Econ Marshall Kl

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real

Back 1

simple return on asset corrected for iflation

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nominal

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return on asset not adjusted for inflation

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bubble

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increase in price based on expectation not real value

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behavioral economics

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3 assumptions:

consumers have clear preferences for some goods over others

consumers face budget constraints

given their preferences, limited incomes, and the prices of different goods, consumers choose to buy combinations of goods that maximize their satisfaction

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reference point

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the point from which an individual makes a consumption decision

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endowment effect

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the tendency of indiviuals to value an item more when they own it than when they do not

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loss aversion

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tendency for individuals to prefer avoiding losses over acquireing gains

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framing

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tendency to rely on the context in which a choice is described when making a decisiion

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anchoring

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refers to the impact that a suggested piece of information may have on your final decision

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rule of thumb

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a common way to economize on the effort involved in making decisions is to ignore seemingly unimportant pieces of information

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law of small numbers

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the tendency to overstate the probability that a certain event will occur when face with relatively little infromation

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why do firms exist

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coordination

eliminate the need for every worker to negotiate every task

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factors of production

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labor

materials

capital

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production function

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function showing the highest output that a firm can produce for every specified combination of inputs

what is technically feasible at efficiently

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short-run

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period of time in which the quantities of one or more production factors cannot be changed

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long-run

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period of time needed to make all production inputs variabl

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fixed inputs

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a production factor that cannot be varied

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marginal product

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the additional output produced as an input when increased by one unit

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marginal product slope

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rises when total product increases at an increasing rate

decreases when total product increases at a decreasing rate

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average product of labor curve

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in general, the average product of labor is given by the slope of the line drawn from the origin to the corresponding point on the total product curve

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marginal product of labor curve

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in general, the marginal product of labor at a certain point is given by the slope of the total product at that point

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If MP > AP, then AP is

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increasing

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If MP < AP, then AP is

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decreasing

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AP = MP at

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maximum of AP

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law of diminishing returns

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the principle that as the use of an input increases with other fixed inputs, the resulting additions to output will eventually dcrease

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labor productivity

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average prodvut of labor for an entire industry or for the economy as a whole

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Isoquant

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a curve showing all possible combinations of inputs that yield the same level of output

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Isoquant map

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a graph combining a number of isoquants, used to describe a production function

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marginal rate of technical substitution MRTS

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the amount by which the quantity of one input can be reduced when one extra unit of another is used so that output remains constant.

MRTS = - (delta K / delta L)

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diminishing MRTS

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additional output from increase use of labor causes a reduction in output from decreased use of capital.

MPL / MPK = MRTS

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returns to scale

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the rate at which output increases as inputs are increased proportionately

increasing

decreasing

constant

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price taking

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because each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on the market price

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price taker

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firm that has no influence over market price and thus takes the price as given

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product homogeneity

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when the products of all firms are homogeneous, no firm can raise the price above the price of other firms ithout losing most or all its business

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free entry and exit

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the condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry

with free entry and exit, buyers can easily switch from one supplier and suppliers can easily enter or exit a market

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3 aspects of a perfectly competitive market

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1. price taking

2. product homegeneity

3. Free entry and exit

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when is a market highly competitive

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highly elastic demand curbes and relatively easy entry and exit

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do firms maximize profits

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smaller firms probably

larger firms owners separate from managers

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3 alternative forms of organization

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cooperative

condominium

non-profit org

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cooperative

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association of businesses or people jointly owned or operated by members for mutual benefit

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condominium

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a housing unit that is individually owned but provides access to common facilities that are paid for an controlled jointly by an association of owners

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non-profit org

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an organization which exists for educational or charitable reasons, and from which its shareholders or trustees do not benefit financially; surplus revenues are used to achieve goals

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marginal revnue

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change in revenue resulting form a one-unit increase in output

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marginal cost

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change in total cost resulting from a one-unit increase in output

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profit

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total revenue less total cost

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profit maximization

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if marginal revenue exceeds marginal cost, the production of an additional unit of output adds more to revenue than to costs.

In this case a firm is expected to increase its level of production to increase its profits

MR > MC increase production

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when are a firms profits maximized?

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when MR = MC

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MR = MC

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where a firms profits are maximized

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marginal revenue

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the additional revenue received from the sale of an additional unit of output

MR = delta TR/Delta Q

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profit

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total revenue less total cost

Profit = R -C

maximized by taking the derivative and setting it equal to zero

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MR = AR = P

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average revenue = price

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D = AR = MR = P

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for a competitive firm demand = price = average revenue = marginal revenue (flat line)

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What output should a perfectly competitive produce

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MC = MR = P

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total revenue formula

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P * q

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Total costs formula

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ATC * q

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when should a firm shut down in the sr

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when P < AVC

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producer's surplus

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PS = R - VC

Profit = R - VC - FC

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5 key points for pure competition in the short run

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1. demand is completely elastic for an individual firm but not for an industry

2. for the individual firm, price equals marginal revenue

3. profits are maximized by producing where Mr = MC above AVC

4. If price is below AVC, the firm should shut down and pay only fixed costs

5. The supply curve of an individual producer is the portion of the marginal cost curve above AVC

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accounting profit

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R - wL

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economic profit

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R - wL - rK

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Zero Economic Profit

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a firm is earning a normal return on its investment; it is doing as well as it could by investing its money elsewhere

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long-run competitive equilibrium

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occurs when three conditions hold:

1. all firms in the industry are maximizing profit

2. no firm has an incentive either to enter or exit the industry because all firms are earning zero economic profit

3. The price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers

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why would a firm that incurs losses choose to produce rather than shut down?

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to mitigate losses if they can - they can when p > avc

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In the long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true/

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with free entry and exit positive econ profit would entice new firms to enter and negative econ profit would encourage firms to exit

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an increase in demand for movies also increases the salaries of actors and actressess. Is the LR supply curve for films likely to be horizontal or upward sloping

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upward slopping

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A firm should always produce at an output at which the LR average cost is minimized

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False

In the LR firms will produce where LR average cost is minimized.

In the SR it may be optimal to produce at different levels

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consumer surplus

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the difference between what a consumer is willing to pay for a good and the actual amount paid.

equal to the net gain from trade received by consumers

MB > P up to last unit

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producer surplus

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sum over all units produced by a firm of the differences between the market price of a good and the marginal cost of production.

P> MC

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Result of a price ceiling

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shortage

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welfare effects

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gains and losses to consumers and producers

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deadweight loss

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net loss of total consumer plus producer surplus

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economic efficiency

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maximization of aggregate consumer and producer surplus

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market failure

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situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

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list 2 market types of market failures

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externalities

lack of information

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externatlities as a market failure

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actions take by either a producer or a consumer which affect other producers or consumers but is not accounted for by the market price

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lack of information

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market failure can also occur when consumers lack information about the quality or nature of a product and so cannot make utility-maximizing purchasing decisions.

may need regulation 'truth in labeling'

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price supports

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price set by government above the free-market level maintained by government purchases of excess supply

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Price supports / production quatos gain/loss

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total loss:

delta PS + delta CS - Cost to Govt' = D- (Q2-Q1)Ps

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import quotas

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limit on the quantity of goods that can be imported

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tariff

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tax on an imported good

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calculate tax on a good

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use

Pb - PS = t

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subsidy

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payment reducing the buyers price below the sellers price

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what is a production function

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a production function represents how inputs are transformed into outputs by a firm.

in particular a production function describes the maximum output that a firm can produce for each specified combination of inputs.

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How does a long-run production function differ from a short-run production function?

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in the short run, one or more factors of production cannot be changed, so a short-run production function tells us the maximum output that can be produced with different amounts of the variable inputs, holding fixed inputs constant. In the long-run production function, all inputs are variable.

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Why is the marginal product of labor likely to increase initially in the short run as more of the variable input is hired?

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the marginal product of labor is likely to increase initially because when there are more workers, each is able to specialize in an aspect of the production process in which her or she is particularly skilled.

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why does production eventually experience diminishing marginal returns to labor in the short run?

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the marginal product of labor will eventually diminish because there will be at least one fixed factor of production, such as capital. As more and more labor is used along with a fixed amount of capital, there is less and less capital for each worker to use

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what is the difference between a production function and an isoquant

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a production function describes the maximum output that can be achieved with any given combination of inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of outputs

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explain the term 'marginal rate of technical substitution' what does an MRTS = 4 mean?

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MRTS is the amount by which the quantity of one input can be reduced when the other input is increased by one unit while maintaining the same level of output. If the MRTS is 4 than one input can be reduced by 4 units as the other is increased by one unit, an output will remain the same.

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Is it possible to have diminishing returns to a single factor of production and constant returns to scale at the same time?

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They are different concepts so it is possible. Could have diminishing returns to labor and and constant returns to scale for overall production

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diminishing returns

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occurs because all other inputs are fixed. Thus, s more and more of the variable factor is used, the additions to output eventually become smaller and smaller because there are no increase in the other factors

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returns to scale

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deals with the increase in output when all factors are increased by the same proportion. While each factor by itself exhibits diminishing returns, output may more than double, less than double or exactly double when all the factors are doubled.

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can a firm have a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale as output increases

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yes. many firms have increasing, then constant, the decreasing returns to scale.