than efficient scale of perfect competition perfect competition: firms produce at pt where ATC is minimized, which is the efficient scale of the firm |
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for a competitive firm, price __ marginal cost.
for a monopolistically competitive firm, price __ marginal cost |
equals
exceeds |
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3 characteristics of oligopoly
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few sellers offering similar or identical products
interdependent firms best off when acting like a monopolist by producing a small qty of output and charging a price above marginal cost |
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an agreement among firms in a market about qty's to produce or prices to charge
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collusion
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group of firms acting in unison
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cartel
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situation in which economic factors interacting with one another each choose their best strategy given the strategies that all the others have chosen
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nash equilibrium
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oligopoly price is __ the monopoly price and ___ the competitive price
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less than monopoly price
greater than competitive price |
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outcome if oligopoly firms pursue own self-interests
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-joint output is > monopoly qty but < competitive industry qty
- market prices are lower than monopoly price but > than competitive price - total profits < monopoly profit |
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as number of sellers in an oligopoly increases, market looks more and more like
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competitive market
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study of how ppl behave in strategic situations
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game theory
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illustrates why cooperation is difficult to maintain even when it is mutually beneficial
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prisoners dilemma
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best strategy for a player to follow regardless of strategies chosen by other players
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dominant strategy
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why is cooperation among oligopolists undesirable from the standpoint of society?
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leads to production that is too low and prices that are too high
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occurs when suppliers require retailers to charge a specific amount
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resale price maintenance (fair trade)
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occurs when a large firm begins to cut the price of its products with the intent of driving its competitor's out of the market
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predatory pricing
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when a firm offers two or more of its products together at a single price, rather than separately
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tying
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marginal product of labor equation
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change in quantity/
change in labor |
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the production function of labor becomes ___ as the number of workers increases
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flatter
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value of the marginal product equation
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marginal product of input x
market price of the output |
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value of marginal product is also known as
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marginal revenue product
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VMPL ___ as number of workers increases bc the market price of the good is constant
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diminishes
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to maximize profits, a competitive firm hires workers up to the pt where
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VMPL= wage
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what causes a labor demand curve to shift?
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output price
technological change supply of other factors |
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what causes labor supply curve to shift?
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change in tastes
changes in alternative opportunities immigration |
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an increase in the supply of labor causes
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-surplus of labor
-downward pressure on wages -makes it profitable for firms to hire more workers -results in diminishing marginal product -lowers value of marginal product -gives new equilibrium |
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increase in demand for labor
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-makes it profitable for firms to hire more workers
-puts upward pressure on wages -raises value of marginal product -gives new equilibrium |
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refers to equipment and structures used to produce goods and services
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capital
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firm increases the qty hired until the VMPL equals
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factor's price= wage
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two goods are __ if an increase in the price of one causes an increase in the demand for the other
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substitutes
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two goods are ___ if an increase in the price of one causes a fall in the demand for the other
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complements
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a fall in input prices causes a firm to ___ supply
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increase
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efficiency is attained when
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total surplus is maximized
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in a perfectly competitive market, process of entry/exit ends when
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marginal revenue= ATC
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if a firm produces nothing which cost will equal 0?
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variable cost
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why are monopolies inefficient?
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they restrict output below socially efficient level of production
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for a competitive firm, average revenue =
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marginal revenue
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why do monopolistically competitive firms face a downward sloping demand curve
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firm's product is different than those offered by other firms in the market
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firms want to maximize total revenue or profit more?
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profit
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if a firm has no startup costs then
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mc=atc
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what type of market has firms selling identical products>?
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perfect competition
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which type of market has many firms with differentiated products?
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monopolistic competition
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movies are an example of what type of market
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monopolistic competition
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bc price is above marginal cost, selling more at the going price raises profits
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output effect
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raising production will increase the amount sold which will lower the price and the profit per unit on all units sold
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price effect
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as number of sellers in oligopoly increases, price approaches __ and qty produced approaches __
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marginal cost
socially efficient level |
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profit in oligopoly depends on (2)
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how much they produce
how much other firms produce |
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a monopolistic cartel charges a price that is __ at an output level where __
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output level- mr=mc
price- corresponding with demand curve above this qty |
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if producers deviate from the cartel quantity, __ effect must have been larger
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output
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due to diminishing marginal product, as more workers are hired, the production function becomes
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flatter
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why does vmpl diminish as number of workers rises
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market price of good is constant
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under the economic assumption that labor and capital are complements in production, an increase in capital leads to ___ for workers
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increased wages
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the demand for capital =
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value of the marginal product of capital
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marginal cost is __ sloping while marginal revenue is __ sloping
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upward-marginal cost
downward- marginal revenue |
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the failure to produce enough to minimize ATC
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excess capacity
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