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114 Cards in this Set
- Front
- Back
Microeconomics
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Focus on the firm and decisions about level of output, prices, and changes in production technology.
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Proprietorship
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owner has right to all gains and is personally liable for losses
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Partnership
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Partners share gains and losses, but each partner is personally liable for all the debt of the partnership
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Corporation
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stockholders share profits, but stockholders are not liable for corporation’s debt
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Principal-Agent Problem
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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. |
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Short-Run Production
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is a period of time during which at least one factor of production cannot be varied.
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Long-Run Production
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a period long enough to allow the firm to vary all factors of production
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Total Product for a Firm
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The maximum quantity that a given quantity of labor can produce in the short-run, with all other inputs fixed
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Total Product Curve
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Shows the maximum quantity the firm can produce with a given quantity of capital for different quantities of labor
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Marginal Product Curve
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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. |
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Average Product Curve
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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 |
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Total Fixed Costs for a Firm
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the sum of the costs that do not vary with the output in the short run
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Average Fixed Costs Formula (AFC)
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TFC/Q
where: TFC=Total Fixed Costs, Q=Units of Output |
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Total Variable Costs Formula (AVC)
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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 |
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Total Costs Formula (TC)
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TFC + TVC
where: TFC=Total Fixed Costs, TVC=Total Variable Costs |
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Average Total Cost for a Firm (Formula)
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TC/Q or AFC + AVC
where: TC=Total Cost, Q=Quantity of Units produced AFC=Average Fixed Cost, AVC=Average Variable Cost |
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Marginal Cost
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dTC/dQ
where: dTC=increase in total cost due to an additional unit of output dQ=additional unit of output |
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Law of Diminishing Returns
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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 |
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Point of Diminishing Returns
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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. |
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Factors causing a Firm's Cost to shift upwards
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higher price of resources
higher taxes |
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Factors causing a Firm's Cost to shift Downwards
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Lower prices of resources
Lower Taxes Improved Technology |
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Sunk Costs for a firm
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costs that have already been incurred
also called a historical costs |
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Total Economic Costs
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Accounting Costs plus Implicit Opportunity Costs
Also called the Total Opportunity Cost |
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Technology Efficiency for a Firm
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occurs when a firm produces a given output by using the least amount of inputs
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Economic Efficiency for a Firm
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when a firm produces a given output at a least average total cost
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Economies of Scale
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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 |
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Dis-Economies of Scale
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the long-run average total cost for each firm in an industry Increases as it's output increases
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Marginal Product of Labor Curve Increases when:??
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the total product increases from additional unit of labor is greater then the total product increase for the previous Unit of Labor
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Marginal Revenue for a Firm
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is the increase in total revenue [dTR] due to the sale of one additional unit of output [dQ]
dTR/Q |
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Profit Maximizing Condition in Terms of Marginal Revenue and Marginal Costs for a Firm
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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) |
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Economic Profit
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If Accounting Revenues > Economic Costs
Economic Costs = Accounting Costs + Opportunity Costs |
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Price Taker Firm
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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 |
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Effects of Changes in Market Demand in a Price Taker
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Increase in market demand initially will result in an increase in the market price and profitability
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Price Searcher Firms
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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) |
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Factors that Increase Short-Run supply of a Product
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Fall in Price,
Improved Production Technology, Decrease in taxes on production, Favorable production conditions |
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Increasing-Cost Industries
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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 |
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Constant-Cost Industries
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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 |
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Decreasing Cost Industries
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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 |
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Markets with High Entry Barriers
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there are few, if any, alternative suppliers. Consumers have very little choice
Allocation Inefficiency with Reduced Competition Monopoly or Oligopoly Rent Seeking |
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Monopoly Advantages
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Innovation Incentive
Economies of Scale Economies of Scope |
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Monopoly
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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. |
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Oligopoly
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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. |
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Prisoners' Dilemma Game with Duopoly
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Both Companies, or just one, often cheats.
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Dominant Firm Oligopoly Model
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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 |
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Monopolistic Competition
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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 |
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Arguments Against Monopolistic Competition
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Price Exceeds marginal cost at the profit-maximizing output level
Excessive advertising is sometimes encouraged |
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Arguments For Monopolistic Competition
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Incentive to produce efficienty
Advertising could lower average total cost Incentive to innovate Can enter/exit with low barriers |
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Perfect Competition
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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. |
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Important Disciplinary Force in Perfect & Monopolistic Competition Markets
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Competition.
Strong incentive to operate efficiently and improve products and innovate |
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Long Run Excess Capacity for a Monopolistic Competition
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where marginal revenue=marginal cost, the firm's efficiency of production is less than the optimal long-run level of production
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Long Run Excess Capacity for a Perfect Competition
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Optimal long-run level of production=efficient scale of production
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Long-Run Markup for Monopolistic Competition
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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 |
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Long-Run Markup for Perfect Competition
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FLAT demand curve and therefore MARGINAL REVENUE= PRICE
no markup of long-run price |
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Price Elasticity of Demand
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-[% Δ in Quantity Demanded / % Δ in Price]
Inverse relationship between the quantity demanded and the price |
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Perfectly Elastic
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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. |
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Elastic
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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. |
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Unitary Elastic
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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 |
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Inelastic
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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. |
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Perfectly Inelastic
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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. |
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Price Elasticity of Demand impacted by Time Horizon
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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 |
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Important Factors Affecting Price Elasticity
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Availability of Substitutes
Luxury v.s. Necessity Price of Products Time Frame |
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Characteristic of factor causing demand to be more Elastic or less Inelastic
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Many Substitutes
Luxury Product High Price Long Time Frame |
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Characteristic of factor causing demand to be less Elastic or more Inelastic
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Few or no substitutes
Necessary Product Low Price Short Time frame |
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Total Profit for a Firm (in terms of Elasticity)
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normally maximized for a higher price and smaller quantity where Total Revenue - Costs is maximized.
corresponds to where price elasticity of demand is elastic |
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Tax on Product with Inelastic Demand (Buyers Viewpoint)
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the greater the portion of a tax on a product will be borne by buyers
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Tax on Product with Inelastic Demand (Sellers Viewpoint)
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the less the portion of a tax on a product will be borne by the sellers
tax will be passed to buyers |
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Price discrimination
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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 |
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Perfect Price Discrimination
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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 |
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Cross Elasticity of Demand
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% Δ in Quanity Demanded / % Δ in Price of Substitute or Complement Product
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Sign of Cross-Elasticity of Demand for a product
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If price of substitute product Increases then Demand for Product Increases
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Income Elasticity of Demand
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%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 |
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Normal Goods (Elasticity of Demand Context)
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Luxury goods and Necessities
Luxury Goods have IEoD >1 Necessities have an IEoD between 0 and 1 |
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Price Elasticity of Supply
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[% Δ in Quantity Supplied / % Δ in Market Price] > 0
positive relationship between quantity supplied and price |
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Company Preference if Market Price Increases (Elasticity)
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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. |
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Tax on Product with Inelastic Supply (Buyers Viewpoint)
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the less the portion of a tax on a product borne on buyers
tax borne by sellers |
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Tax on Product with Inelastic Supply (Sellers Viewpoint)
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the greater the portion of a tax on a product borne by the sellers
less on the buyers |
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Marginal Product of Labor for a Firm
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Δ in the firm's total output that results from the use of 1 additional unity of labor
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Marginal Revenue Product of Labor
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Δ in the firm's total revenue that results from the use of one additional unity of labor
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Marginal Revenue Product of Labor (Formula)
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MP * MR
where: MP=Marginal Product of Labor MR=Marginal Revenue of Labor |
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Firm's Demand Curve for Labor
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inversely related to the wage rate of labor for the firm
Downward Sloping |
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Market Demand Curve for Labor
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determined by combining the demand curves for labor of all firms
Downward Sloping (Wage Rate v.s. Quantity of Labor Utilized) |
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Elasticity of Demand for Labor
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INCREASE in the supply of labor normally results in a LOWER wage rate for labor
However, DEPENDS on the elasticity of demand for labor |
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Elastic Demand of labor causes
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INCREASE in supply of labor
LOWER wage rates HIGHER total labor income |
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Derived Demand
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Demand for a factor of production, such as labor. Derived from the demand for goods and services produced by the factor
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Supply of Labor
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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 |
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Labor Unions
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Try to make the demand for Union Labor Less Elastic
Try to Increase demand for Union Labor |
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Monopsony Labor Market
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Only 1 employer.
the wage rate is the lowest at which the single employer can attract labor it plans to hire Downward sloping curve |
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Efficiency Wage
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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 |
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Physical Capital of a Firm
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consists of goods purchased from other firms along with inventories of raw materials, work-in-progress, and finished goods
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Financial Capital for a Firm
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financial resources of the firm
used to buy physical capital |
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Marginal Product of Financial Capital for a Firm [MP(f)]
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the change in the firm's total output that results from the use of one additional unit of financial capital
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Marginal Revenue Product of Financial Capital for a Firm [MRP(f)]
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the change in the firm's total revenue that results from the use of one additional unit of financial capital
MRP=MP(f) * MR |
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Profit Maximizing firm
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PVMRP=Marginal Expenditure
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Firm's Demand Curve for Financial Capital
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inversely related to the interest rate paid for financial capital by the firm
Downward Sloping |
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INCREASE Supply of Financial Capital stems from?
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-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 |
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What are the Long-Run Economic and Accounting Profits for a Firm in Perfect Competition
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Long-Run Economic Profit is not possible
Long-Run Accounting Profit is possible |
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What are the Short-Run Economic and Accounting Profits for a Firm in Perfect Competition
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Short-Run Economic and Accounting Profit is possible
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Demand Curve for a Firm in Perfect Competition
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faces a Flat Demand Curve
Marginal Revenue=Price |
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For a Perfect Competition Firm, what is the effect on Price and Demand
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Price is normally LESS than with less competition
demand is usually GREATER than with less competition |
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Long-Run Price for a Firm in Perfect Competition
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Price=Marginal Cost
Price=Average Total Cost |
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Perfect Competition firm's short-run supply curve for a product
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(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. |
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What will the be the affect in Market Demand for a Price Taker in a Perfectly Competitive Market
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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.) |
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What is the Direction of the Demand Curve for a Monopoly?
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A Monopoly faces a DOWNWARD-SLOPING demand curve
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What is the relationship between marginal Revenue and Price for a Monopoly?
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Marginal Revenue < Price
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What is the Price Elasticity of Demand for a Monopoly
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Total Revenue is MAXIMIZED when when price and revenue are at a point
where the price elasticity of demand is UNITARY ELASTIC |
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Why is a Monopoly said to be Inefficient??
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Because the Profit maximizing output for a monopoly firm normally is less than the output at which average total cost is minimized
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Relationship between Marginal Revenue and Price for a Price Searcher Firm
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Marginal Revenue is LESS than the price of the product
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What are the Defects that can occur in a market with HIGH ENTRY BARRIERS?
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(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. |
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Effect on Perfect Price Discrimination for a Price Searcher Firm in a non-perfect competition market
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can gain by charging HIGHER prices to groups with a more INELASTIC
demand and LOWER prices to groups with a more ELASTIC demand |
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Economies of Scope
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if an INCREASE in the range of goods produced results in a DECREASE in the average total cost of producing the goods,
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What is the Marginal Total Economic Cost Effect on Rate Regulated Monopoly?
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NEGATIVE ECONOMIC PROFIT if the allowable price per unit is EQUAL to marginal total economic cost.
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What is the Average Total Economic Cost Effect on Rate Regulated Monopoly?
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ZERO ECONOMIC PROFIT if the allowable price per unit is EQUAL to average total economic cost per unit.
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Command Systems
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method of organizing production that uses a managerial hierarchy
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Coping with the Principal-Agent Problem
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(1) Ownership
(2) Incentive pay (3) Long-term contracts |