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237 Cards in this Set
- Front
- Back
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Scarcity
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our inability to satisfy all our wants
-we must make choices, which depends on incentives |
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Incentives
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encouragement for an action or penalty that discourages an action
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Economics
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social science that studies choices that individuals, businesses and government make as they cope with scarcity
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Microeconomics
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choices that individuals and businesses make, the way those choices interact in markets and influence of governments
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Macroeconomics
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the performance of the national and global economics
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Tradeoffs
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when people choose where to spend their money, when governmet chooses how to spend tax revenue
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Opportunity Cost
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the opportunity foregone in the choice of another
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Marginal Benefit
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benefit from pursuing an incremental increase in an activity
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Marginal Cost
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Opportunity cost of pursuing an incremental increase in an activity
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If MB > MC then we will
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do more of that activity
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If MB<MC then we will
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do less of that activity
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Paramount
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the rule of law that protects private property and failities voluntary exchange in markets
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Positive Statesments
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can be tested by checking it against facts
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Normative Statements
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cannot be tested
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PPF
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Production Possibilities Frontier
the boundary between the combos of goods and service that can and cannot be produced shows opportunity cost |
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Production Efficiency
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if we cannot produce more of one good without producing less of some other good
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Why is the PPF concave?
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because resouces are not equally productive in all activities
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Prefrences
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describes what we like and dislike
economists use marginal benefit and marginal benefit curve |
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Marginal Cost and PPF
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to find MC-- find the slope of the PPF btw two points
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Marginal Benefit
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the benefit recieved from consuming one more unit
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Principle of Decreasing MB
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the more we have of any good, the smaller the MB
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Allocative Efficiency
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when we cannot produce more of any good without giving up another we value more
pt on PPF at which MB=MC |
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Two key Factors of Expansion of PPF
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Technological Change
Capital Change |
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Cost of Economic Growth
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to use the resources in research and development and to produce new capital, we must decrease our production of consumption goods and services
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How does forgone consumption today affect PPF?
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by foregoing current consumption, we can shift our PPF outwad and increas our future PPF
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Comparative Advantage
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if a person can perform an activity at lower OC than anyone else
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Absolute Advantage
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person is more productive than others
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What does specialisation do for productivity?
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with specialisation in comparative advantages, productivity is increased
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Dynamic Comparative Advantage
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when a person gains comparative advantage from learning by doing
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How does the curve in PPF reflect the law of increasing OC?
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representing the increase in OC when we focus our resources on one product extreme
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Why is it inefficient to produce within the PPF
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it is attainable but inefficient, OC exists between that pt and one on the line, not producing as muc as possible
unemployment, misallocation |
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Production efficiency
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rate at which we cannot produce more without sacraficing another
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Allocaive Efficiency
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where you're prducing # of goods and how much people desire it, a specific pt of efficiency that produces the greatest utility
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How does Allocative Efficiency relate to MC and MB
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AE is basically the pt where MC meets MB in equilibrium
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Market
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arrangement that brings together buyers and sellers to get info and business
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Competitive Market
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many buyers and sellers, so no single buyer or seller can influence the price
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Money Price
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the amount of moey needed to buy it
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Relative Price
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ratio of its money price to the next best alternative: it is the OC
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Demand
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something you WANT, CAN AFFORD, and PLAN TO BUY
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Law of Demand
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Price increases and Demand decreases
Price decreases and Demand increases |
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Substitution Effect
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when relative price(OC) of a good or service icreases, people look for other options so the Quantity Demanded decreases, but increases for the Substitute
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Income Effect
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when price increases and income stays the same, demand decreases
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Quantity Demanded
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Amount consumer will buy at a price
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Change in D
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wen some other influence changes what people demand--> new demand curve
increased D= shift right decreased D= shift left |
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6 main factors that Change D
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1. prices of other goods
2. expected future prices 3. income 4. Expected future income 5. Population 6. prefrences |
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Substitute
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can be used in place of another good
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Complient
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Used in Conjunction with another good
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Change in Quantity Demanded
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Movement along the curve, based on change of price
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Change in Demand
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Movement of demand at same price
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Supply
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when a firm has the resources and technology to produce it, can profit from t, and has the intent to produce and sell
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Law of Supply
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Increase P= Increase Supply
Decrease P= Decrease Supply |
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Quantity of Supply
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amount supplied at give price
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Change in Supply
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when other factors change for a good, there is a change insupply--> new supply curve
supply increases-- left shift supply decreses-- right shift |
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5 Main non price factors that shift S
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1. Price of factors of production
2. prices of related goods produced 3. expected future prices 4. # of suppliers 5. State of Nature |
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Substitutes of Production
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can be used to produce multiple goods
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compliments of production
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must be made together
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Market Equilibrium
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when quantity demanded equals quantity supplied
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Surplus
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When Quantity supplied > Quantity Demanded
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Shortage
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When Quantity Supplied < Quantity Demanded
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Elasticity
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measures responsiveness
we know there will be an effect, but to what extent |
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How to calculate the elasticity of Demand?
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Change in Quantity Demanded
_________________________ Change in Price |
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Point Formula Method for Elasticity
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Price Original Chang in Quantity
__________ x __________ Q Original Change in Price |
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Midpoint Formula for Elasticity
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(Po +Pn) change in Q
______ X _________ (Qo+Qn) change in P |
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Negative Sign of Price Elasticity
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formula yields neg value because P and Q move in opposite directs so always take absolute value
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Point Elasticity
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measures elasticity at a point
need to know original and new Price as well as original and new Quantity |
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Mid Point Elasticity
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measures average elasticity btw two points
dont need to know which is original |
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Inelastic Demand
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quantity demanded doesn't change when price changes
(vertical) |
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Unit Elastic
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Change in Quantity demanded equals the percentage change in price, equals 1
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Perfect Elasticity
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change in Quantity is no response from price change
(horizontal) |
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Elastic good
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elasticity > 1
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Unit Elastic Good
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elasticity = 1
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Inelastic good
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elasticity < 1
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Scare Resources might be allocated by
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1. Market Price
2. Command 3. Majority Rule 4. Contest 5. First Come, First Serve 6. Sharing Equally 7. Lottery 8. Personal Characteristics 9. Force |
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market price as allocative method
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the people who get the resources are those most wiling to pay
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Command as Allocative Method
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allocates by the order of someone in authroity
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Majority Rule as Allocative Method
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allocates in the wayof the majority votes
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Contest as Allocative Method
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allocates resources to the winner
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First Come, First Serve as Allocative method
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allocates to those who are first in line
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Sharing Equally as Allocative Method
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resources evenly distributed, must be all in agreement of use and implementation
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Lottery as Allocative Method
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resources through luck of the draw
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Personal Characteristics as Allocative Method
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resources go to tose with the right characteristics, can cause discrimination
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Force as Allocative Method
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Theft/ Taxes- forced to use the resources a specific way
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Individual Demand
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relationship btw price of a good and quantity demanded for one person/firm
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Market Demand
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relationship tbw price of a good and quantity demanded of a whole group
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Consuer Surplus
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value of the ood, price paid for it summed over quantity bought
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Cost
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what the producer gives up
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Price
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what the producer recieves
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Marginal Cost
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cost of one more unity
Minimum supply=supply=MC |
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Individual Supply
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relationship btw price and quantity supplied for 1 firm
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Market Supply
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relationship of P and Q for multiple firms
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Producer Surplus
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price recieved- minimum supply price over quantity sold
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Competitive Equilibrium
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quantity demanded = quantity sold
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Consumer Surplus + Producer Surplus= ?
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Total Surplus
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Indvisible Hand
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competitive markets send resources to their highest valued use in society and Consumers and Producers will pursue their own self interest, all will just fall back into efficient equilibrium
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underproduction
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too little produced, produced a DWL
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overproduction
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too much produced, produces a DWL
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6 Obstacles to Efficiency
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1. P and Q regulation
2. Taxes 3. Externalities 4. Public Goods and Common Resources 5. Monopoly 6. High Transaction Costs |
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Price Regulators
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blocks on price adjustment
--> leads to underproduction |
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Quantity Regulators
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limits suppliers
--> underproduction |
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Taxes
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lead to underproduction-- increase buyer's cost and decreases Q produced
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Subsidies
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lower prices and increases supply
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Externalities
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a cost or benefit that effects someone other than the seller or buyer
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Public Goods
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benefits everyone and no one is excluded
-free rider problem and underproduction |
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Common Resources
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owned by no one but used by everyone
-overproduction |
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Monopoly
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a firm has sole provider of a good or service
produce too little-- underproduction |
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High Transaction Costs
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market too costly to operate
underproduction |
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Price Ceiling
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'price cap'
illegal to sell above specific price |
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price ceiling > Equilibrium
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no effect
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price ceiling < equilibrium
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DWL, inefficiency, shortage
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Search Activity
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time spent looking for someone to do business with
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Black market
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illegal market alongside legal markets where illegal arrangements are made btw renters and landlords at illegal prices
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Inefficiency of Rent Ceilings
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if under equilibrium, underproduction of good or service
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Price Floors
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makes illegal prices below set level
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Price Floor < equillibrium
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no effect
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Price Floor > equilibrium
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surplus and inefficiency
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Taxes
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everything you earn and buy are taxed
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Tax Incidence
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divsion of burden of tax btw buyers and sellers
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Perfectly inelastic demand and Taxes
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Buyer pays entire tax
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perfectly elastic demand and taxes
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Seller pays entire tax
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Benefits Principle
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people should pay taxes equal to the benefits they recieve
-fair because those who benefit more pay more - hard to administer |
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Ability to Pay Principle
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people should pay tazes according to how easily they can bear the burden
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Production Quota
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upper limit on quantity produced during specific time period
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what happens when govt puts a cost on breaking the law
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Supply-- decreases as CBL increases because of risk involved
Demand-- decreases as CBL increases because of risk |
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Pollution Problem
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biggest public bad, emphasis on cost and benefit
starting point: demand for clean environment |
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Demand for clean environment increasesdue to:
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1. income increase, demand increases-- want better quality
2. Our knowledge of effects has increased |
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MEC
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marginal external cost
---- cost on eeryone for 1 more unit |
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MPC
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Marginal production cost (MC)
----- the private cost for 1 more unit |
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MSC
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marginal cost incurred by entire society,
sum of MPC + MEC= MSC |
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Coase theorem
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if property rights exist only a small number of parties are involved and transaction cost are low, they are efficient and no externalities
-but only works with low # parties and low transaction costs |
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Pigouvian Tax
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a tax levied on a market activity that generates negative externalities
usually placed on companies causing excess pollution |
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Emission Charges
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price per unit of pollution; more pollution--> higher cost
hard to regulate |
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Marketable Permits
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each firm permitted amount per period and firms can trade permits
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Tragedy of Commons
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the absence of incentives to preven the overuse of a commonly owned resource
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Sustainable Production
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rate of production that can be maintained indefinitely
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Imports
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goods and services that we buy from people in other countries
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Exports
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good and services that we sell to other countries
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What drives International Trade?
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National Comparative Advantage
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Who loses out with imports?
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suppliers have a reduced surplus while consumers have a greater surplus-- therefore producers lose out
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Who loses out with exports?
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Supplier has an increased surplus while consumers have a lower surplus-- therefore consumers lose out
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Tariff
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tax on an imported good on the other company importing
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Import Quotas
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a restriction that limits the maximum quantity of a good that may be imported in a given period
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Export Subsidies
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payment by government to a domestic producer of an exported good
- often creates a DWL |
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Infant Industry Argument
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that it is necessary to protect new industries as to allow them the opportunity to learn by doing, but also an issue that they grow used to the protection and have no incentive to grow up
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The Dumping Argument
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when a foreign firm sells exports at lower price than cost of production
- foreign firm trying to drive out domestic company-- gain global monopoly power but virtually impossible to determine a firms cost, hard to think of a global economy and better to regulate than restrict |
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Consumption Possibilities
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household consumption constrained by income and prices
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Budget Line
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descrives the limits of Consumption Possibilities
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Budget Equation
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PxQx + PyQy = Y
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Relative Price
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the magnitude of the slope-- one price of a good divided by the price of another good
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BL- Change in Prices?
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slope changes
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BL-Change in Income?
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parallel shift of BL
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Indifference Curve
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a line that shows combos of goods among which a consumer is indifferent
all points above the line are preffered all points below the line are not prefered all points along the line are indifferen |
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Prefrence map
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a series of Indifference curves
the further from zero, the happier we are |
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Marginal Rate of Substitution
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MRS
----- measures rate a person is willing to give up good y to get an additional unit of good x while still indifferent |
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Diminishing Rate of Subsitution
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the more you have of a good, the more you are willing to give it up while still remaining indifferent
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Degree of substitutability
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shape reveals subsitutability between two goods
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Perfect compliment
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need to give 1 with 1 of the other, increase equally
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Perfect Substitute
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one or the other, doesn't mater which
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Ordinary Goods
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you're only willing to give up a fraction of one for more of another
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Best Affordable Choice
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based on BL, highest attainable indifference curve that has a MRS btw the 2 goods equal to the relative price
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Inferior Good
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when P increases, Q increases, when real income increases, Consumption decreases
substitution effect still dominates, downward sloping |
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Behavioral Economics
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studies ways in which limits on human's brain to compute and implement rational decisions
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Endowment Effect
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tendency of people to value something more highly that you won simply because you own it
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Neuroeconomics
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study of human brain when a person makes an economic decision, different decisions appear in different areas of the brain
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Economic Profit
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equal to Total revenue minus total cost with total cost being OC of production
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Explicit Costs
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amount spent by firm on resources
seen in accounting |
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Implicit Costs
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unseen but important
1. uses its own campital 2. cost of owner's resources |
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implicit rental rate
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cost of renting from self
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normal profit
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profit that an entrepeneur can expect to recieve on average
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3 Product Schedules
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describe relationship btw output and Q Labor
1. Total Product 2. Marginal Product 3. Average Product |
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Total Product
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TP: total output produced in a given period
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Marginal Product
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change in TP that results from 1 more unit of labour
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Average Product
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total product divided by quantity of labour
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As Q Labour increases-->
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TP increase
MP increase but eventually falls AP increases but eventally falls |
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Describe TP curve
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will always have an S shape
anything under TP curve = attainable anything above TP curve = unattainable |
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Describe MP curve
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derived from TP curve
increase in workers on x-axis, change in TP on y-axis shows both increasing and then decreasing marginal return |
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Increasing Marginal return
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due to increased specialisation and division of labour
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Diminishing Marginal return
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employing addition units of labour means each worker has less access to capital and less space to work
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Law of Diminishing Return
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as a firm uses more a variable input, with fixed quantitie inputs, MP of the variable input eventually falls
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Descrive AP curve
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close relationship to MP
MP > AP -- AP rises MP < AP -- AP falls MP = AP -- AP Maximised |
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Total Cost: TC
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cost of all resources used
parallel to TFC but distance btw is equal to TVC |
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Total Fixed Cost: TFC
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cost of the fixed inputs, don't change with output
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Total Variable Cost: TVC
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cost of variable inputs, do change with output
horizontal line |
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Average Total Cost
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TC/ Q
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Average Fixed Cost
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TFC/ Q
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Average Variable Cost
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TVC/ Q
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MC is below AVC
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AVC is fallign
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MC is above AVC
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AVC is rising
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AVC is a minimum
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MC=AVC
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ATC is falling
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MC is below ATC
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ATC is rising
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MC is above ATC
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Describe the Relationship between AP, MP, MC, and AVC
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MC is a minimum at the same level that MP is max, while MP increases MC decreses
AVC is minimum at the same level when AP is max, AP increases while AVC decreases inverse relationships |
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Diminishing MP of Capital
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increase in output from increase one unit capital firms production function exhibits diminishing marginal returns to labour and capital
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Economies of Scale
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features of firm's technology that lead to falling LR average Cost
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Dieconomies of Scale
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features of firms tehnology that lead to falling LR Average Cost
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Perfect competition
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each firm is a price take, cannot influence the price
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Total Profit (TP)=
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TR-TC
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Total Revenue (TR)=
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P x Q
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Total Cost (TC)=
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Opp. Cost of production
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Marginal Analysis
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used to determine profit-maximising output
~ because Marginal Revenue is constant and Marginal Cost eventually increases as output increases, profit is meaxed by producing where MR=MC |
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Temporary Shut Down Decision
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must decide to stay in market or exit, decision is to minimise losses
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Loss comparision if Temp Shut Down
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Firms loss= TFC + TVC- TR
which = TFC + (AVC-P)x Q if firm shuts down Q=0 then the loss = TFC |
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Shut down Point
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the P &Q where it is indifferent btw producing and shutting down
where AVC is minimum, where MC crosses AVC curve |
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P= ATC firm-->
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Breaks even
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P > ATC firm-->
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makes positive economic profit
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P< ATC firm-->
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incurs negative economic profit
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A Permanant Decrease in D
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decreases the demand-- incurs left shift and a fall in both P and Q-- Pm < ATC and thefefore incur economic loss
as Price increase- Qproduced decreases as firms exit and Qproduced increases for firms staying in New LR equilibrium when price increses to ATC, firms Economic Profit = 0, no firms exit and fewer firms are making equilibrium Q |
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A Permanant Increase in D
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increase in D-- incurs right shift and increase P and Q-- Pm >ATC and incur economic profit-- EP induces entry in LR and increases market supply which shifts the SR Supply right
Market supply increases and Price decreases while Q increases as P decreases firms decrease S New LR equilibrium when P decreses to ATC, Firms economic profit=0, no firms enter and more firms prodcue equilibrium Q |
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External Economies
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factors beyond the control of an idividual firm that lower the firms costs as industries output increase
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External Diseconomies
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factors beyond the control of an individual firm that raise the firm's costs as industry output increases
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without external economies and diseconomies
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a firms cost would remain constant
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Without External Econs and Disecons the LRS curve is
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horizontal
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with External Economies the LRS is
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upward sloping
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with external disecons the LRS is
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downward sloping
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Efficient Use of Resources
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No one is made better off without making someone worse off
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D Choices
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shows how best budget allocation changes as P changes so consumers get most value of resources at all pts along curve with no external benefits, Dm is MSB
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S Choices
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shows how profit-maximising Q changes as P changes so firm gets most value of resources at pts along curve with no external cost, Sm is the MSC
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Monopoly
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a market with
1. single seller of product with no close substitutes 2. high barriers to enry - firm has entire marke to itself, firm and market are the same |
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No Close Substitutes
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a monopoly has no close substitutes, if a firm has a close substitute even if it produced by only one firm, that firm effectively faces competition
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Barriers to Entry
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creates natural monopoly: an industry in which economies of scale enable one firm to supply the entire market at lowest possible cost
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Ownership Barriers to Entry
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one firm owns a significant portion of a key resource
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Legal Barrier to Entry
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creates a legal monopoly: market in which competition and entry are restricted by the grantic of: Public Franchise, government licence controls, or patent/ copyright
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Monopolies are contrained by
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Market Demand and Technology and Cost
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Inefficiency of Monopoly
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P> MSC
MSB> MSC DWL arises some of the CS is redistributed to PS |
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economic rents
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a monopolies economic Profit and Producer Surplus
-any surplus |
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Price Discrimination
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when a firm sells different units of a good or different prices when it sells different buys at different prices
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Perfect Price Discrimination
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when a firm is able to sell each unit of output for the highest price anyone is willing to pay
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The more perfectly a monopoly P discriminates
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the closer output is to Competitive Output (P=MC) and the more efficient outcome
but different because monopoly captures the entire CS and increase in Economic Profit attracts even more rent seeking-- inefficient |
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Natural Monopoly Regulation
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socieal interest theory and capture theory
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social Interest theory
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political and regulatory process relentlessly seeks out inefficiency and regulates to eliminate DWL
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Capture Theory
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regulation serves the self-interest of the producers who capture the regulator
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Marginal Cost Pricing Rule
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a regulation that sets the Price equal to Monopolies MC and Qproduced at a P=MC is Q*
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Standard Monogoply
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upward sloping J Shaped MC
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Natural Monopoly
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horizontal MC- very high fixed cost, downward sloping ATC and low constant MC
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Monopolistic Competition
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A market structure in which
1. large # of firms compete 2. Each firm produces a differentiated product 3. firms compete on product quality, P, and marketing 4. firms are free to enter and exit industry |
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Product Differentiation
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firms make product that are slightly different from products of other firms
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Two Key differences between Monopolistic Competition and Perfect Competition
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Monopolistic Competition has
excess capacity: if it produces less than the Q at which ATC is minimune Markup: the amount by which Price exceeds MC |
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Is Monopolistic Competition Efficient?
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P= MSB, Firms MC=MSC
P>MC so MSB>MSC so in LR --> firm produces < efficient Q |
