Microeconomics (Cfa Level 1)

Front 1

Microeconomics

Back 1

Focus on the firm and decisions about level of output, prices, and changes in production technology.

Front 2

Proprietorship

Back 2

owner has right to all gains and is personally liable for losses

Front 3

Partnership

Back 3

Partners share gains and losses, but each partner is personally liable for all the debt of the partnership

Front 4

Corporation

Back 4

stockholders share profits, but stockholders are not liable for corporation’s debt

Front 5

Principal-Agent Problem

Back 5

the problem of devising compensation rules that
induce an agent to act in the best interest of a principal.

Principal (stockholders) may not have full information about how their agents (corporate managers) are operating the corporation.

Agents may be running the corporation for themselves first (salary & perks), rather than the stockholders’ objectives.

Front 6

Short-Run Production

Back 6

is a period of time during which at least one factor of production cannot be varied.

Front 7

Long-Run Production

Back 7

a period long enough to allow the firm to vary all factors of production

Front 8

Total Product for a Firm

Back 8

The maximum quantity that a given quantity of labor can produce in the short-run, with all other inputs fixed

Front 9

Total Product Curve

Back 9

Shows the maximum quantity the firm can produce with a given quantity of capital for different quantities of labor

Front 10

Marginal Product Curve

Back 10

for a given quantity of capital is the increase in total product that can produced with one additional unit of labor for different quantities of labor.

Law of Diminishing Returns states that as a firm uses more of a variable input, with all other inputs fixed, the marginal product of the variable input will eventually decrease.

Front 11

Average Product Curve

Back 11

is the total product divided by the quantity of labor for different quantities of labor

Has an inverted U-Shape

Maximum value for the average product curve occurs for the quantity of labor where the marginal product of labor is equal to the average product of labor

Front 12

Total Fixed Costs for a Firm

Back 12

the sum of the costs that do not vary with the output in the short run

Front 13

Average Fixed Costs Formula (AFC)

Back 13

TFC/Q

where:
TFC=Total Fixed Costs,
Q=Units of Output

Front 14

Total Variable Costs Formula (AVC)

Back 14

TVC/Q

sum of the costs that rise as the output increases in the short run

where:
TVC=Total Variable Costs,
Q=Units of Output

Front 15

Total Costs Formula (TC)

Back 15

TFC + TVC

where:
TFC=Total Fixed Costs,
TVC=Total Variable Costs

Front 16

Average Total Cost for a Firm (Formula)

Back 16

TC/Q or AFC + AVC

where:
TC=Total Cost,
Q=Quantity of Units produced
AFC=Average Fixed Cost,
AVC=Average Variable Cost

Front 17

Marginal Cost

Back 17

dTC/dQ

where:
dTC=increase in total cost due to an additional unit of output

dQ=additional unit of output

Front 18

Law of Diminishing Returns

Back 18

as more and more units of a variable factor are applied to a fixed amount of other resources (in the short-run), output will eventually increase by smaller and smaller amounts

returns to the variable factor will diminish

Front 19

Point of Diminishing Returns

Back 19

the level output where marginal cost will increase if output is further increased

Prior to the point of diminishing returns, marginal cost will decline as the output increases

After the point is reached, the marginal cost will go up as the output increases more.

Front 20

Factors causing a Firm's Cost to shift upwards

Back 20

higher price of resources

higher taxes

Front 21

Factors causing a Firm's Cost to shift Downwards

Back 21

Lower prices of resources

Lower Taxes

Improved Technology

Front 22

Sunk Costs for a firm

Back 22

costs that have already been incurred

also called a historical costs

Front 23

Total Economic Costs

Back 23

Accounting Costs plus Implicit Opportunity Costs

Also called the Total Opportunity Cost

Front 24

Technology Efficiency for a Firm

Back 24

occurs when a firm produces a given output by using the least amount of inputs

Front 25

Economic Efficiency for a Firm

Back 25

when a firm produces a given output at a least average total cost

Front 26

Economies of Scale

Back 26

the long-run average total cost for each firm in an industry Decreases as it's output increases

The "point" is different from Industry to Industry

Front 27

Dis-Economies of Scale

Back 27

the long-run average total cost for each firm in an industry Increases as it's output increases

Front 28

Marginal Product of Labor Curve Increases when:??

Back 28

the total product increases from additional unit of labor is greater then the total product increase for the previous Unit of Labor

Front 29

Marginal Revenue for a Firm

Back 29

is the increase in total revenue [dTR] due to the sale of one additional unit of output [dQ]

dTR/Q

Front 30

Profit Maximizing Condition in Terms of Marginal Revenue and Marginal Costs for a Firm

Back 30

Maximum Profits=Marginal Revenue=Marginal Costs

If Marginal Rev > Marginal Costs = increase profit (or decrease loss)

if Marginal Rev < Marginal Costs = decrease in Profit (or increase loss)

Front 31

Economic Profit

Back 31

If Accounting Revenues > Economic Costs

Economic Costs = Accounting Costs + Opportunity Costs

Front 32

Price Taker Firm

Back 32

firm which must "Take" the price (or below) in order to sell its product.

(Face a flat demand curve)

Also called a perfect competition firm

Front 33

Effects of Changes in Market Demand in a Price Taker

Back 33

Increase in market demand initially will result in an increase in the market price and profitability

Front 34

Price Searcher Firms

Back 34

Has come choice over the price it charges for its product

(The amount of product that the firm is able to sell is inversely related to the price that it charges)

Front 35

Factors that Increase Short-Run supply of a Product

Back 35

Fall in Price,
Improved Production Technology,
Decrease in taxes on production,
Favorable production conditions

Front 36

Increasing-Cost Industries

Back 36

with higher costs for resources as industry output expands ---> resulting in an upward sloping market long-run supply curve

Increase in long-run demand would cause the long-run equilibrium price to increase

Front 37

Constant-Cost Industries

Back 37

with constant costs for resources as industry output expands, resulting in a flat market long-run supply curve

change in long run demand has no impact on long-run equilibrium price

Front 38

Decreasing Cost Industries

Back 38

with lower costs for resources as industry output expands, resulting in a "Downward-Sloping" market long-run supply curve

very unusual

An increase in long-run demand would cause a decrease in long-run equilibrium price

Front 39

Markets with High Entry Barriers

Back 39

there are few, if any, alternative suppliers. Consumers have very little choice

Allocation Inefficiency with Reduced Competition

Monopoly or Oligopoly

Rent Seeking

Front 40

Monopoly Advantages

Back 40

Innovation Incentive

Economies of Scale

Economies of Scope

Front 41

Monopoly

Back 41

market structure where there is a single seller of a good or service for which there are no close substitutes

Download Sloping Demand Curve and has considerable control over price.

Front 42

Oligopoly

Back 42

market structure where there are only a few sellers of either a differentiated or homogeneous good or service

Have strong incentive for collusion.

Significant interdependence among firms in industry with regard to price.

Non-Price competition is very common.

Front 43

Prisoners' Dilemma Game with Duopoly

Back 43

Both Companies, or just one, often cheats.

Front 44

Dominant Firm Oligopoly Model

Back 44

a dominant firm that has a big cost advantage over other firms int he industry and produces a large part of the industry output.

Dominant Firm acts like a monopoly and sets the price. Other firms act like price takers

Front 45

Monopolistic Competition

Back 45

market structure where there are numerous sellers of differentiated goods or services

goods/services are differentiated by quality, location, design, service, and/or advertising

usually low barriers to entry and exit

Front 46

Arguments Against Monopolistic Competition

Back 46

Price Exceeds marginal cost at the profit-maximizing output level

Excessive advertising is sometimes encouraged

Front 47

Arguments For Monopolistic Competition

Back 47

Incentive to produce efficienty

Advertising could lower average total cost

Incentive to innovate

Can enter/exit with low barriers

Front 48

Perfect Competition

Back 48

market structure where there are a large number of sellers of a homogeneous good or service

each seller is assume to be small relative to total market

competition usually involves low barriers to entry and exit.

Front 49

Important Disciplinary Force in Perfect & Monopolistic Competition Markets

Back 49

Competition.

Strong incentive to operate efficiently and improve products and innovate

Front 50

Long Run Excess Capacity for a Monopolistic Competition

Back 50

where marginal revenue=marginal cost, the firm's efficiency of production is less than the optimal long-run level of production

Front 51

Long Run Excess Capacity for a Perfect Competition

Back 51

Optimal long-run level of production=efficient scale of production

Front 52

Long-Run Markup for Monopolistic Competition

Back 52

there is a slightly downward sloping demand curve and therefore marginal revenue is slightly less than price.

at its optimal long-run level of production, the corresponding optimal long-run price it charges is greater than it's marginal cost ==> Positive Markup

Front 53

Long-Run Markup for Perfect Competition

Back 53

FLAT demand curve and therefore MARGINAL REVENUE= PRICE

no markup of long-run price

Front 54

Price Elasticity of Demand

Back 54

-[% Δ in Quantity Demanded / % Δ in Price]

Inverse relationship between the quantity demanded and the price

Front 55

Perfectly Elastic

Back 55

Quantity demanded changes by an infinitely large percentage in response to a tiny change in price (opposite direction)

Total revenue changes in the opposite direction to the change in price.

Front 56

Elastic

Back 56

Quantity demanded changes by a larger percentage as does price (in opposite direction)

Elasticity > 1

total revenue changes in opposite direction to change in price.

Front 57

Unitary Elastic

Back 57

Quantity demanded changes by the same percentage as does price (opposite direction)

Elasticity=1

Total revenue unchanged where price and quantity where total revenue maximized

Front 58

Inelastic

Back 58

Quantity demanded changes by a smaller percentage than does price (same direction)

Elasticity<1

total revenue Δ in the same direction as Δ in price.

Front 59

Perfectly Inelastic

Back 59

Quantity demanded does not change when price changes

Elasticity=-0

Total revenue Δ in same direction as Δ in price, and proportional to Δ in price.

Front 60

Price Elasticity of Demand impacted by Time Horizon

Back 60

When Price of Production increases, consumers will reduce their consumption rate by a larger amount in the long-term than in the short-term.

long-term consumers has time to find good substitutes

Front 61

Important Factors Affecting Price Elasticity

Back 61

Availability of Substitutes

Luxury v.s. Necessity

Price of Products

Time Frame

Front 62

Characteristic of factor causing demand to be more Elastic or less Inelastic

Back 62

Many Substitutes

Luxury Product

High Price

Long Time Frame

Front 63

Characteristic of factor causing demand to be less Elastic or more Inelastic

Back 63

Few or no substitutes

Necessary Product

Low Price

Short Time frame

Front 64

Total Profit for a Firm (in terms of Elasticity)

Back 64

normally maximized for a higher price and smaller quantity where Total Revenue - Costs is maximized.

corresponds to where price elasticity of demand is elastic

Front 65

Tax on Product with Inelastic Demand (Buyers Viewpoint)

Back 65

the greater the portion of a tax on a product will be borne by buyers

Front 66

Tax on Product with Inelastic Demand (Sellers Viewpoint)

Back 66

the less the portion of a tax on a product will be borne by the sellers

tax will be passed to buyers

Front 67

Price discrimination

Back 67

where sellers charge some different customers different prices for the same product or service

Price Searcher Firms can gain if it can identity groups of customers that have different price elasticities of demand

and

prevent customers from re trading the product

Front 68

Perfect Price Discrimination

Back 68

occurs if a firm is able to sell each unity of output for the highest price anyone is willing to pay for it.

marginal revenue=price, just as in perfect competition

therefore, Very Efficient

Front 69

Cross Elasticity of Demand

Back 69

% Δ in Quanity Demanded / % Δ in Price of Substitute or Complement Product

Front 70

Sign of Cross-Elasticity of Demand for a product

Back 70

If price of substitute product Increases then Demand for Product Increases

Front 71

Income Elasticity of Demand

Back 71

%Δ in Quantity Demanded / % Δ in Income

indicates the responsiveness of the demand for a product when income changes

Normal goods have positive income elasticity of demand

Inferior Goods have an negative elasticity of demand

Front 72

Normal Goods (Elasticity of Demand Context)

Back 72

Luxury goods and Necessities

Luxury Goods have IEoD >1

Necessities have an IEoD between 0 and 1

Front 73

Price Elasticity of Supply

Back 73

[% Δ in Quantity Supplied / % Δ in Market Price] > 0

positive relationship between quantity supplied and price

Front 74

Company Preference if Market Price Increases (Elasticity)

Back 74

a company would prefer Elastic Supply

means that the quantity the company supplies would increase by a larger percentage than the increase in market price.

Front 75

Tax on Product with Inelastic Supply (Buyers Viewpoint)

Back 75

the less the portion of a tax on a product borne on buyers

tax borne by sellers

Front 76

Tax on Product with Inelastic Supply (Sellers Viewpoint)

Back 76

the greater the portion of a tax on a product borne by the sellers

less on the buyers

Front 77

Marginal Product of Labor for a Firm

Back 77

Δ in the firm's total output that results from the use of 1 additional unity of labor

Front 78

Marginal Revenue Product of Labor

Back 78

Δ in the firm's total revenue that results from the use of one additional unity of labor

Front 79

Marginal Revenue Product of Labor (Formula)

Back 79

MP * MR

where:
MP=Marginal Product of Labor
MR=Marginal Revenue of Labor

Front 80

Firm's Demand Curve for Labor

Back 80

inversely related to the wage rate of labor for the firm

Downward Sloping

Front 81

Market Demand Curve for Labor

Back 81

determined by combining the demand curves for labor of all firms

Downward Sloping (Wage Rate v.s. Quantity of Labor Utilized)

Front 82

Elasticity of Demand for Labor

Back 82

INCREASE in the supply of labor normally results in a LOWER wage rate for labor

However, DEPENDS on the elasticity of demand for labor

Front 83

Elastic Demand of labor causes

Back 83

INCREASE in supply of labor

LOWER wage rates

HIGHER total labor income

Front 84

Derived Demand

Back 84

Demand for a factor of production, such as labor. Derived from the demand for goods and services produced by the factor

Front 85

Supply of Labor

Back 85

positively related to the wage rate up to a point.

If high enough, can be inversely related to the wage rate because of the income effect

Supply of labor curve is upward sloping

Front 86

Labor Unions

Back 86

Try to make the demand for Union Labor Less Elastic

Try to Increase demand for Union Labor

Front 87

Monopsony Labor Market

Back 87

Only 1 employer.

the wage rate is the lowest at which the single employer can attract labor it plans to hire

Downward sloping curve

Front 88

Efficiency Wage

Back 88

is a wage rate above the wage rate that the firm pays, with the aim of attracting the most productive workers

makes employment for desirable

Front 89

Physical Capital of a Firm

Back 89

consists of goods purchased from other firms along with inventories of raw materials, work-in-progress, and finished goods

Front 90

Financial Capital for a Firm

Back 90

financial resources of the firm

used to buy physical capital

Front 91

Marginal Product of Financial Capital for a Firm [MP(f)]

Back 91

the change in the firm's total output that results from the use of one additional unit of financial capital

Front 92

Marginal Revenue Product of Financial Capital for a Firm [MRP(f)]

Back 92

the change in the firm's total revenue that results from the use of one additional unit of financial capital

MRP=MP(f) * MR

Front 93

Profit Maximizing firm

Back 93

PVMRP=Marginal Expenditure

Front 94

Firm's Demand Curve for Financial Capital

Back 94

inversely related to the interest rate paid for financial capital by the firm

Downward Sloping

Front 95

INCREASE Supply of Financial Capital stems from?

Back 95

-INCREASE in income (person) generally results in HIGHER current savings rate

-INCREASE in Expected Future income generally results in LOWER current savings rate

-INCREASE in interest rate generally results in HIGHER Current Savings Rate

Front 96

What are the Long-Run Economic and Accounting Profits for a Firm in Perfect Competition

Back 96

Long-Run Economic Profit is not possible

Long-Run Accounting Profit is possible

Front 97

What are the Short-Run Economic and Accounting Profits for a Firm in Perfect Competition

Back 97

Short-Run Economic and Accounting Profit is possible

Front 98

Demand Curve for a Firm in Perfect Competition

Back 98

faces a Flat Demand Curve

Marginal Revenue=Price

Front 99

For a Perfect Competition Firm, what is the effect on Price and Demand

Back 99

Price is normally LESS than with less competition

demand is usually GREATER than with less competition

Front 100

Long-Run Price for a Firm in Perfect Competition

Back 100

Price=Marginal Cost

Price=Average Total Cost

Front 101

Perfect Competition firm's short-run supply curve for a product

Back 101

(1) POSITIVELY related to the
product's price

(2) the portion of the firm's SHORT-RUN MARGINAL COST curve for the product that lies ABOVE the firm's average variable cost curve for the product.

Front 102

What will the be the affect in Market Demand for a Price Taker in a Perfectly Competitive Market

Back 102

an INCREASE in MARKET DEMAND will initially result in an INCREASE in market price, with a corresponding INCREASE in profitability for firms in the market.

(Profitability will initially increase from an economic break-even to an economic profit.)

Front 103

What is the Direction of the Demand Curve for a Monopoly?

Back 103

A Monopoly faces a DOWNWARD-SLOPING demand curve

Front 104

What is the relationship between marginal Revenue and Price for a Monopoly?

Back 104

Marginal Revenue < Price

Front 105

What is the Price Elasticity of Demand for a Monopoly

Back 105

Total Revenue is MAXIMIZED when when price and revenue are at a point
where the price elasticity of demand is UNITARY ELASTIC

Front 106

Why is a Monopoly said to be Inefficient??

Back 106

Because the Profit maximizing output for a monopoly firm normally is less than the output at which average total cost is minimized

Front 107

Relationship between Marginal Revenue and Price for a Price Searcher Firm

Back 107

Marginal Revenue is LESS than the price of the product

Front 108

What are the Defects that can occur in a market with HIGH ENTRY BARRIERS?

Back 108

(1) Discipline of market forces is weakened with REDUCED competition

(2) Allocation inefficiency with REDUCED competition

(3) Government grants of monopoly power will ENCOURAGE rent seeking.

Front 109

Effect on Perfect Price Discrimination for a Price Searcher Firm in a non-perfect competition market

Back 109

can gain by charging HIGHER prices to groups with a more INELASTIC
demand and LOWER prices to groups with a more ELASTIC demand

Front 110

Economies of Scope

Back 110

if an INCREASE in the range of goods produced results in a DECREASE in the average total cost of producing the goods,

Front 111

What is the Marginal Total Economic Cost Effect on Rate Regulated Monopoly?

Back 111

NEGATIVE ECONOMIC PROFIT if the allowable price per unit is EQUAL to marginal total economic cost.

Front 112

What is the Average Total Economic Cost Effect on Rate Regulated Monopoly?

Back 112

ZERO ECONOMIC PROFIT if the allowable price per unit is EQUAL to average total economic cost per unit.

Front 113

Command Systems

Back 113

method of organizing production that uses a managerial hierarchy

Front 114

Coping with the Principal-Agent Problem

Back 114

(1) Ownership
(2) Incentive pay
(3) Long-term contracts