Microeconomics

Front 1

Scarcity

Back 1

Term used to describe the limited availability of resources--If no price were charger, the demand would exceed the supply.
- Forces people to make decisions b/c everyone can't have everything they want

Front 2

Trade-offs (Implications and decision making)

Back 2

Opportunity Cost forgone when choosing one good over another. Giving one good/service for another good/service

Front 3

Opportunity Costs

Back 3

The cost of a resource when measured against the value of the next best.

Front 4

Sunk cost

Back 4

expenditure that has already been made and cannot be recovered no matter what choice is made.

Front 5

Production Possibilities frontier

Back 5

graph showing various combinations of output that an economy can produce given available factors of production and technology

Front 6

Production Possibilities Frontier (Graph)

Back 6

Graph:

Front 7

Market Types:

Back 7

-Competitive
-Perfect
-Monopoly
-Oliogopoly
-Monopolistic Competition

Front 8

Competitive Market

Back 8

- Many buyers and sellers
Not controlled by any one person
- No single buyer or seller has significant impact on price

Front 9

Perfect Competition

Back 9

- Products are the same
- Numerous buyers and sellers that have no influence over the price
- Buyers and sellers are price takers
- Free entry and exit to the market

Front 10

Monopoly

Back 10

- One seller who controls prices

Front 11

Oligopoly

Back 11

- Few sellers
- Entry is impeded to new firms
- similar or identical products
- Best off cooperating and acting as monopolies

Front 12

Monopolistic Competition

Back 12

- Many sellers
- differentiated products
- free entry
- establishes own prices
** ie) crest toothpaste vs colgate, etc.. bc substitutes available (b/c not same product)

Front 13

Quantity Demanded

Back 13

Amount of a good that buyers are willing and able to purchase

Front 14

Law of Demand

Back 14

States that there is an inverse relationship between price and quantity demanded

Front 15

Market Demand

Back 15

sum of all individual demands for a particular good or service
* Graphically, are the summation of horizontal individual demand curves

Front 16

normal good

Back 16

demand for this increases as income increases

Front 17

inferior good

Back 17

demand for this decreases as income rises

Front 18

substitute

Back 18

When a fall in the price of one good reduces the demand for another good

Front 19

Complement

Back 19

When a fall in the price of one good increases the demand for another good

Front 20

Law of supply

Back 20

direct (positive) relationship between price and Q supplied

Front 21

Price Schedule

Back 21

Table that shows the relationship between price of the good and the quantity supplied

Front 22

Excess supply (surplus)

Back 22

When the price is above the equilibrium price, the Q supplied exceeds the Q demanded.
* Suppliers react by lowering prices
* Consumer surplus- difference between what consumers
would be willing to pay and what they actually pay
*Producer surplus- difference between what a producer would be willing to sell a good for and what it actually sells for

Front 23

Excess Demand (Shortage)

Back 23

When the price is set below the equilibrium price, the quantity demanded exceeds the Q supplied. Suppliers react by raising prices

Front 24

Consumer and Producer Surplus in Market Equilibrium

Back 24

Graph:

Front 25

Price ceiling

Back 25

- legally established maximum price where a good can be sold
- NOT BINDING if set above equilibrium price, otherwise is binding

Front 26

Price floor

Back 26

legally established minimum price where a good can be sold
-NON-BINDING if set below equilibrium price

Front 27

Price Ceiling

Back 27

Graph(binding vs non-binding):

Front 28

Minimum wage

Back 28

Graph:

Front 29

Elasticity

Back 29

- The measure of how much buyers and sellers respond the changes in market conditions
- Allows us to better analyze supply and demand

Front 30

Price elasticity of demand

Back 30

- Formula (percentage change in quantity demanded/ percentage change in the price)
- measures how much the Q demanded for a good when price changes
- EX) luxury, large number of substitutes, longer time period

Front 31

Price elasticity equation

Back 31

Price elasticity of demand= (percent change in Q demanded/ Percentage change in price)

* Elastic is greater than 1
*Inelastic is less than 1

Front 32

Property Rights

Back 32

-Assigning an individual the authority of an asset, and what to do with it
-

Front 33

Forms of property rights

Back 33

-communal (everyone has property rights)
- common (nobody has rights)
- Private
- State

Front 34

Comparative statics (Analyzing changes in equilibrium)

Back 34

- Decide whether the event shifts the supply curve, demand curve, or both
- Which direction it shifts
- Examine how the shift affects equilibrium price and Q

Front 35

Midpoint formula for finding elasticity of demand

Back 35

(Q2/Q1)/ [(Q2+Q1)/2]
-------------------------------
(P2-P1)/ [(P2+P1)/2]

Front 36

Inelastic demand

Back 36

Quantity demanded DOES NOT respond strongly to changes in prices
*Less than 1
** Demand is more vertical than horizontal

Front 37

Elastic Demand

Back 37

Quantity demanded responds strongly to changes in price
*Greater than 1
**Demand is more horizontal than vertical

Front 38

Income elasticity of demand

Back 38

how much the quantity demanded responds to changes in consumer's income
* (Percentage change in Q demanded/ Percentage change in Income)

Front 39

Income elasticities

Back 39

*inelastic- necessities (food, fuel, medical)
*elastic-luxuries (furs, cars, etc..)

Front 40

Cross-price elasticity

Back 40

% change in Q demanded of one good resulting from a 1% increase in price of another good
*Substitutes will be positive because the two products are competitors
* Complements are used together- will respond in the same way

Front 41

Total revenue and inelastic demand

Back 41

Increase in P leads to a proportionately smaller decrease in Q demanded. Thus, TR increases

Front 42

Total revenue and elastic demand

Back 42

Increase in P leads to a proportionately larger decrease in Q demanded. Thus, TR decreases

Front 43

Price Elasticity of supply

Back 43

% change in Q supplied/ % change in price
*ELASTIC= more horizontal
**INELASTIC= more inelastic

Front 44

Indifference Curves

Back 44

curve that shows bundles of goods that make the consumer equally happy

Front 45

Marginal Rate of substitution

Back 45

rate at which a consumer is willing to substitute one good for another

Front 46

Budget Constraint

Back 46

any point on the line indicates the consumer's combination or tradeoff between two goods
* All combinations of goods where the total amount of money spent is equal to income

Front 47

Utility Maximization

Back 47

Where highest I.D. curve and Budget constraint are tangent
* Where MRS= relative price

Front 48

Income Effect

Back 48

Change in consumption resulting from a change in prices that moves the consumer to a higher or lower Indifference Curve

Front 49

Substitution Effect

Back 49

Change in consumption resulting when a price change moves the consumer along the same indifference curve to a new point

Front 50

Giffen good

Back 50

inferior goods where the income effect dominates.
**UPWARD sloping demand curves

Front 51

Isoelastic demand

Back 51

Demand curve where price elasticity is constant along the entire curve

Front 52

Market demand curve

Back 52

horizonatally summed to find the amount demanded at a given price

Front 53

Economic Costs

Back 53

costs of utilizing resources in production. INCLUDES opportunity costs

Front 54

Accounting Cost

Back 54

actual expenses plus depreciation for capital equipment

Front 55

Economic profit

Back 55

Total revenue minus all the opportunity costs (explicit and implicit)
** Generally smaller than accounting profit

Front 56

Accounting profit

Back 56

total revenues minus only the explicit costs

Front 57

Isoquant

Back 57

curve showing all possible combinations of inputs that yield the same output
**Slope is MRTS

Front 58

Marginal Rate of Technical Substitution (MRTS)

Back 58

The rate at which one quantity can be reduced when one extra unit of a different input is used --> So that output remains constant.

Front 59

Isocosts

Back 59

Graph showing all combinations of labor and capital that can be purchased for a given total cost

Front 60

economies of scale

Back 60

LR ATC declines as output increases.
*Output can be doubled for less than a doubling of costs

Front 61

Diseconomies of scale

Back 61

LR ATC rises as output increases
* Cannot double output without requiring more than double the costs

Front 62

Constant returns to scale

Back 62

LR ATC does not vary as output increases

Front 63

economies of scope

Back 63

joint output by a single firm is greater than output that can be achieved by two different firms where each produces a single product

Front 64

diseconomies of scope

Back 64

joint output of a single firm is less than coud be achieved by separate firms when each produces a single product.

Front 65

Theory of the Firm

Back 65

explains how a firm makes cost minimizing production decisions and how it costs vary with output

Front 66

Three building blocks of the theory of the firm

Back 66

1) Production technology- using a given output, how to decide on best combination of inputs used
2)Cost constraints- Firms take into account prices of labor, capital and other inputs
3)Input choices- firm choosing how much of each input the firm uses.

Front 67

Transaction costs

Back 67

the costs of providing for some good through the market rather than having it provided from within the firm

Front 68

Profit Maximization

Back 68

assume that reasonable firms are profit maximizers (have LR profit max in mind).
**MEETS where MC= MR

Front 69

Game theory

Back 69

study of how people behave in strategic situations

Front 70

strategic decisions

Back 70

when each person (when deciding what actions to take) must consider how others might react to that

Front 71

dominant strategy

Back 71

when the best strategy for a player is to do whats best for them, regardless of what the other player does
** Not every game has a dominate strategy

Front 72

Marginal Revenue product

Back 72

add'l revenue resulting from the sale of output created by the use of one add'l unit of an input

Front 73

Economic rent

Back 73

Measure of market power, this is the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use.
**NO economic rent in perfect comp

Front 74

Lorenz Curve

Back 74

Shows the degree of inequality that exists in the distribution of the two variables

Front 75

Edgeworth Box

Back 75

Diagram showing all possible allocations of two goods between two people

Front 76

Pareto optimal

Back 76

a combination of goods and trades so that no add'l trading will make one person better off without making the other person worse off

Front 77

Impacts of taxes

Back 77

-discourage market activity
-decreased the Q sold if taxed
-buyers and sellers share the burden

Front 78

Tax Incidence

Back 78

the study of who bears the burden of a tax

Front 79

subsidy

Back 79

payment reducing the buyer's price below the seller's price

Front 80

Antitrust law purposes

Back 80

*increase competition thru preventing mergers, break up mega-companies, other activities that inhibit competition.

Front 81

Sherman Act

Back 81

Reduced the market power of the large and powerful trusts of the time

Front 82

Clayton Act

Back 82

Strengthened the gov't power and authorized private lawsuits

Front 83

Predatory pricing

Back 83

setting prices in a which that drives out competition and inhibits new entrants so that the firm can have higher future profits.

Front 84

Pigouvian tax

Back 84

tax levied on each unit of an externality producer's output in the amount equal to the damage done

Front 85

Public goods

Back 85

*Nonrival- goods that are available to everyone without consumption affecting any other individual's opportunity for consumption
**NONEXCLUSIVE- Goods that people cannot be excluded from consuming . It is difficult or impossible to charge people for using a nonexlusive goods

Front 86

Social Welfare Function

Back 86

Weights applied to individual's utility in determining what is socially desirable

Front 87

Absolute advantage

Back 87

When comparing productivity between firms, nations, etc. This producer has lower costs of producing a good

Front 88

Comparative advantage

Back 88

Compares producers of goods in terms of opportunity costs. Producer with smallest opp. cost has a comparative advantage in producing that product

Front 89

Tariffs

Back 89

taxes on imported goods--> Used to raise the price of imported goods above the world price (by the amt of the tariff)

Front 90

Effects of Tariffs

Back 90

*reduces domestics prices
*reduces welfare of domestic consumers
*increases welfare of domestic producers

Front 91

Benefits of International Trade

Back 91

*Increased variety of goods
*Lower costs thru economies of scale
*Increased competition
*Better flow of ideas

Front 92

Arguments for restricting trade

Back 92

*jobs
*national security
*Unfair competition
*Infant industries

Front 93

Trade Agreements (non-tariffs)

Back 93

UNILATERAL- when a country removes its trade tariffs on its own
MULTILATERAL- a country reduces trade restrictions while others do the same (NAFTA, GATT)

Front 94

Asymmetric information

Back 94

situation where a buyer and a seller possess different information about a transaction

Front 95

Adverse selection

Back 95

Due to asymmetric information. EX) When ppl buy insurance because they know more abt their risk and the pricer is unable to account for this in the costing. Ends with main ppl buying insurance are sick ones.

Front 96

Moral Hazard

Back 96

When people act differently after being less succeptable to consequences of risk. EX) buy insurance making one more likely to go dirt biking.

Front 97

GDP

Back 97

value of all finished goods and services produced within a period. EX) food, clothing, cars, dr. visits, housekeeper, haircut

Front 98

Calculate GDP

Back 98

Y=C+I+G+NX
GDP =Consumption (spending by households)+ Investment (spending on capital, equip)+ Gov't spending (spending by gov't) + net exports (Exports - imports)

Front 99

Nominal vs Real GDP

Back 99

Nominal--> values goods and services at current prices
Real--> Values goods and services at a constant price

Front 100

GDP deflator

Back 100

= (Nominal GDP/ Real GDP) *100

Front 101

To find Real GDP

Back 101

= (Nominal GDP/ GDP deflator) *100

Front 102

Consumer price index (CPI)

Back 102

measure of overall costs of goods and services bought by a typical consumer

Front 103

Inflation

Back 103

% change in price index from preceding year.
* [(CPI Y1- CPI Y2)/ CPI Y1] x100

Front 104

categories of unemployment

Back 104

*Natural- does not go away, even in LR
*Cyclical- year to year fluctuactions- generally associated with business cycle

Front 105

Types of unemployment

Back 105

Frictional- time taken to match workers with best suited jobs
Sectoral- Results from changes in industries/ economy
Structural- Q of labor supplied exceeds Q of labor demanded

Front 106

definition of unemployed

Back 106

temporary layoff, actively searching for work, waiting to start a new job

Front 107

Labor Force

Back 107

*% of labor force
**[(labor force/ adult population)x100]

Front 108

Aggregate demand

Back 108

Shows the quantity of goods and services that households, firms, and gov't want to buy at each price level

Front 109

Aggregate supply

Back 109

shows quantity of goods and services that firms produce and sell at each level

Front 110

phillips curve

Back 110

shows the relationship between inflation (vertical axis) and unemployment (horizontal)

Front 111

IS curve

Back 111

Shows all combinations of real interest rates and incomes.
**aggregate expenditure in aggregate output

Front 112

LM curve

Back 112

shows equilibrium between incomes and interest rates in the money market.
** Q of money in aggregate output

Front 113

Money Market

Back 113

financial market where highly liquid assets are traded. Used as a means for borrowing and lending in short term.

Front 114

Interest rates (expected)

Back 114

if higher rates are expected in future, demand for money increases.

Front 115

PV equation

Back 115

PV= FV / (1+ i ) ^ t
* [1/ (1+ i) ^ t is the discount factor
**

Front 116

Quantity theory of money

Back 116

says that money supply has a direct, proportional relationship to price level
* explains the LR determinants of price level and inflation rate

Front 117

fiscal policy

Back 117

gov't transactions, taxes
*SR- aggregate demand (ie: thru gov't purchases, or changes in taxes)

Front 118

Monetary Policy

Back 118

*Controlled by the Fed, this affects the money supply and interest rates

Front 119

Mundell- Fleming model

Back 119

open economy version of IS-LM model.
**Includes balance of payments aspect [ X -Z+ F(net capital inflow)] =0

Front 120

Convergence

Back 120

the idea that per capita income levels will converge over time. It is the idea that poorer economies per capita income will grow faster than richer economies

Front 121

balance of payments acct

Back 121

records economic transactions between US and foreign residents (goods and assets)

Front 122

types of balance of payments accounts

Back 122

Current= goods and services
Merchandise= goods only
Services= services only
Financial= assets