AGB 144 Final exam
Generalizations
Meant to describe the average consumer
Explicit Costs
Monetary payments for resources that a firm doesn't own Ex. salaries, rent, inputs
Export Subsidy
Money given to domestic producer to encourage exports
Money and government
Money: medium of exchange; active but limited government(market failures)
A decrease in quantity demanded is depicted by a
Move from point Y to point X
The price elasticity of demand is generally
Negative but the minus sign is ignored
We would expect the cross elasticity of demand between dress shirts and ties to be
Negative, indicating complementary goods
Infant Industries
New industries should be protected to allow them to become competitive; most common in developing countries; protection can persist after industry has been established
Framing Effects and Advertising
New information can alter your perception of a gain or loss
Monopolistic Competition: Efficiency
No allocative or productive efficiency
"NAFTA" stands for
North American Free Trade Agreement
Inelastic
Not responsive to price change; 1% change in prices leads to a less than 1% change in quantity demanded
Price Elasticity Coefficient of Demand
Numbers used to gauge how sensitive consumers are to changes in price
Scientific Method
Observe, Hypothesis, Test, Accept/Reject/Modify, Continue Testing; A well tested and accepted theory = economic law or principal
Technology and Capital Goods
Technological advances in capital goods creates efficiency
Ag economics in the long run: Industry
Technological progress: result of experiment stations, USDA educational programs and private industry; demand has increased in the u.s. because of slow population growth or "lagged demand"
An extraordinarily small crop of farm products due to drought causes
a large increase in the price of farm products because the demand for farm products is price inelastic
Marginal Revenue (Pure competition vs. Pure monopoly)
Pure competition: MR = P ; Pure monopoly: MR<P, have to lower price to increase demand
Demand curve: pure competition vs. pure monopoly
Pure competition: less elastic, less competition, product differentiation; Pure monopoly: more elastic, more competition
Quantity Supplied vs. Supply
Quantity supplied is a move from one point on the line to another; Supply is a shift of the supply curve, right for increase, left for decrease
Suppose that tacos&pizza are substitutes and that soda&pizza are complements, we would expect an increase in the price of pizza to
Reduce the demand for soda and increase the demand for tacos
Geographic Specialization
Regions, international
Monopolistic competition: characteristics
Relatively large number of sellers, differentiated products, easy entry and exit, some price control
Elastic
Responsive to price change; 1% change in price leads to a greater than 1% change in quantity demanded
Private Goods
Rivalry, Excludability
3 parts of economic perspective
Scarcity and choice, purposeful behavior, marginal analysis
Budget Lines
Schedule/Curve of all the combinations of goods/services you can afford; attainable: what you can afford; unattainable: outside your budget; Tells us what we can buy, not what we should buy
Supply
Schedule/curve showing the various amounts of a product that produces are willing and able to make available for sale at each of a serious of possible prices during a specific period
A decrease in demand is depicted by a
Shift from line D2 to line D1
Characteristics of a Pure Monopoly
Single seller, no close substitutes, price maker, blocked entry, non price competition
Regulated monopoly: Socially optimal vs. Fair return price
Socially optimal: where the price would be if in purely competitive market; Fair return: P = ATC
A leftword shift of a product supply curve might be caused by
Some firms leaving the industry(decrease in supply)
Losses and Shrinking Packages
Status Quo: People react when the price rises, they don't always notice when the package gets smaller
Microeconomics
Study of the individual
Macroeconomics
Study of the whole economy
Determinants of Price Elasticity of Demand
Substitutability, Proportion of Income, Luxury/Necessity
World Trade Organization
Successor to GATT; 153 member nations in 2010; oversees trade agreements and helps to settle disputes; additional trade negotiations
Consumer Surplus
Surplus benefit received by consumers, maximum price consumers are willing to pay minus the actual price they pay
Producer Surplus
Surplus benefit received by supplier, price received by producer minus minimum acceptable price for the producer
Average Total Cost
TC/Q and AFC+AVC
Total Cost
TFC/Q
Average Variable Cost
TVC/Q
A breakdown in price leadership leading to successive rounds of price cuts is known as
a price war
Nonprice competition refers to
advertising, product promotion, and changes in the real or perceived characteristics of a product
Law of Diminishing Marginal Utility
all wants are insatiable, but the want for a particular item can be satisfied at some point
OPEC provides an example of
an international cartel
Law of Demand
as price decreases, demand increases
Product variety & profit maximization: Complications
assumptions: fixed product and fixed level of advertising; assumptions don't hold
Which of the following is the best example of oligopoly?
automobile manufacturing
Collusion
cooperate with your rivals in order to increase your profits; incentive exists to cheat
Other things equal, economists would prefer
free trade to tariffs and tariffs to import quotas
Criticisms: Policies
fund research to increase productivity while limiting acreage
The study of how people (or firms) behave in strategic situations is called
game theory
The demand for agricultural products
has a price elasticity coefficient of about .20 to .25
Product Variety & Profit maximization: Profits
having a differentiated product and advertising could increase profitability
Free trade: Characteristics
higher efficiency, more choice, higher satisfaction, promotes competition, links national interests, high world incomes
Suppose that domestic price (no-international-trade price) of copper is $1.20 a pound in the U.S. while the world price $1.00 a pound. Assuming no transportation costs, the U.S. will
import copper
If the demand for agricultural product is inelastic, a bumper crop will
lower price and decrease total revenues
Marginal Analysis
marginal = extra
The monopolistically competitive seller maximizes profit by producing at the point where
marginal revenue equals marginal cost
Tariffs
may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs)
Monopolistically competitive firms
may realize either profits or losses in the short run, but realize only accounting profits in the long run
The restaurant, legal assistance, and clothing industries are each illustrations of
monopolistic competition
Price discrimination: Assumptions
monopoly power, market segregation, no resale
Under monopolistic competition entry to the industry is
more difficult than under pure competition but not nearly as difficult as under pure monopoly
The primary gain from international trade is
more goods than would be attainable through domestic production alone
Which of the following is a unique feature of oligopoly?
mutual interdependence
Profit maximizing characteristics
not highest price, no supply curve, maximize total profit, losses are possible
In a two nation model, the equilibrium world price will occur where
one nation's export supply curve intersects the other nation's import demand curve
Productive Efficiency
produce goods in least cost way
Copyrights and Trademarks are examples of
property rights
Acreage allotment programs were designed to
reduce the supply of agricultural products
Long run equilibrium for monopolistically competitive firm where economic profits are zero results from
relatively easy entry
The demand for agricultural products is
relatively inelastic with respect to price
The demand schedules for such products as eggs, bread, and electricity tend to be
relatively price inelastic
Kinked demand theory
rival will either (A) match changes in price or (B) ignore changes in price
Econ of farm policy: government subsidies
support for ag prices, income and output; soil and water conservation; ag research; farm credit; crop insurance; subsidized sale of farm products in world markets
Price supports
surplus outputs; gain to farmers; consumer losses; additional losses; international costs; environmental costs
Trade barriers
tariffs, import quota, non-tariff barriers, voluntary export restriction, export subsidy
Revenue Tariff
used on items not produced domestically
Criticisms: Parity
value should be determined based on supply and demand which is always changing
Division of Labor
Differences in ability, learning by doing, saving time
Why do we trade?
Distribution of resources uneven: labor, land, capital intensive goods; technology and technological expertise vary by nation; preferences
Protection against dumping
Dumping: sale of products in foreign countries below cost or below prices charged domestically; may want to drive competitor out of business or may have to lower price to be competitive in other markets; antidumping laws in u.s.; rarely occurs
Unit Elastic
E(d) = 1 ; A 1% change in price will lead to a 1% change in quantity demanded
Mid-Point Formula
E(d) = [Q2-Q1/(Q2+Q1)/2] / [P2-P1/(P2+P1)/2]
Barriers to entry
Economies of scale, ownership/control of resources, patents, licenses, price wars, advertising
Pure monopoly (complications)
Economies of scale: simultaneous consumption, network effects; X-inefficiency: not using least cost measures; Monopoly preserving expenditures: costs incurred to keep monopoly; Very long run: technological advances
Freedom
Enterprise: can buy and use resources to produce their choice of goods and services to sell in the open market Choice: employer, employees, consumer
Decreasing Cost Industry
Entry of firms decrease costs of resources, Exit of firms increases cost of resources
Increasing Cost Industry
Entry of new firms increases cost of resources, exit decreases cost of resources
Constant Cost Industry
Entry/exit doesn't affect resource prices
Self Interest
Maximize profits, Minimize losses, maximize utility
To Maximize Utility
MU of A/$A = MU of B/$B all income should be spent
Resources
land, labor, capital, entrepreneurial ability(makes all decisions for the business, innovate, bears risk)
Monopolistic competition is characterized by a
large number of firms and low entry barriers
Reducing Surpluses
(1) Reduce Supply: acreage allotments, stop farming worst land, use better technology to increase yield, not as effective as was hoped, Conservation Reserve Program; (2) Increase Demand: research(ethanol), Government Programs(SNAP, WIC, school lunches), Marketing(Check off programs), reduce barriers to trade
The relationship between quantity supplied and price is (1) and the relationship between quantity demanded and price is (2)
(1) direct (2) inverse
Allocative Efficiency
-right mix of goods are produced -maximize consumer and producer surplus
What percentage of their spending do U.S. consumers allocate to food purchases?
12 percent
Percentage consumers spend on food
12% of expenditures
North American Free Trade Agreement
1993: canada, mexico and u.s. created free trade zone
Demand Curve
A schedule/curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time
Comparative vs. Absolute Advantage
Absolute advantage: most efficient producer of the product; Comparative advantage: produce the product for the lowest opportunity cost; More important to have comparative than absolute advantage
The Invisible Hand
Adam Smith; The market essentially regulates itself through self interest and competition; efficiency, incentives, freedom
Which of the following arguments is not generally made to justify farm subsidies?
Agribusiness firms need subsidies to achieve economies of scale
Price leadership model
Allows for coordinated prices without breaking laws; One firm rises/decreases prices and the rest follow, infrequent price changes, communication through "need to raise prices", limit pricing; keep prices low enough to keep other firms out
Market
An institution that brings buyers and sellers into contact
Pure monopoly: Policy options
Anti-trust laws, regulate prices and operations, ignore
Diseconomies of Scale
As a firm increases production, average cost increases
Constant Returns to Scale
As a firm increases production, average cost remains constant
Economies of Scale
As a firm produces more, there is a lower average cost of production; Ex. labor specialization, managerial specialization, efficient capital
Diminishing marginal utility
As you consume more of an item, each additional unit yields less and less marginal utility
An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that
Bicycles are normal goods
Complications with regulation
Bureaucracies, inefficiency, rate increases
The price elasticity of demand coefficient measures
Buyer responsiveness to price changes
Private Property
Can own property and enter into legal contracts regarding that property; intellectual property rights(patents, copy rights, trademarks)
What is a distinguishing feature of a command system?
Central Planning
Marginal Revenue
Change in Total Revenue/Change in Quantity
Quantity demanded vs. demand
Change in demand is a shift of the demand curve, increase shift to right, decrease shift to left; Change in quantity demanded is a movement from one point to another as a fixed demand curve
Price discrimination: Types
Charging each consumer the maximum price they are willing to pay; charging one price for the 1st unit then lower prices for additional units; Charging some consumers one price and other consumers another price
Product variety & profit maximization: Benefits
Choice; variety could trump efficiency; product improvement
Command systems are also known as
Communism
Digital Cameras and Memory Cards are
Complementary Goods
DVD player and DVD's are
Complementary goods
Determinants of Demand
Consumer preferences, number of buyers in the market, income, price of related goods, consumer expectations
When an economist says that the demand for a product has increased, this means that
Consumers are now willing to purchase more of this product at each possible price
Fixed Cost
Cost that doesn't vary with production; Ex. rent, electricity, salary
Variable Costs
Costs that vary with production; Ex. input costs, hourly wages
The advent of DVD's has virtually removed the market for videocassettes. This is an example of
Creative destruction
Examples of command economies are
Cuba and north korea
Demise of the Command System
Deciding production levels, securing the capital resources, no way to correct if production level estimates are wrong, bigger economy means bigger problems, no incentive to innovate or take risks
Obstacles to collusion
Demand and cost differences, large number of firms, cheating, recessions, entry of new firms, antitrust laws
Demand-Side Market Failures
Demand curve doesn't reflect actual willingness to pay ex: fireworks, roadways, shoveling sidewalks
Prices
Determined by buyers and sellers
Terms of trade
Exchange ratio between two countries for goods; Depend on supply of the goods in question relative to their demand
Import vs. Export
Export: world price is higher than domestic price; Import: world price is lower than domestic price
Positive Economics
Facts, cause-and-effects; no value judgements
Economics of farm policy: Justifying Subsidies
Farm products are important and should receive a higher price through the government; family farm is desirable in itself; farm products are subject to hazards not faced by other industries and would be uninsurable otherwise; farm products are purely competitive but the inputs aren't
Oligopoly: characteristics
Few sellers, either homogeneous or differentiated products, control over price but with mutual interdependence, some barriers to entry(similar to those found in a monopoly)
Voluntary export restriction
Foreign firms volunteer to restrict supply in order to reduce a tariff or stricter quota
Competition
Freedom of sellers and buyers to enter or leave markets on the basis of their economic self interest
Assumptions
Full employment, fixed resources, fixed technology, two goods(consumer and capital); make assumptions to limit variables
Managing Risk
Future markets, contracting with processors, crop revenue insurance, leasing land, non farm income
Trade agreements
General goal is to lower barriers to trade
What is not a characteristic of the market system?
Government ownership of major industries
The Command System
Government owns all factors of production; no method to motivate because the government decides everything
If a demand for a product is elastic, the value of the price elasticity coefficient is
Greater than one
Elasticity
Have to continually lower the price by larger and larger amounts to convince consumers to purchase more
Proportion of Income
High proportion(elastic); Low proportion(inelastic)
Cross elasticity of demand
How sensitive are consumers of product X to changes of the price of Y; Substitutes: E(d) is positive, the price of Y increases and demand increases; Complements: E(d) is negative, the price of Y increases, demand decreases
Income Elasticity of Demand
How sensitive are consumers to changes in income?; Normal goods: E(d) is positive, as income increases, demand increases; Inferior goods: E(d) is negative, as income increases, demand decreases
Military self-sufficiency
Idea that national security trumps efficiency
A market is in equilibrium
If the amount producers want to sell is equal to the amount consumers want to buy
Diversification for Stability
Impose tariffs or quotas to encourage diversification
How will it be produced?
In combinations and ways that minimize the cost per unit output
Which of the following statements is correct?
In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits
When the price of a product increases, a consumer is able to but less of it with a given money income. This describes the
Income effect
Gains from trade
Increased trading possibilities line: improved alternatives, greater output
Demand (slope)
Individual firm(perfectly elastic), Total market(downward sloping)
3 oligopoly models
Kinked demand theory, Collusive pricing, Price leadership; 3 models because oligopolies are diverse and complications of interdependence
Nontariff barriers
Licensing, inspections, unreasonable standards
Import Quota
Limit on the amount or value of a product; prices are higher; consumption is reduced; domestic production gets higher price and increased sales
Substitutability
Lots of subs(elastic); Hardly any subs(inelastic)
Luxury/Necessity
Luxury(elastic); Necessity(inelastic)
Profit Maximization: Pure Monopoly
MR = MC rule still applies; only difference is that MR doesn't equal price
Law of Supply
Other things equal, as prices rise, the quantity supplied will rise
When a monopolistically competitive firm is in long-run equilibrium
P = MC = ATC
Monopoly demands: Assumptions
Patents, economies of scale, resource ownership; no government regulation; charges same price to everyone
Triple Bottom Line
People (Employees, Consumers), Planet, Profit
The basic formula for the price elasticity of demand coefficient is
Percentage change in quantity demanded divided by percentage change in price
Short Run
Plant capacity is fixed but can adjust the degree to which the plant is used
Long Run
Plant capacity variable
Break Even Point
Point at which all costs are recovered ATC = MC
We would expect the cross elasticity of demand between Coke and Pepsi to be
Positive, indicating substitute goods
Shutdown
Price < minimum AVC
Equilibrium
Price and quantity at which all that is demanded is produced and all that is produced is sold; market clearing price and quantity; no surplus or shortage; supply = demand
The Demand Curve shows the relationship between
Price and quantity demanded
The law of demand states that, other things equal,
Price and quantity demanded are inversely related
Price Floors
Price is held artificially high; Chronic surplus(restrict supply, buy excess)
Price Ceilings
Price is held artificially low; Chronic shortage(black markets, rationing)
Determinants of Supply
Price of good itself, resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, number of sellers
Breakdowns in price leadership
Price wars; Eventually one will break and raise prices, rest will follow suit and the price leader has been established
Total Revenue
Price x Quantity Sold
Market System
Private industry owns factors of production; markets are used to motivate and direct economic activity; lassez faire: markets make all decisions; danger: monopoly, market crash
Characteristics of the Market System
Private property, freedom, self interest, competition, markets and prices, technology, specialization, use of money, active but limited government
The law of supply indicates that, other things equal,
Producers will offer more of a product at high prices than at low ones
Monopolistic competition: Differentiation
Product attributes, Service, Location, Brand name and packaging
Four Market Models
Pure Competition(Agriculture), Pure Monopoly(Electric Companies), Monopolistic Competition(Cell Phone Companies), and Oligopoly(OPEC)
In which of these continuums of degrees of competition (highest to lowest) is oligopoly properly placed?
Pure competition, monopolistic competition, oligopoly, pure monopoly
Other things equal, what might shift the demand curve of gasoline to the left?
The development of a low-cost electric automobile (decrease in demand)
What will be produced?
The goods and services that can be produced at a continuing profit will be produced, while those whose production generates a continuing loss will be discontinued
The elasticity of demand for a product is likely to be greater
The greater amount of time over which buyers adjust to a price change
Which of following best describes the short-run problem faced by farms?
The highly inelastic nature of agricultural demand, together with fluctuations in exports of farm goods, has caused small year-to-year fluctuations in farm output to result in highly unstable farm incomes
Increased Domestic Employment
The idea that cutting off imports will increase domestic employment; If one nation reduces their imports, it reduces the income in the exporting nation and they reduce their imports; Net effect is that imports and exports are reduced
Economizing Problem
The need to make choices because economic wants exceed economic needs; holds true for the individual and the firm
Implicit Costs
The opportunity costs of using the resources that the firm does own; Ex. OC of land, OC of natural resources
Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in
The price of some other product
Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect
The supply to increase as farmers plant more corn
The market system's answer to the fundamental question "who will get the goods and services?" is essentially
Those willing and able to pay for them
Opportunity Costs
To obtain more of one thing, society forgoes the opportunity of getting the next best thing
Economic Profit
Total Revenue - (Explicit Costs + Implicit Costs) Gives an accurate picture of the success of your business
Accounting Profit
Total Revenue - Explicit Costs Overstates the success of your business
Average Revenue
Total Revenue/Quantity
Total Revenue Test
Total amount the seller receives from the sale of a product; TR = PxQ
Principal of Comparative Advantage
Total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good
Total Product
Total quantity that is produced
Farm Income
Traditionally lower than average income but is changing because prices have been going up; fewer farms, rising productivity, government support; Supplement farm income with off farm jobs
Scarcity and Choice
Unlimited wants but limited resources
Example of an inferior good
Used clothing
Protective Tariff
Used to protect domestic industries
Specialization
Using resources to produce a limited number of items
Purposeful Behavior
Utility = happiness/satisfaction; not to be read as rational, but rather with purpose; not random, limited information, emotions
Normative Economics
Value judgement; use words like "should" or "ought"
Pure Competition characteristics
Very large number of sellers, Standardized product, Price takers, Free entry and exit from the market
5 fundamental questions
What goods/services will be produced, how will it be produced, who will get the goods and services, how will the system accommodate change, how will the system promote progress
Normal Profit
What the entrepreneur could have made elsewhere
Unrelated Goods
When the price of X changes it has no effect of demand for Y
Complements
When the price of X increases, the demand for Y increases
Substitutes
When the price of X increases, the demand for Y increases
Economic systems differ according to which two main characteristics?
Who owns the factors of production and the methods used to coordinate economic activity
The term oligopoly indicates
a few firms producing either a differentiated or a homogeneous product
Monopolistic competition resembles pure competition because
barriers to entry are either weak or nonexistent
Countries engaged in international trade specialize in production based on
comparative advantage
The kinked demand curve of an oligopolist is based on the assumption that
competitors will follow a price cut but ignore a price increase
Farm share of U.S. GDP has
declined from about 7 percent in 1950 to 1 percent today
Ag econ in the long run: demand vs. population
demand hasn't kept pace with increase in supply; income: as income increases, buy other goods; income elasticity is 0.10 ; population: once income elasticity is low, demand must be made through population growth
Differences in production efficiencies among nations in producing a particular good result from
different endowments of fertile soil; different amounts of skilled labor; different levels of technological knowledge
Suppose the domestic price (no-international-trade price) of wheat is $3.50 a bushel in the U.S. while the world price is $4.00 a bushel. Assuming no transportation costs, the U.S. will
export wheat
Mutual Interdependence
firms profit depends on its own price and advertising as well as competitors
In the U.S. cartels are
in violation of the antitrust laws
Because government price supports cause surplus production, government policies have been designed to
increase demand and decrease supply of farm products
The food-stamp program is designed to
increase the demand for farm products
Cartels are difficult to maintain in the long run because
individual members may find it profitable to cheat on agreements
The demand for most agricultural products is
inelastic with respect to both price and income
Which of the following arguments for trade protection contends that new domestic industries need support to establish themselves and survive?
infant industry argument
A market
is an institution that brings together buyers and sellers
Game Theory
is the analysis of how people (or firms) behave in strategic situations
In the theory of comparative advantage, a good should be produced in that nation where
its cost is least in terms of alternative goods that might otherwise be produced
Marginal Cost
the additional cost of producing one more unit of output Change in total cost/change in quantity TC2-TC1/Q2-Q1
Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary?
the diversification for stability argument
A fundamental difference between the command system and the market system is that, in command systems
the division of output is decided by central planning rather than by individuals operating freely through markets
Utility Maximizing Rule
to maximize satisfaction the consumer should allocate their income so that the last dollar spent on each product yields the same amount of marginal utility
Ag industry in the short run: demand
varies due to dependency on world markets: weather and crop production in foreign markets, fluctuations in foreign income, foreign economic policy, international relations, value of the dollar
The World Trade Organization
was established to resolve disputes arising under world trade rules
World price vs. domestic price
world price: price paid in the open world market; domestic price: price paid in a closed domestic market
