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17 Cards in this Set
- Front
- Back
What is the Law of Demand?
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The law states that, all else being equal, as the price of a product increases, the quantity demanded lowers.
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What makes specialization from trade more efficient?
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Comparative Advantage
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Diminishing Marginal Productivity of a factor
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The more of a factor is employed (holding other factors equal) the marginal productivity falls
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To maximize profit, when are factors employed until?
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Factors are employed until their value of marginal product (P*MP) equals their unit cost.
For Labor: p*MPL = w For Capital p*MPK = wage of capital |
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Competitive Markets
Q = ? |
Sell as much output as they choose at a given price
Each firm sees a perfectly elastic demand curve at P (they don't control the price) Produce Q where P = MC(Q) |
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Costs on the "Intensive Margin"
Equation? |
When capitol is fixed, costs rise within the firm, as MP of labor falls
MC = w/MPL |
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What happens if P < Min AVC
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the firm shuts down because when the price is lower than the minimum average cost of labor hiring anyone is a bad move.
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What happens if P < min ATC?
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In the short run they might produce, but in the long run the firm would shut down because by paying their fixed costs they are losing more than they are making.
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Economic effeciency under perfect competition:
output is most effecient produce until MV = ? |
MV = MC
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Positive Externality
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Benefits to society not realized by the decision maker.
Socially optimal output > PC output |
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Negative Externality
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Costs to society that are not realized by the decision maker
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What quantity will a monopoly sell to?
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The quantity where their MR(Q) = MC(Q)
MV > MC Output < Effeciency Price > Efficient |
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Price Descrimination
1st vs 2nd? vs 3rd degrees |
1st charge each consumer's MV for the good
3rd separate market into 2, set MR = MC in each market. |
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Name three kinds of games
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Prisoner's Dilemma
Bertrand Competition Firms chose price Cournot Competition Firms choose output |
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to maximize profits (rents) what must you set p to?
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p = MC
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When does the Marginal Cost curve always cut through the Average cost curve?
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At the lowest point of both curves.
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Elastic Vs Inelastic
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Elastic = flat = large change in quantity with small change in price
Inelastic = steep small change in quantity with large change in price. |