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47 Cards in this Set
- Front
- Back
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Define: Externality Market failure Internalizing externality |
- The uncompensated actions of one person that influences the well being of a bystander - When market fails to allocate resources efficiently - Alter incentives so that people take account of the external effects of their actions |
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Private vs social cost Optimal |
- Private cost: Cost to produce the product - Social cost: Includes private cost and the cost to those bystanders affected - Always lower than equilibrium, the demand intersects the social cost |
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What are public goods? What are common resources? |
- Are are neither excludable or rival in consumption - They are rival in consumption, but not excludable |
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Define - Explicit costs - Implicit costs - Sunk costs - Normal profit |
- Input cost that require an outlay of cash - Input cost that doesn't require an outlay of cash - A cost that has been omitted and can't be recovered - Level of profit necessary to prevent owner from withdrawing from industry |
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What is the difference between Economic profit and Accounting profit? |
- Economic includes explicit costs and implicit cost - Accounting only looks at explicit costs |
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What are the 3 types of firms? |
- Proprietorship - single owner and operator - Partnership - multiple owners - Corporation - separate legal entity from those who own it |
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What is the difference between Debt and equity financial? |
- Debt is borrowed money - Equity is owner provided money |
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______ is the relationship between the quantity of inputs used & amounts of outputs produced |
- Production function |
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Define - Total product (TP) - Average product (AP) - Marginal product (MP) |
- Quantity of output produced - TP divided by variable input - Change of output that comes when an additional unit of additional input is employed |
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Lists the relationships between product curves |
- Increasing marginal returns - Diminishing returns: as extra amounts of variable inputs are added beyond some point, output would decrease at a increasing rate - Negative returns - Mp & Ap |
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Define - Total fixed costs (TFC) - Total variable cost (TVC) - Total costs (TC) - Average fixed cost (AFC) - Average variable cost (AVC) - Average total cost (ATC) - Marginal cost (MC) |
- TFC: Costs that do not vary with output - TVC: Costs that vary with output - TC: TFC + TVC - AFC: TFC / Q - AVC: TVC / Q - ATC: TC / Q - MC: Change in TC / Change in Q |
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Relationship between cost curves? |
- Marginal cost increases with the quantity of output - The ATC curve is U shaped - The MC crosses the ATC at the minimum of ATC |
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Define Capacity Returns to scale Long run average cost (LRAC) |
- Level of output corresponding to short run ATC curve - The long term relationship between the amount of output produced and amount of input used - Over a long range of output a firm faces economies of scale but eventually experiences diseconomies of scales |
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What is the (minimum) efficient scale? Relationships between LRAC and short run ATCs |
- Level of output corresponding to minimum point on LRAC curve - LRAC is an envelops curve enclosing all the short ATC's |
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Shifts in LRAC |
- Change in technology ( LRAC go down) - Change in input prices ( LRAC go up) |
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What are Assumptions in perfect competition? |
- Standardized product - Freedom of entry and exit |
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What are Demand in perfect competition? |
- Market demand - downward sloping demand curve - Firm demand - Horizontal at market price |
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How do you check profit maximization? |
Set mC = mR |
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How do you check if a firm is making a profit or a loss? What are economic profits? What are normal profits? What are economic losses? |
- # = TR - TC - When AR > ATC - When AR = ATC - When AR < ATC |
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When does a firm decides to shutdown? |
- if AR < AVC
- if p < AVC
- p = avc: shutdown price |
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What is firm supply? What is industry supply? What are the Long Run Equilibrium |
- Firm supply is MC above AVC - Horizontal summation of individual firm supply - If AR > AVC: Signal for entry - If AR < AVC: Signal for exit |
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Define: Productive efficiency Allocative efficiency |
- Producing at lowest per unit cost - Price of the last good produced equals its MC |
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What are the characteristics of monopoly? |
- Unique product - Price setter - Goodwill - Barriers to entry - one firm |
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What are some barriers to entry in monopoly |
- Natural (economies of scale, local monopolies) - Created ( Government, absorbing/ eliminating rivals) |
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What are collusions in monopoly? |
Cooperation between producers - Covert - hidden agreements - Overt - open agreements - Tacit - no agreements |
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What are the measures of market power? |
- Concentration ratio (CR) - % of sales/ output of top firms - Herfindahl index (HI) - sum of squared market shares |
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Profit maximization in monopolies? |
- Demand - Market demand - Marginal revenue - Set MC = MR |
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Profits and losses in monopoly? |
- Economic profits AR>ATC - Normal profits AR = ATC - Economic loss AR < ATC |
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Define Price discrimination Regulated monopolies |
- When a seller chargers different prices for a product that are not related to cost differences - Natural monopolies with large economies of scales |
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What are the characteristics of monopolistic competition? |
- Large number of small firms - Differentiated products - Price setter - elastic demand - Non-price competition |
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When can a firm produce in monopolistic competition? When will a firm shut down? |
- When the AVC intercepts the MC - When it is way above the demand curve (AR) |
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What are the options with losses? (SPICEA) |
- Shut down - Exit - Price discriminate - Advertise - Cut cost - Improve quality |
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What are the Long Run Equilibrium in monopolistic competition? |
- Economic profit: signal entry & D moves to the left. until normal profits are made - Economic loss: exit, D moves to the right. until normal profits are made again |
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Excess capacity is under what? |
Conditions in long run equilibrium for monopolistic competitions |
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What are the characteristics of oligopoly? |
- Few number of firms - Identical or differential products - Barrier to entry |
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Define: Game theory Prisoner's dilemma Dominant strategy |
- The study of how people behave in strategic positions - A game between 2 prisoners that shows why cooperation is difficult to maintain even if its mutually beneficial - A strategy that is best for a player regardless of the other strategies chosen by other players |
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What is Nash equilibrium? What is derived demand? |
- When economic actors come together to choose the best strategy based on the strategies other economic actors have chosen - The demand for any good depends on the existent demand for the good or service |
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Define value of marginal product (VMP)? |
The addition revenue that results from using 1 more unit of factor |
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what are the Factor demands |
- Assume firm is price taker - MC = VMP - competitive markets - shifts (Output price & technology) |
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what are the Factor supply |
- if more is offered for a factor service, more will be supplied - income - leisure trade off labour supply is upward sloping |
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Causes of earning variation |
- Human capital - Above equilibrium wages - Below equilibrium wages due to monopsony |
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Define Gini coefficient |
Calculates the extent to which the distribution of income among individuals within a country deviates from a perfectly equal distribution |
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An average family spends ___% on food, clothe and shelter (fcs). a family is considered poor if the spend ___% on fcs How many percent in Canada are poor? |
- 43% - 63% - 9% |
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Elasticity of earnings between father and son |
percentage change in sons earnings/ percentage change in fathers earnings |
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Define Moral hazard Adverse selection Signalling |
- The tendencies for persons imperfectly monitored to engage in dishonest acts - The tendency for mix of observed attributes to become undesirable from the standpoint of the uninformed party e.g people avoid used cars - When an informed party reveals private information to an uninformed party |
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What is screening? |
An action taken by the uninformed party to get the informed party to reveal information |
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Formulae for profit Vc |
- Profit = (p - atc) * q - acv * q |
