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57 Cards in this Set
- Front
- Back
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Marginal Decisions |
-How much -Deciding to do a little more or less of an activity -Additional Benefit (marginal benefit) -additional cost (marginal cost) |
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Incentives |
Reward or penalty that motivates people to change behavior |
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Efficiency vs equity |
Effienceny: Takes all opportunities to make some people better off w/o making other people worse Equity: Fairness |
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Gains from trade |
Benefits from trading |
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Division of Labor: |
Breaking a task into smaller jobs -increases output due to specialization -Economy as a whole can produce more |
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Market Failures |
Market doesn't give efficient outcome because of : 1. Externalities - they are side affects from individual actors not taken into account 2. Monopolies: High prices and no competition |
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What is Comparative advantage |
- Whoever has the lowest opp. cost has to comparative advantage - Need at least two people involved -Tied to gains from trade, specialization, increased output, trade. |
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Normative statement |
"We should be"; an opinionated statement |
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Positive Statement
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"What is"; a factual statement -value free |
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Competitive Markets |
-many buyers and sellers -makes sure nobody can control the price |
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"Law of Demand" |
As price decreases, ceterus peribus, the quantity demanded increases |
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Movement along the Demand curve |
Only the Price is changing |
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Shift in the Demand curve |
Due to other factors 1. population changes 2. change in price of related goods 3. changes in income 4. changes in taste 5. changes in expectations |
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Substitutes (tea) |
If Price of substitute (tea) increases, more people drink coffee |
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Compliments (cream, sugar, donuts) |
If Price of compliment (cream, sugar) increases, less people drink coffee
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Normal good
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everyday goods (when income increases, you buy more) |
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Inferior goods |
when income increases, you buy less. -fast food, etc |
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"Law of Supply" |
As prices increase, the quantity supplied increases |
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Movement along supply curve |
Price change |
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Shift in supply curve |
other factors 1. input prices 2. prices of related G&S 3. Technology 4. changes in expectations 5. number of produces |
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input prices |
- increase in input price = decrease in supply (left shift) - decrease in input price = increase in supply (right shift) |
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Changes in expectations |
-income is increasing= increase in supply |
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Number of producers |
increase in producers = increase in supply |
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consumer surplus |
-Willingness to - price= consumer surplus -When price decreases, CS increases |
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Producer Surplus |
Price - Willingness to Accept |
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Total Surplus |
CS + PS = TS |
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Ricardian model of Int'l trade |
Constant opportunity cost |
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Hekschar-Ohln Model |
a country has comparative advantage in producing a good that uses a factor thats abundant (app cost will be low) |
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Reasons for comparative advantage |
1. differences in climate and resources 2. differences in labor and capital 3. differences in technology 4. external economics |
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Autarky |
when there is NO Int'l trade |
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Types of protectionism |
Tariffs and quotas -Benefit the producers |
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Tariffs |
-CS will decrease (Prices increase) -PS will increase |
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Economic costs |
explicit + implicit |
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economic proft |
Revenue - (explicit + dep + implicit) |
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Sunk costs |
cost that has already been incurred and is non-receivable -should be ignored for future decisions |
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net gain |
MB - MC |
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Net Present value |
PV of benefits - PV of costs |
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Present value |
A dollar today is worth more than a dollar in the future |
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Marginal Analysis |
-Once you make a decision, it becomes marginal analysis ( "how much") -always comparing MC and MB |
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Production function |
Relationship between quantity of inputs a firm uses and the quantity of outputs it produces |
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Fixed inputs |
short run |
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Varied inputs |
long run |
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Marginal Product of Labor
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Tells us how productive the next worker is |
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Total product curve |
The slope of the TP curve is Marginal Product of Labor |
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Diminishing returns to Labor |
-Always seen when something is fixed -Happens when MP decreases |
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Total production |
When workers are more productive, you need fewer workers = lower costs |
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Minimum cost output occurs where? |
-Where ATC is lowest -MC always goes through minimum of ATC and AVC curves |
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When Q < minimum ATC |
MC < ATC |
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When Q > minimum ATC
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MC > ATC |
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Fixed input depends on |
Output -Choose the fixed costs that minimizes ATC |
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Economies of scale |
People specialize and buy in bulk which spreads costs |
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Diseconomies of scale |
As output increases, costs crease as well -Company gets to big -too much bureaucracy -poor chain of command |
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LRATC Curve shape |
It has this shape because of the the different economies of scale |
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Shut down price |
When Price = minimum AVC |
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Break even price |
When Price = minimum ATC |
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Optimal Production |
- operating at P=MC - (P - ATC) X Q |
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External economies (economies of scale) |
-Reach a critical mass: firms benefit from connections, supply chain |
