Real Econ Final Flashcards

Front 1

What determines DWL?

Back 1

price elasticities of supply and demand

Front 2

consumer surplus

Back 2

difference between market price and how much consumers are willing to pay

Front 3

producer surplus

Back 3

difference between market price and lowest price producers are willing to sell at (cost of production)

Front 4

tax incidence

Back 4

manner in which tax burden is shared among participants in a market

Front 5

2 implications of taxes

Back 5

1) taxes discourage market activity (when something is taxes, Q sold < equilibrium) 2) buyers and sellers share the burden of the tax

Front 6

what causes shifts in the demand curve?

Back 6

1) income 2) price of related goods 3) tastes 4) expectations 5) number of buyers

Front 7

substitutes

Back 7

price increase in one good = price increase in other good (ie butter and margarine)

Front 8

complements

Back 8

price increase in one good = decrease in demand of other good (ie PB&J)

Front 9

price floor/price ceiling

Back 9

legal minimum/maximum imposed on a good's price (ie min wage/rent controls)

Front 10

4 "lessons" learned from taxes

Back 10

1) burden doesn’t always fall on the check-writer; 2) tax incidence is same regardless of check-writer 3) burden falls on the inelastic actor 4) “ideal taxes” tax perfectly inelastic or perfectly elastic goods

Front 11

3 implications of free markets

Back 11

1) goods go to buyers who value them most by willingness to pay; 2) demand for goods goes to sellers who produce at the lowest cost; 3) produce Q that maximizes TR

Front 12

inferior good

Back 12

good for which as income increases, demand decreases

Front 13

normal good

Back 13

good for which as income increases, demand increases

Front 14

law of supply and demand

Back 14

an increase in demand for a good raises the price, which attracts sellers to the market, which increases the supply of goods and lowers the price back down to a long-run equilibrium

Front 15

efficiency

Back 15

achieved by maximizing total surplus

Front 16

elasticity

Back 16

measure of responsiveness of QD/QS to one of its determinants

Front 17

total revenue

Back 17

amount paid by buyers and received by sellers – P * Qsold

Front 18

what causes shifts in the supply curve?

Back 18

1) input prices; 2) change in technology; 3)expectations; 4) number of sellers

Front 19

what determines elasticity?

Back 19

1) availability of close substitutes; 2) necessity versus luxury; 3) definition of the market; 4) time horizon

Front 20

what changes with who bears the burden of a tax?

Back 20

if consumers bear the burden, there is a decrease in quantity demanded; if producers bear the burden, there is a decrease in quantity supplied; if an inelastic good is taxed there is no DWL

Front 21

midpoint formula

Back 21

QA – QB / (QA+QB/2)/
QA-QB / (PA + PB/2)

Front 22

welfare economics

Back 22

study of how resource allocation affects the economic well-being of a society

Front 23

surplus

Back 23

QS>QD

Front 24

shortage

Back 24

QS<QD

Front 25

willingness to pay

Back 25

max amount buyer will pay for a good

Front 26

price elasticity of supply

Back 26

responsiveness of QS to price: (%change in QS/%change in P)

Front 27

income elasticity of demand

Back 27

how much QD responds to change in income: (%change QD/%change income)

Front 28

cost of production

Back 28

value of everything a producer must give up to produce a good

Front 29

what is the efficient level of output for a firm?

Back 29

For “benevolent social planner,” this is where the MC and D curves intersect

Front 30

where is DWL in a monopoly?

Back 30

it's that one triangle

Front 31

sources of barriers to entry

Back 31

1) monopoly resources: key resource owned by single firm; 2) government regulation: gvt gives single firm exclusive rights to a resource; 3) production process: single firm can produce at lowest cost

Front 32

what happens with change in demand in a perfectly competitive firm?

Back 32

In the short run, with an increase in demand there is an increase in price and SR profits. But in the long run, more firms will enter the market and the price will fall, restoring a LR equilibrium.

Front 33

how do you graph a firm's profits?

Back 33

it's the square thing.

Front 34

what are the production decisions for a perfectly competitive firm?

Back 34

In the short run, produce if P>AVC; shut down if P<AVC. In the long run, product if P>ATC; shutdown and exit if P<ATC.

Front 35

what is market price equal to in a PC firm?

Back 35

marginal revenue

Front 36

ATC in short run and long run...

Back 36

...differ because fixed costs are variable in the long run

Front 37

differences between MC and PC firm

Back 37

1) PC produces efficiently at min ATC, MC produces < efficiently; 2) P = MC in PC; P>MC in MC

Front 38

properties of indifference curves

Back 38

1) higher curves are preferred; 2) downward sloping; 3) do not cross 4) bowed inward (slope = MRS, which depends on how much of each good is being consumed)

Front 39

how does a change in income effect consumers' choices?

Back 39

Increase in income = shift out of budget constraint. If the good is normal, you’ll buy more of both; if one is inferior, you’ll buy less of that one and more of the normal good

Front 40

income effect

Back 40

change in consumption that results when change in price moves a consumer to a higher or lower indifference curve

Front 41

substitution effect

Back 41

change in consumption that results when change in price moves a consumer along an budget constraint to an indifference curve with a new MRS (one good becomes relatively more expensive to consume)

Front 42

how do these effects affect consumer choice?

Back 42

When both act in the same direction consumer will consume more of both goods; when they act in opposite directions the total effect is ambiguous

Front 43

production function

Back 43

relationship between Q inputs and Q output (ie # workers and output)

Front 44

economies of scale

Back 44

long run ATC falls as Q output increases

Front 45

monopolistic competition

Back 45

many firms sell similar (but not identical) products

Front 46

what attributes does an MC market have?

Back 46

1) many sellers; 2) product differentiation; 3) free entry and exit (zero-profit condition)

Front 47

how do wages affect labor supply?

Back 47

workers always prefer more leisure and consumption, but an increase in wages could mean more or less hours worked depending on the person’s preferences. If income effect is stronger, labor supply increases as wage decreases. If substitution effect is stronger, labor supply increases as wage increases.

Front 48

how do MC firms and monopolies maximize profits?

Back 48

where MC = MR, but price off the demand curve because they are price-makers

Front 49

what does consumer choice theory tell us?

Back 49

it examines tradeoffs faced by consumers and gives us a more complete understanding of demand

Front 50

budget constraint

Back 50

limit on consumption bundles that give consumers the same amount of satisfaction

Front 51

indifference curve

Back 51

curve that shows consumption bundles that a consumer can afford

Front 52

MRS

Back 52

rate at which a consumer is willing to trade one good for another (tells you what you’re willing to trade off)

Front 53

what do ICs of perfect substitutes and perfect complements look like?

Back 53

perfect substitutes = straight-line ICs; perfect complements = right-angle ICs

Front 54

what does your BC tell you?

Back 54

what you’re able to trade off

Front 55

TC

Back 55

= market value of inputs used in production

Front 56

profit

Back 56

TR-TC

Front 57

explicit costs

Back 57

costs that require outlay of money by the firm

Front 58

implicit costs

Back 58

costs that do not require outlay of money by the firm

Front 59

accounting versus economic profits

Back 59

accounting profits don’t include the implicit costs

Front 60

diminishing marginal product

Back 60

as Q input increases, marginal product decreases

Front 61

fixed versus variable costs

Back 61

fixed costs don’t vary w/Q output produced (but they can vary in the long run)

Front 62

marginal cost

Back 62

additional cost arising from the production of an additional unit

Front 63

marginal revenue

Back 63

change in total revenue resulting from sale of an additional unit

Front 64

profit maximization

Back 64

where MR=MC; a PC firm will produce as long as MR>MC

Front 65

what does the MC curve double as?

Back 65

the firm's supply curve (in a PC market)

Front 66

why does the zero profit condition exist?

Back 66

because firms are still making some economic profits, and because they are just as well of here as anywhere else

Front 67

what does a monopoly's demand curve look like?

Back 67

it’s downward-sloping because they are price-makers (they have to supply the entire market for demand and must accept a lower price if they wish to sell more units)

Front 68

is there price effect in a PC firm?

Back 68

no, because they can sell all they want at market price

Front 69

why would a monopolist price discriminate?

Back 69

because it raises profits and total surplus and decreases consumer surplus; and if they can perfectly price discriminate they eliminate consumer surplus and total surplus = firm’s profits

Front 70

examples of price discrimination

Back 70

financial aid, airline prices, movie tickets, bulk discounts, discount coupons

Front 71

similarities/differences between PC firm and monopoly

Back 71

similarities: goal is to maximize profit, maximize profit by setting MR=MC, economic profits exist in the short run…but for monopolies, there are economic profits in the long run, P<MR, it doesn’t maximize social surplus, there are barriers to entry, and there is price discrimination

Front 72

VMPL

Back 72

P*MPL

Front 73

how does a PC firm decide to hire workers?

Back 73

They’ll hire workers up to the point where wage = VMPL.

Front 74

how are wages determined in PC labor markets?

Back 74

Wages adjust to balance supply and demand for labor, so W=VMPL.

Front 75

an increase in labor supply...

Back 75

reduces wage and increases employment

Front 76

and increase in labor demand...

Back 76

increases wage and increases employment

Front 77

oligopoly

Back 77

market condition in which a few sellers offer similar or identical products

Front 78

game theory

Back 78

study of how people behave in strategic situations

Front 79

collusion

Back 79

agreement among firms about quantity produced or price charged

Front 80

cartel

Back 80

group of firms acting in unison (ie OPEC)

Front 81

dominant strategy

Back 81

best strategy for a player regardless of what everyone else decides
- tit-for-tat – cooperate until one party defects, then defect

Front 82

tit-for-tat

Back 82

cooperate until one party defects, then defect

Front 83

what causes shifts in the labor supply curve?

Back 83

1) change in tastes; 2) change in alternative opportunities; 3) immigration

Front 84

what causes shifts in the labor demand curve?

Back 84

1) output price 2) technological change 3) supply of other factors

Front 85

MPL

Back 85

increase in amount output from an additional unit of labor (delta Q/delta L)

Front 86

how can the government respond to monopolies?

Back 86

1) try to make them competitive with antitrust laws; 2) regulate behavior (ie for natural monopolies) 3) turn them into public enterprises; 4) do nothing

Front 87

externality

Back 87

uncompensated impact of person’s actions on well-being of bystander (market failure)

Front 88

examples of positive externalities

Back 88

restored historic buildings; education; R&D

Front 89

examples of negative externalities

Back 89

automobile exhaust, barking dogs

Front 90

internalizing an externality

Back 90

altering incentives so people take into account the external effects of their actions

Front 91

how can one internalize a negative externality?

Back 91

through corrective taxes; tax producers however much the externality is costing (tax will shift supply curve up by tax amount)

Front 92

how can one internalize a positive externality?

Back 92

through subsidies

Front 93

industrial policy

Back 93

government intervention to promote technology-enhancing industries through tax breaks and patent protection (internalizes technology spillover through property rights)

Front 94

command and control policy

Back 94

strict government regulation of something because external costs to society FAR exceed the benefits to the polluter

Front 95

examples of market-based policies

Back 95

(Pigouvian taxes): corrective taxes/subsidies; tradable pollution permits

Front 96

corrective taxes

Back 96

taxes designed to induce private decision-makers to take account of social costs that arise from negative externalities; they raise revenue and enhance economic efficiency

Front 97

what's so special about gasoline?

Back 97

it is the highest taxed good in many nations because of the extreme negative externalities it helps produce (congestion, accidents, and pollution)

Front 98

graph corrective tax/pollution permits?

Back 98

tax is a horizontal line and supply of pollution permits is a vertical line; P&Q are same in both

Front 99

private solutions to externalities?

Back 99

moral injunctions; charities; contracts

Front 100

Coase theorem

Back 100

if private parties can bargain without cost over resource allocation, they can solve the problem of externalities on their own

Front 101

why don't private solutions always work?

Back 101

because of transaction costs; it also won’t work if there is a large number of interested parties

Front 102

four types of goods

Back 102

private (rival and excludable); natural monopoly (nonrival and excludable); common resource (rival, nonexcludable); public good (nonrival, nonexcludable)

Front 103

examples of private goods

Back 103

ice cream cones, clothing, congested toll roads

Front 104

examples of natural monopolies

Back 104

cable TV, fire protection, uncongested toll roads

Front 105

examples of common resources

Back 105

wildlife, environment, congested nontoll roads

Front 106

examples of public goods

Back 106

tornado siren, national defense, uncongested nontoll roads

Front 107

when should the gvt subsidize or provide public goods?

Back 107

when benefits>costs

Front 108

major problem with antipoverty programs?

Back 108

Financial assistance usually decreases when income increases, so there are large effective marginal tax rates for the poor, which creates a disincentive for families to escape poverty on their own

Front 109

information asymmetry

Back 109

hidden characteristics (ie a lemon) and hidden actions (ie effort at a job)

Front 110

moral hazard

Back 110

tendency of person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior

Front 111

adverse selection

Back 111

tendency for mix of unobserved attributes to become undesirable form the standpoint of the uninformed party (ex: health insurance price reflects the costs of a sicker-than-average person because sicker people are more likely to buy it)

Front 112

signaling

Back 112

action by informed party to reveal private information to uninformed parties, ie getting a college degree

Front 113

screening

Back 113

action by uninformed party to induce/require informed party to reveal information; ie car insurers using driver’s history to determine insurance price

Front 114

why can't the gvt take on the problems of information asymmetry?

Back 114

1) private market can sometimes solve it with signaling and screening 2) government usually doesn’t know any more than the private parties 3) government is itself an imperfect institution

Front 115

political economy

Back 115

study of government using analytic methods of economics

Front 116

Condorcet paradox

Back 116

failure of majority rule to produce transitive preferences for society

Front 117

Arrow's impossibility theorem

Back 117

under certain conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences

Front 118

median voter theorem

Back 118

majority rule picks most preferred point of median voter

Front 119

behavioral economics

Back 119

integrates the insights of psychology into economics

Front 120

findings of behavioral economics

Back 120

1) people are not always rational; 2) people care about fairness; 3) people are inconsistent over time

Front 121

poverty rate

Back 121

% of population whose household income falls below an absolute level called the poverty line

Front 122

poverty line

Back 122

absolute level of income set by federal government for each family, below which a family is deemed to be in poverty

Front 123

why the rise in income inequality?

Back 123

With increased trade with low-wage countries and changes in technology, demand for unskilled workers has decreased and demand for skilled workers has increased. Thus, the wages of unskilled workers have fallen relative to the wages of skilled workers and this change in relative wages has resulted in rising inequalities in family incomes

Front 124

facts about poverty

Back 124

it correlates with race, age, and family composition

Front 125

problems with measuring income inequality

Back 125

1) in-kind transfers aren’t counted; 2) economic life cycle isn’t taken into account (regular pattern of income variation over life); 3) transitory income versus permanent income: a change in transitory income does not automatically equal a decrease in standard of living; standard of living depends largely on permanent (normal/average) income

Front 126

economic mobility

Back 126

movement of people among/between income classes

Front 127

utilitarianism

Back 127

J.S. Mill and J. Bentham – gvt should maximize utility of everyone

Front 128

liberalism

Back 128

Rawls – gvt should choose “just” policies as evaluated by an impartial observer behind a “veil of ignorance”

Front 129

maximin criterion

Back 129

liberal view that gvt should aim to maximize the well-being of the worst-off person in society

Front 130

social insurance

Back 130

gvt policy aimed at protecting people against risk of adverse effects

Front 131

libertarianism

Back 131

Nozick – gvt should punish crimes and enforce voluntary agreements but should not redistribute income

Front 132

policies to reduce poverty

Back 132

minimum wage; welfare; negative income tax; in-kind transfers; antipoverty programs and work incentives

Front 133

what's the income distribution spectrum in the United States?

Back 133

richest 1/5 of the population earns more than 10x the income as the poorest 1/5

Front 134

where does LR profit in a PC firm occur and why?

Back 134

It occurs at min ATC, which is where P=ATC. If P>ATC, there will be profits and entry into the market. If P<ATC there will be losses and exit from the market. P=ATC is the only stable LR price.