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186 Cards in this Set

  • Front
  • Back
ability to produce a good using fewer inputs than another producer
absolute advantage
absolute advantage measures the cost of a good in terms of the
inputs required to produce it
the ability to produce a good at a lower opportunity cost than another producer
comparative advantage
if two countries have an absolute advantage in one good and specialize in that good then
both countries can gain from trade
when two countries specialize in a good in which it has a comparative advantage,
total production in all countries is higher, the worlds economic pie is bigger, and all countries gain from trade
group of buyers and sellers of a particular product
a market with many buyers and sellers, each has a negligible effect on price
competitive market
market with all goods exactly the same, buyers and sellers so numerous that no one can affect the market price (each is a price taker)
perfectly competitive
the amount of the good that buyers are willing and able to purchase
quantity demanded
claim that the qty demanded of a good falls when the price of the good rises (all other things equal)
law of demand
table showing the price of a good and the qty demanded
demand schedule
sum of qty demanded of all buyers at each price
qty demanded in the market
demand curve shifters
# of buyers
price of substitutes/complements
change in tastes/preferences
comes from behavior of sellers
according to the law of supply, the qty supplied of a good rises when the price of the good
rises, all other things equal
table that shows relationship between the price of a good and the qty supplied
supply schedule
4 supply curve shifters
# of sellers
input prices
in increase in income for a normal good shifts the demand curve
an increase in income for an inferior good shifts the demand curve
an increase in the price of pizza shifts the demand for hamburgers
to the right
bc they are substitutes
if price of computers rises, the demand for software shifts
bc they are complements
a fall in input prices shifts the demand curve
an increase in the number of sellers shifts the supply curve
a firm expects the price of a good to rise in the future, this would shift the supply curve
the firm would reduce supply now to save some of its inventory to sell later at the higher price
price occurs where
qty supplied = qty demanded
qty supplied > qty demanded
qty demanded > qty supplied
facing a shortage, sellers __ the price
facing a surplus, sellers __ the price
movement along a fixed D & S curves
change in qty demanded
change in qty supplied

occur when price changes
measure of how much the qty demanded of a good responds to a change in the price of the good
price elasticity of demand
elasticity is measured in __ terms
4 determinants of the price elasticity of demand
availability of close substitutes
necessities vs. luxuries
definition of the market
time horizon
price elasticity is __ when close substitutes are available
price elasticity is ___ for luxuries than for necessities
price elasticity is ___ for broadly defined goods than narrowly defined ones
examples of narrowly defined good vs. broadly defined
blue jeans
vs. clothing
price elasticity is __ in the long run than in the short run
gas: not much ppl can do in short run besides carpool
in long run, buy more fuel efficient cars
price elasticity of demand equation
% change in qty demanded/
% change in price
qty demanded does not respond to price changes
perfectly inelastic
qty demanded does not respond strongly to price changes
inelastic demand
price elasticity of demand is <1
inelastic demand
qty demanded responds strongly to changes in price
elastic demand
price elasticity of demand >1
elastic demand
qty demanded does not respond to price changes
perfectly inelastic
qty demanded changes infinitely with any change in price
perfectly elastic
qty demanded changes by same percentage as the price
unit elastic
price elasticity of demand is/is not the same as the slope
is not
amount paid by buyers and received by sellers of a good
total revenue
total revenue equation
TR= price of good x qty sold
measures how much the qty demanded of a good responds to a change in consumer's income
income elasticity of demand
income elasticity of demand equation
% change in qty demanded/
% change in income
higher income __ the qty demanded for normal goods but __ the qty demanded for inferior goods
raises; lowers
necessities are income ___, while luxuries are income ___
inelastic; elastic
measure of how much the qty demanded of one good responds to a change in the price of another good
cross- price elasticity of demand
complements have a __ cross price elasticity where substitutes have a __ cross price elasticity
negative; positive
cross-price elasticity of demand equation
% change in qty demanded of good1/
% change in price of good2
measure of how much the qty supplied of a good responds to a change in the price of that good
price elasticity of supply
price elasticity of supply and its 2 determinants
ability of sellers to change amount of good they produce (beach front property is inelastic--cant make more beach)
time period (supply is more elastic in long run)
price elasticity of supply equation
% change in qty supplied/
% change in price
measures how much a buyer values a good
willingness to pay
consumer surplus equation
WTP of a buyer- price buyer actually pays
where is consumer surplus located on demand curve
area under demand curve, above the price from 0 to Q
area of triangle
producer surplus equation
amount a seller is paid for a good- the seller's cost
producer surplus on supply curve
area above supply curve, under the price, from 0 to Q
the fairness of the distribution of well-being among the various buyers and sellers
a social planner cares about
market efficiency and equity
economic goal of a firm is to
maximize profits
the market value of the inputs a firm uses in production
total cost
profit equation
total revenue- total cost
input costs that require a direct outlay of money by the firm
explicit costs
input costs that do not require an outlay of money by the firm
foregone interest you could have earned
implicit cost
economic profit equation
total revenue- total cost
accounting profit equation
total revenue- explicit costs
shows relationship between qty inputs used to make a good and the qty of output of that good
production function
slope of a production function measures the ___ of an input
marginal product
when the marginal product declines, the production function becomes flatter
fixed costs are costs that don't vary with __
qty of output produced
cost of each typical unit of product
average cost
increase in total cost that arises from an extra unit of production
marginal cost
marginal cost equation
change in total cost/
change in qty
at low levels of output, ATC is high because
fixed cost is spread over only a few units
ATC __ as output increases
where does the bottom of a U-shaped ATC curve occur?
qty that minimizes ATC
whenever marginal cost is less than ATC, ATC is
whenever marginal cost is greater than ATC, ATC is
in the short run, __ costs are fixed, in the long run __ costs __
all; become variable costs
property whereby long-run ATC falls as the qty of output increases
economies of scale
property whereby long-run ATC rises as the qty of output increases
diseconomies of scale
property whereby long-run ATC stays the same as the qty of output increases
constant returns to scale
market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
competitive market
market with many buyers and sellers, goods are largely the same, free entry/exit
perfectly competitive market
in perfect competition, the price of the good equals
average revenue
average revenue equation
for perfect competition
P x Q/

in a competitive market, price of good equals
marginal revenue
in a competitive firm, goal is to maximize profit meaning they will want to produce qty that maximizes the difference between __ and __
total revenue
total cost
profit maximization occurs at the QTY where __ =__
marginal revenue= marginal cost
when MR > MC, __ Q
when MR<MC, __ Q
when MR=MC, ___
profit is maximized
when will a firm shut down
TR/ Q < VC/Q
firm considers sunk cost when __ but ignores them when __
deciding to exit
deciding to shutdown
where is a competitive firm's short run supply curve located?
on the marginal cost curve that lies above AVC
when will a firm exit the market?
P &lt; ATC
3 equations for profit
tr- tc
(tr/q - tc/q) x q
(p-atc) x q
where is profit located on graph for competitive firm
area between price and ATC, up to Q
where does a competitive firm's long-run supply curve lie?
portion of marginal-cost curve that lies above ATC
in the long run in a competitive market, price = ___. Supply curve is __ at this price.
minimum of ATC
at the end of the process of entry and exit, firms that remain are making 0 ___
economic profit
process of entry and exit ends when __ and __ are driven to equality
market with firm that is sole seller of a product and the product does not have close substitutes
3 barriers to entry for a monopoly
ownership of a key resource
gov't gives single firm exclusive right to produce some good
costs of production make a single producer more efficient than other producers
a single firm can supply a good to an entire market at a smaller cost than could two or more firms
natural monopoly
monopolies face a __ demand curve, while competitive firms face a __ demand curve
downward-sloping-- monopoly
horizontal curve-- competitive
a monopoly's marginal revenue is always ___ the price of its good
less than
when a monopolist drops the price to sell one more unit, the revenue received from the previous units ___
also decreases
2 effects on total revenue when a monopoly increases the amount it sells
output effect
price effect
more output sold, Q is higher
output effect
price falls, so P is lower
price effect
monopoly maximizes profit where
for a competitive firm, price __. for a monopoly, price __
p= mr= mc

p > mr=mc
which profit-maximizing firms set mr=mc
wedge in monopoly between the consumer's WTP and the producer's cost
deadweight loss
why does a monopoly incur deadweight loss?
bc it sets its price above marginal cost
4 ways gov't responds to monopoly
make more competitive
regulate behavior
turn private into public
do nothing
2 effects of price discrimination on a monopoly
increase monopolist's profits
reduce deadweight loss
when a monopolist uses perfect price discrimination...
consumer surplus and deadweight loss are converted into profit
2 types of imperfectly competitive markets
monopolistic competition
many firms selling products that are similar but not identical
monopolistic competition
only a few sellers, each offering a similar or identical product to the others
3 attributes of monopolistic competition
many sellers
product differentiation
free entry and exit
when short-run economic losses encourage firms to exit the market, what happens to remaining firms' demand curves?
shift right
and increase firms' profits
excess capacity in long-run:

monopolistic competition
perfect competition
monopolistic competition DOES have excess capacity in long-run

perfect DOES NOT
efficient scale of firm: output

monopolistic competition
perfect competition
monopolistic competition:
output is less than efficient scale of perfect competition

perfect competition:
firms produce at pt where ATC is minimized, which is the efficient scale of the firm
for a competitive firm, price __ marginal cost.
for a monopolistically competitive firm, price __ marginal cost

3 characteristics of oligopoly
few sellers offering similar or identical products
interdependent firms
best off when acting like a monopolist by producing a small qty of output and charging a price above marginal cost
an agreement among firms in a market about qty's to produce or prices to charge
group of firms acting in unison
situation in which economic factors interacting with one another each choose their best strategy given the strategies that all the others have chosen
nash equilibrium
oligopoly price is __ the monopoly price and ___ the competitive price
less than monopoly price
greater than competitive price
outcome if oligopoly firms pursue own self-interests
-joint output is > monopoly qty but < competitive industry qty
- market prices are lower than monopoly price but > than competitive price
- total profits < monopoly profit
as number of sellers in an oligopoly increases, market looks more and more like
competitive market
study of how ppl behave in strategic situations
game theory
illustrates why cooperation is difficult to maintain even when it is mutually beneficial
prisoners dilemma
best strategy for a player to follow regardless of strategies chosen by other players
dominant strategy
why is cooperation among oligopolists undesirable from the standpoint of society?
leads to production that is too low and prices that are too high
occurs when suppliers require retailers to charge a specific amount
resale price maintenance (fair trade)
occurs when a large firm begins to cut the price of its products with the intent of driving its competitor's out of the market
predatory pricing
when a firm offers two or more of its products together at a single price, rather than separately
marginal product of labor equation
change in quantity/
change in labor
the production function of labor becomes ___ as the number of workers increases
value of the marginal product equation
marginal product of input x
market price of the output
value of marginal product is also known as
marginal revenue product
VMPL ___ as number of workers increases bc the market price of the good is constant
to maximize profits, a competitive firm hires workers up to the pt where
VMPL= wage
what causes a labor demand curve to shift?
output price
technological change
supply of other factors
what causes labor supply curve to shift?
change in tastes
changes in alternative opportunities
an increase in the supply of labor causes
-surplus of labor
-downward pressure on wages
-makes it profitable for firms to hire more workers
-results in diminishing marginal product
-lowers value of marginal product
-gives new equilibrium
increase in demand for labor
-makes it profitable for firms to hire more workers
-puts upward pressure on wages
-raises value of marginal product
-gives new equilibrium
refers to equipment and structures used to produce goods and services
firm increases the qty hired until the VMPL equals
factor's price= wage
two goods are __ if an increase in the price of one causes an increase in the demand for the other
two goods are ___ if an increase in the price of one causes a fall in the demand for the other
a fall in input prices causes a firm to ___ supply
efficiency is attained when
total surplus is maximized
in a perfectly competitive market, process of entry/exit ends when
marginal revenue= ATC
if a firm produces nothing which cost will equal 0?
variable cost
why are monopolies inefficient?
they restrict output below socially efficient level of production
for a competitive firm, average revenue =
marginal revenue
why do monopolistically competitive firms face a downward sloping demand curve
firm's product is different than those offered by other firms in the market
firms want to maximize total revenue or profit more?
if a firm has no startup costs then
what type of market has firms selling identical products>?
perfect competition
which type of market has many firms with differentiated products?
monopolistic competition
movies are an example of what type of market
monopolistic competition
bc price is above marginal cost, selling more at the going price raises profits
output effect
raising production will increase the amount sold which will lower the price and the profit per unit on all units sold
price effect
as number of sellers in oligopoly increases, price approaches __ and qty produced approaches __
marginal cost
socially efficient level
profit in oligopoly depends on (2)
how much they produce
how much other firms produce
a monopolistic cartel charges a price that is __ at an output level where __
output level- mr=mc
price- corresponding with demand curve above this qty
if producers deviate from the cartel quantity, __ effect must have been larger
due to diminishing marginal product, as more workers are hired, the production function becomes
why does vmpl diminish as number of workers rises
market price of good is constant
under the economic assumption that labor and capital are complements in production, an increase in capital leads to ___ for workers
increased wages
the demand for capital =
value of the marginal product of capital
marginal cost is __ sloping while marginal revenue is __ sloping
upward-marginal cost
downward- marginal revenue
the failure to produce enough to minimize ATC
excess capacity