AP Economics (Microeconomics)

Three Fundamental Economic Questions

1. What to produce? 2. How to produce? 3. For whom to produce?

Marginal Cost

Additional cost of producing one more unit of output ∆TVC/∆Q - Initially falls due to specialization - MC= ATC or MC= AVC at respective minimums (MC is least when costs are least) - Forms "checkmark"

Game Theory

An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.

Firm

An organization that employs factors of production to produce a good or service that it hopes to profitably sell

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

How is equilibrium established?

At a price higher than equilibrium, demand will be less than 500, but supply will be more than 500 and there will be an excess of supply in the short run. Graphically, we say that demand contracts inwards along the curve and supply extends outwards along the curve. Both of these changes are called movements along the demand or supply curve in response to a price change.

AFC

Average Fixed Costs- The fixed costs of production (FC) divided by the quantity (Q) of output produced

ATC

Average Total Cost- The average cost per unit of output. To find it, divide the total cost (TC) by the quantity the firm is producing (Q)

Trade

The exchange of goods by two or more parties of people

PED and revenue

When Total Revenue is at a maximum, MR = zero, and PED = 1.

Unitary Elastic Demand

abs value of Ed is equal to 1

Proportional Tax

Constant tax rate regardless of income

Fixed Cost

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc.

Variable Cost

Costs that vary with the quantity of output produced

Duopoly

Exists when two companies dominate a market.

Command System

Government controls everything; prices, quantities, and factors of production. (Communist society)

Average Cost Pricing

setting price equal to average total cost

Fallacy of Composition

false statement that what is true for the parts is true for the whole and vice versa

Factors of Production (3)

land, labor, physical capital

Imperfectly Competitive Market

markets where individual buyers or sellers can control or influence the price

Pigouvian Taxes

taxes designed to reduce external costs

Elasticity

unitless measure of responsiveness of a relationship to a change in a variable

Elasticity Coefficient

value measuring degree of elasticity

Income Effect

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

Demand shifts to the left

A decrease in demand shifts the demand curve to the left and reduces price and decreases the quantity supplied.

Supply shifts to the left

A decrease in supply shifts the supply curve to the left, which raises price but reduces the quantity demand.

Determinants of Resource Demand

- Product demand - Productivity (affected by:) 1) Quantity of resources 2) Technology progress 3) Quality of variable resources - Price of other resources 1) Substitute: SE and OE 2) Complement: When machinery and labor are complements, they will have a direct relationship

Shut-Down Decision

- Shut down when TVC exceeds revenue to minimize loss (loss will only be TFC) Short run: MC above SDP is the supply curve for each PC firm Long run: Firms see profit and will continue to enter market, shifting S right until MC=MR=P=ATC= No profit!

AVC and APl

- Work inversely of each other - When APl is highest, AVC is lowest

MC and MPl

- Work inversely of each other - When MPl is highest, MC is lowest

Subsidy

- Works opposite way of a tax

Price ceilings

A price ceiling may be set to prevent price from rising beyond a per-determined level. A price ceiling will only have an effect on the market if it is set below the prevailing market clearing price. A price ceiling is also called a maximum price.

Allocative Efficiency

A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players

Subsidies

A subsidy of B - C (U - S) would provide the necessary incentives for universities to supply Q1 places, and for students to take-up this number. If funded in this way, students would contribute part of the real cost of their education by paying C, which is equivalent to the private benefit they expect to derive, and 'society', would contribute a further part of the cost of education (B - C) equivalent to the external benefit which is derived by society. This subsidy would be funded through taxation.

The economic problem

All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.

Opportunity Cost

All that is given up in choosing to produce one good over another (next-best option)

P = MC

Allocative efficiency

Allocative efficiency

Allocative efficiency occurs when consumers pay a market price that reflects the private marginal cost of production. The condition for allocative efficiency for a firm is to produce an output where marginal cost, MC, just equals price, P.

Free Good

Also called a Public Good- A good that cannot profit directly from its existence (fees can be charged for the viewing of a statue, for example, but many people will look at it for free due to lack of regulation). Not necessarily government-owned, non-rivalrous and non-excludable. Markets do NOT provide these, but the govt. CAN force private companies to produce them.

Diseconomies of Scale

An economic concept referring to a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased.

Samuelson's three questions

America's first Nobel Prize winner for economics, the late Paul Samuelson, is often credited with providing the first clear and simple explanation of the economic problem - namely, that in order to solve the problem of scarcity all societies, no matter how big or small, developed or not, must endeavor to answer three basic questions.

Private Good

An item that yields positive benefits to people" that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits

Net welfare loss

Net welfare loss can exist in two situations. Firstly, it exists when the marginal cost to society of a particular economic activity, such as manufacturing 200,000 computers, is greater than the marginal benefit to society. Secondly, it can exist when the marginal benefit of a given economic activity, such as producing 50,000m computers, is greater than the marginal cost.

Total Surplus

Consumer Surplus + Producer Surplus

Consumer surplus

Consumer surplus is derived whenever the price a consumer actually pays is less than they are prepared to pay.

Demand

Consumer willingness and ability to buy products

Law of Supply

DIRECT relationship between price and quantity supplied.

Inelastic

Describes demand that is not very sensitive to price changes

Coase Theorem

Describes the economic efficiency of an economic allocation or outcome in the presence of externalities.

Wealth

Determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts or the accumulation of resources

Black Market

Economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur "under the table" to let participants avoid government price controls or taxes.

Economic Growth using a Production Possibility Frontier (PPF)

Economic growth has two meanings: Firstly, and most commonly, growth is defined as an increase in the output that an economy produces over a period of time, the minimum being two consecutive quarters. The second meaning of economic growth is an increase in what an economy can produce if it is using all its scarce resources. An increase in an economy's productive potential can be shown by an outward shift in the economy's production possibility frontier (PPF).

Cross-Price Elasticity of Demand

Ex,y = (%dQd good X) / (%d Price Y). If Ex,y > 0, goods X and Y are substitutes. If Ex,y < 0, goods X and Y are complementary

Salary

A form of payment from an employer to an employee, which may be specified in an employment contract

Rival

A good is this if one person's use of it decreases the quantity available for someone else.

Demerit Good

A good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves

Artifically Scarce Goods

A good that is excludable but nonrival in consumption.

Inferior Good

A good whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases)

Complementary Good

A good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased

Substitute

A good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased; both in the same direction.

Indifference Map

A graphical representation of a consumer's tastes. Each curve reflects a different level of utility. Curves farther from the origin represent greater consumption levels and, therefore, higher levels of utility. Indifference curves in a consumer's indifference map don't intersect.

Cartel

A group of firms that collude by agreeing to restrict output to increase prices and profits.

Cartel

A grouping of producers that work together to protect their interests. Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided

Mixed System

A mix of some or all types of market systems.

Prisoners Dilemna

A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place

Industry

A particular form or branch of economic or commercial activity.

Short run

A period during which at least one of a firm's resources is fixed

Long run

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

Fiscal Policy

A policy in which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

•Free Float

The exchange rate for a country's currency is determined by the supply and demand of that currency on the international currency markets

Rationing, signalling and incentives

The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated prices. Relative prices, and changes in price, reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand, and away from where they are least demanded.

Quantity Supplied

The quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.

Marginal Tax Rate

The rate at which the tax is paid on each additional unit on taxable income

Marginal Tax Rate

The rate paid on the last dollar earned ∆Taxes Due/∆Taxable Income

Production Function

The relationship between quantity of inputs used to make a good and the quantity of output of that good

Price floors

Price may also be set above the natural market price. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price.

Sales maximization graph

Sales maximization means achieving the highest possible sales volume, without making a loss. To the right of Q, the firm will make a loss, and to the left of Q sales are not maximized.

Traditional System

System where traditions, customs, and beliefs control what is produced in a society and how it is distributed.

Average Total Cost

TC/Q - Form "U-Shape" with ATC being x=AFC higher than AVC

Average Fixed Cost

TFC/Q

Average Variable Cost

TVC/Q - Form "U-Shape"

CPI

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Engel curves

The Engel Curves illustrate the relationship between consumer demand and household income. Engel curves for normal goods slope upwards - the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.

Externality

The cost or benefit that affects a party who did not choose to incur that cost or benefit.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale

Lorenz Curve

The curve that illustrates income distribution

Deadweight Loss

The decrease in total surplus that results from an inefficient underproduction or overproduction.

Shut Down Price

the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run

Diminishing Marginal Utility

the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed

Excludable

the property of a good whereby a person can be prevented from using it

Coase Theorem

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

Law of Demand

theory of an inverse relationship between price and quantity buyers are willing to purchase

Gross National Product (GNP)

The value of all finished goods and services produced in a country in one year by its nationals, essentially it is a "broad measure".

Labor

A measure of the work done by human beings

Proportional Tax

A tax in which the average tax rate is the same at all income levels.

Income effect

Demand increases when income increases and falls when income decreases

Fixed Input

an input whose quantity is fixed for a period of time and cannot be varied

Variable Input

an input whose quantity the firm can vary at any time

Egalitarianism

Belief in the equality of all people - Reduces incentive to work hard

Shortage

Demand for a product exceeds the amount supplied by a firm.

Marginal Cost

Extra cost of producing one additional unit of production.

Cost-Push Inflation

Inflation caused by increase in prices of input (such as labor, material, etc.)

MRPL

P*MPL; value firm places on marginal worker; demand curve for labor

Complements in Production

must be produced with initial good

Substitution Effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Tacit Collusion

when firms limit production and raise prices in a way that raises each others' profits, even though they have not made any formal agreement

Expected Future Income

when future income raises, demand today increases

Decreasing Returns to Scale

when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale

Incentive

when marginal benefits exceed marginal cost

Allocative Efficiency

when marginal cost is equal to marginal benefit

Elastic Demand

when the abs value of Ed is greater than 1, change in qty is greater than that of price

Normal Goods

when there is a direct relationship between income and demand

Ceteris Paribus Assumption

while certain variables change we assume all other things are unchanged--this must be true to be tested for economic analysis

Income Elasticity of Demand (+/-)

∆%Qd/ ∆%Income Measures normal (Lux/nec.) vs. inferior based on consumer income

Price Elasticity of Demand (|a|)

∆%Qd/ ∆%P Measures normal (Lux/nec.) vs. inferior

Cross-Price Elasticity (+/-)

∆%QdX/ ∆%PY Measures comp vs. sub

Price Elasticity of Supply

∆%Qs/ ∆%P

Basic Elasticity Formula

∆%Quantity/ ∆%Price

•Positive externality

A benefit that is enjoyed by a third-party as a result of an economic transaction.

Excise Tax

A tax levied on a particular good or service - federal excise tax on gasoline.

Tariff

A tax on imports or exports between sovereign states.

Economic Growth

economy's ability to produce more with the same amount of resources or less

Money Price

number of dollars given up

Factor Distribution of Income

the division of total income among labor, land, and capital

Minimum Efficiency Scale

the lowest level of output at which a firm can minimize long run ATC

Value of the Marginal Product

the marginal product of an input times the price of the output

In the Short-Run...

Firms can intensify production using existing plants (cannot change capacity size), therefore supply is more elastic.

Marginal Utility per Dollar

the marginal utility from a good that results from spending one more dollar on it

Shift Factors of Supply (5)

1. # of sellers 2. change in technology 3. change in resources and input price 4. expectations of producers 5. price of related goods produced

Price Elasticity of Demand (Ed)

% change in qty. demanded/% change in price

Midpoint formula

((Q2-Q1)/(Q2+Q1))/((P2-P1)/(P2+P1))

Raw

(???) → raw material: Substances used in the primary production of goods

Federal Trade Commission

(WW) 1914 , A government agency established in 1914 to prevent unfair business practices and help maintain a competitive economy, support antitrust suits

Marginal Utility

(economics) the amount that utility increases with an increase of one unit of an economic good or service

% change formula

(point 2-point 1)/point 1 * 100

Bureaucratic Restrictions

*

Sources of Inequality

- Ability - Human capital - Discrimination - Preferences - Market power - Luck and connections

Excise Tax Conclusions

- As Ed falls and Es rises, the greater the consumer's share of tax (less ability to respond to price as they are more inelastic) - As Es falls and Ed rises, the greater the producer's share of tax

PC Profit Maximization

- Cannot change price, only output - TC and TR will continually increase - Choose level where MC=MR Tπ= Equ. Quantity * (P-ATC) TR= Equ. Quantity * Equ. Price TC= Equ. Quantity * (TR-Tπ)

In a Monopoly...

- D is downward sloping (normal) - MR < P - Operates left of the midpoint (elastic upper range of demand)

Graphing Private/ Public Goods

- Dprivate will be lower than Dpublic - Spillover benefits exist at the point where Dpublic meets supply and extends down to Dprivate - Market price is where Dprivate meets supply

PC: Market vs. Firm

- Firm will have perfectly elastic (horizontal) demand curve-- changing price will infinitely affect its demand - Market will not necessarily have perfectly elastic demand curve but changes in firm will not affect market

Deadweight Loss

- Increases as quantity moves further from equilibrium

Market Power in Product Market

- Monopoly hires less than competitive market - Less need for labor - Marginal revenue product is lower

PC Profit Max. Pt 2

- Never leave Qe! OR DIE. - When P=ATC, π=0 - At Qe... - If MC<ATC, loss (ATC will not hit d curve) - If MC>ATC, profit

Bertrand

...

Cournot

...

Stackelberg

...

The 4 Factors of Production

1) Capital 2) Land 3) Labor 4) Entrepreneurship

Characteristics of Oligopoly

1) Few large producers 2) Product can be standard or differentiated 3) Entry barriers 4) Mutual interdependence

MRPL Calculations

1) Find marginal product from total product 2) Find marginal revenue (price) 3) MP x MR= MRPL 4) Stop hiring when MRPL= Wage

Characteristics of Monopolistic Competition

1) Large number of firms 2) Differentiated products 3) Easy entry or exit

Barriers to Enter Monopoly

1) Legal barriers (Ex. patents) 2) Economies of Scale (Larger firms do better) 3) Control of key resources

Characteristics of Perfect Competition

1) Many small independent producers and consumers 2) Produce a standardized product 3) No barriers to entry or exit 4) Firms are "price takers" Example: Agriculture - d=p=MR=AR

Market Economy: Defining Characteristics

1) Private property 2) Freedom to produce, purchase, and sell resources 3) Competition 4) Self-interest 5) Prices

Characteristics of Monopoly

1) Single producer 2) No close substitutes 3) Barriers to Entry 4) Market Power-- "Price Maker"

Factors that Shift Supply Curve (NPFs)

1) Subsidies (Out) and Taxes (In) 2) Technology 3) Other manufactured goods' prices 4) Resource costs 5) Expectations of future prices 6) Number of suppliers

Factors Affecting Demand Elasticity

1) Substitutes - Necessity/ luxury often refers to relative supply (or lack of) substitutes 2) Income 3) Time

Factors that Shift Demand Curve (NPFs)

1) Tastes of consumers 2) Income of consumers 3) Number of consumers 4) Expectations of consumers 5) Related goods' prices (Subs/Comps) 6) Special Circumstances (Nature)

Curve Shift Notes: Draw Graphs!* try

1) When demand increases, EqPrice and EqQuantity both increase. 2) When supply increases, EqPrice decreases and EqQuantity increases. 3) When both shift, predict p and q first. One will be constant (predictable) and the other will change (ambiguous).

4 Complimentary Social Institutions

1. Firm 2. Market 3. Property Rights 4. Money

4 Economic Questions

1. What do I produce and how much? 2. How to produce? 3. To whom is the product for? 4. Who owns/ controls the factors of production?

Shift Factors of Demand (5)

1. number of buyers 2. taste and preferences 3. income 4. expectations of buyers 5. prices of related goods in consumption

Production Possibility Frontier (PPF)

A PPF shows all the possible combinations of two goods, or two options available at one point in time. Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice.

The Lorenz curve

A Lorenz curve shows the % of income earned by a given % of the population. A 'perfect' income distribution would be one where each % received the same % of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income.

Firm

A business concern, esp. Involving a partnership of 2 or more people.

Public Good

A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization

Market Share

A company's product sales as a percentage of total sales for that industry

Net income

A company's total earnings of revenue minus the cost

Regressive Tax

A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.

Sunk Cost

A cost that has already been committed and cannot be recovered

•Negative externality

A cost that is suffered by a third party as a result of an economic transaction.

Production possibilities curve

A curve showing the different combinations of 2 goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed

Long Run Average Total Cost Curve

A curve that indicates the lowest average cost production at each rate output when size or scale of the firm varies. It is also called the planning curve.

Indifference Curve

A curve that shows consumption bundles that give the consumer the same level of satisfaction

Patent

A document granting an inventor sole rights to an invention

Cyclical Unemployment

A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, the business cycle is low and cyclical unemployment will rise.

Monopoly

A firm that is the sole seller of a product without close substitutes

Minimum Efficient Scale

A firm's minimum efficient scale (MES) is the lowest scale necessary to achieve the economies of scale required to operate efficiently and competitively in its industry. No further significant economies of scale can be achieved beyond this scale.

Accounting Profit

A firm's total revenue minus its explicit costs

Embargo

A government order that restricts commerce or exchange with a specified country or the exchange of specific goods

Quota

A government-imposed trade restriction that limits the number, or monetary value, of goods that can be imported or exported during a particular time period.

Production Possibilities Curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

Perfect Competition

Very (very) many firms selling an identical product. Unrestricted/free ease of entry/exit

Price Ceiling

A legal maximum price that a product cannot be sold above-- creates shortage. - The more elastic d and s are, greater the shortage - Can create black market

Price Floor

A legal minimum price that a product cannot be sold below-- creates surplus. - The more elastic d and s are, greater the surplus= greater gov't spending= greater taxes

Diminishing Marginal Product

A level of production in which the marginal product of labor decreases as the number of workers increases; (Gets less additional usefulness)

Trade License

A license or permission issued by the municipal corporation granting permission to carry on a particular trade on a particular address.

Oligopoly

A market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. A market structure in which a few large firms dominate a market.

Deadweight Loss

A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.

Veblen Good

A luxury item whose price does not follow the usual laws of supply and demand. Usually, the higher the price of a particular good the less people will want it.

Monopsony

A market in which a single firm is the only buyer - Wage (labor supply) curve is upward sloping - Marginal factor cost now greater than wage

Monopolistic Competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.

Perfectly Competitive Market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Natural Monopoly

A market that runs most efficiently when one large firm supplies all of the output

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Gini Coefficient

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Elastic

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Natural Monopoly

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Giffen Good

A product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics

Moral Hazard

occurs when banks and other financial institutions take on to much risk, hoping that the Fed and regulators will later bail them out

Nash Equilibrium

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Productive efficiency

A situation in which the economy could not produce any more of one good without sacrificing production of another good.

Constant Returns to Scale

A situation in which the long-run total cost increases proportionately with output, so average cost is constant

Tax

A sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes

Marginal Cost Pricing

A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question. The opportunity cost is the marginal cost to society.

Indirect Tax

A tax eventually paid to the government through an entity in the supply chain

Progressive Tax

A tax for which the percentage of income paid in taxes increases as income increases

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Costs

Accounting cost, or actual funds spent carrying out the action, and the opportunity cost, or the amount of money that could have been made by using funds and other resources dedicated to the action on some other objective.

Marginal Revenue

Additional income of selling one more good - In PC, MR=P=AR=D

Marginal Utility

Additional utility received or lost by consumption of the next good ∆TotalU/ ∆Q - Constantly diminishing

Injection

Additions to investment, government spending, or exports. This boosts the circular flow of income and leads to a multiplied expansion of output.

Collusion

An agreement among firms to divide the market, set prices, or limit production

Association (Correlation) v. Causation

one event following another doesn't mean event 1 caused event 2

Clayton Anti-trust Act

An attempt to improve the Sherman Antitrust Act of 1890, this law outlawed interlocking directorates (companies in which the same people served as directors), forbade policies that created monopolies, and made corporate officers responsible for antitrust violations. Benefitting labor, it declared that unions were not conspiracies in restraint of trade and outlawed the use of injunctions in labor disputes unless they were necessary to protect property.

Surplus

An excess amount of goods left over after the market is satisfied.

•Dirty Float

An exchange rate regime in which the country's central bank occasionally intervenes to change the direction or the pace of change of the country's currency value. ... There are several reasons why a central bank intervenes in a currency market that is usually allowed to float.

negative production externalizes

An external cost, such as the cost of pollution from industrial production, makes the marginal social cost (MSC) curve higher than the private marginal cost (MPC). The socially efficient output is where MSC = MSB, at Q1, which is a lower output than the market equilibrium output, at Q.

Demand shifts to the right

An increase in demand shifts the demand curve to the right, and raises price and increase the quantity supply.

Supply shifts to the right

An increase in supply shifts the supply curve to the right, which reduces price and increases the quantity demanded.

Appreciation

An increase in the value of an asset over time

Human Capital

An organization's employees, described in terms of their training, experience, judgment, intelligence, relationships, and insight.

Normal Profit

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

Full Employment

Any economic situation that is devoid of cyclical or deficient-demand unemployment. Cyclical unemployment is the fluctuating type of unemployment that rises and falls within the normal course of the business cycle.

Normal Good

Any goods for which demand increases when income increases, and falls when income decreases but price remains constant

Fixed Costs

Are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs.

Keynes

Are the various theories about how in the short run - and especially during recessions - economic output is strongly influenced by aggregate demand.

Producer Surplus

Area above supply curve and below market price.

Consumer Surplus

Area under demand curve and above market price.

Voluntary export restraints (VER)

Arrangements between exporting and ia license or permission issued by the municipal corporation granting permission to carry on a particular trade on a particular address.

Law of Diminishing Marginal Returns

As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product falls.

Marginal

Associated with a specific change in the quantity used of a good or service, as opposed to some notion of the overall significance of that class of good or service, or of some total quantity thereof.

AVC

Average Variable Costs- A firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced

Average fixed costs

Average fixed costs are found by dividing total fixed costs by output. As fixed cost is divided by an increasing output, average fixed costs will continue to fall

Average total cost

Average total cost (ATC) is also called average cost or unit cost. Average total costs are a key cost in the theory of the firm because they indicate how efficiently scarce resources are being used. Average variable costs are found by dividing total fixed variable costs by output.

Average variable costs

Average variable costs are found by dividing total fixed variable costs by output.

Social Benefits/Costs

Benefit- how a good or service benefits society as a whole; Cost- how a good or service harms society as a whole.

Positive Externality

Benefits someone recieves when not involved in the activity - Means there is an underallocation for those resources in the market - Solution is a subsidy for producer - Supply curve will hopefully shift to Dprivate at Qsocial

Buffer stocks

Buffer stocks are stocks of produce which have not yet been taken to market. They can help stabilize prices by taking surplus output and putting it into a 'store', or, with a bad harvest, stock is released from storage.

Capital Goods

Buildings, machines, technology, and tools needed to produce goods and services.

Derived Demand

Business demand that ultimately comes from the demand for consumer goods

Diseconomies of Scale

Can occur if a firm becomes too large (rising LRAC) - Less efficient due to poor management, communication, etc

Constant Returns to Scale

Can occur when Long-Run AC is constant over a variety of plant sizes (Nearly flat LRAC)

Marginal Revenue

Change in revenue resulting from a one-unit increase in output

Marginal Resource Cost

Change in total cost when an additional unit of a resource is hired, other things constant. (Usually, MRC= wage)

Marginal Product of Labor (MPl)

Change in total product resulting from a change in the labor input. MPL = ∆TPL/∆L

Elastic

Changes in quantity are relatively large when price is changed. Often occurs for luxury goods or goods that can be purchased easily elsewhere. Ex: iPods or Sprite

Inelastic

Changes in quantity are relatively small when price is changed. Often occurs for necessities that people are willing to pay for even at a high price. Ex: Vaccines

Unit Elastic

Changes in quantity respond perfectly to price (I.e. The percentage change in quantity will equal the percentage change in price)

COLA

Cost of Living Adjustments

Total Costs

Cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials

Spillover Costs

Costs of production that affect people who have no control over how much of a good is produced

Total Variable Cost

Costs that change with variations in output. If output is 0, TVC= 0.

Total Fixed Cost

Costs that do not vary with changes in short-run output, paid even when output is 0

Derived Demand

Demand for industrial products and services is driven by demand for consumer products and services. - Demand for product rising causes price to rise - The MRPL goes up, so the hiring of labor at the current wage goes up

Long-run Monopolistic Competition

Demand continues to shift leftward until just tangent under ATC - DWL equal to triangle: d= ATC,-> d=MC -> MR=MC

Demand Curve

Demand curves generally have a negative slope. There are at least three accepted explanations of why demand curves slope downwards: The law of diminishing marginal utility The income effect The substitution effect

Explicit Costs

Direct, purchased, objective costs

Division of Labor

Division of tasks in a system so an individual may specialize for maximum efficiency

Protectionism

Economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations.

Dis economies of scale

Economic theory predicts that a firm may become less efficient if it becomes too large. The additional costs of becoming too large are called dis economies of scale.

Economic welfare

Economic welfare is the total benefit available to society from an economic transaction or situation. Economic welfare is also called community surplus. Welfare is represented by the area ABE in the diagram below, which is made up of the area for consumer surplus, ABP plus the area for producer surplus, PBE.

Why is the PPF always a bowed out shape?

Economically: a difference in resources either not equally suited or having different productivity in producing one good compared to another Mathematically: an increase of opportunity cost as result from differences in resources

Business Cycle

Economy-wide fluctuations in production, trade, and general economic activity. An expansion is characterized by increasing employment, economic growth, and upward pressure on prices. A peak is the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment, and inflationary pressures on prices are evident. Following a peak, the economy typically enters into a correction which is characterized by a contraction where growth slows, employment declines (unemployment increases), and pricing pressures subside. The slowing ceases at the trough and at this point the economy has hit a bottom from which the next phase of expansion and contraction will emerge. (aka economic cycle/ boom-bust cycle)

(Economic) Development

Efforts that seek to improve the economic well-being and quality of life for a community by creating jobs.

Decreasing Cost Industry

Entry of new firms shifts the cost curves for all firms downward - Takes longer for profit to be eliminated - Lower LR price than constant

Increasing Cost Industry

Entry of new firms shifts the cost curves for all firms upward

Average Costs

Equal to total cost divided by the number of goods produced

Market equilibrium

Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing 'left over'. This is efficient because there is neither an excess of supply and wasted output, nor a shortage - the market clears efficiently. This is a central feature of the price mechanism, and one of its significant benefits.

Technology Spillover

External benefit that results when knowledge spreads among individuals and firms

Marginal Product

Extra output due to the addition of one more unit of input

Economies of Scale

Factors that cause a producer's average cost per unit to fall as output rises

Profit maximization

Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.

In the Market Period...*

Firms are unable to respond to price changes.

In the Long-Run...

Firms can expand or reduce plant capacity, therefore supply is highly price elastic. - Economic profit will= 0 (break even)

Marginal Productivity Theory of Income Distribution

Firms in competitive or perfect product and factor markets pay factors their marginal revenue products.

Sherman Anti-trust Act

First United States law to limit trusts and big business. Said that any trust that was purposefully restraining interstate trade was illegal.

Total Cost

Fixed Cost + Variable Cost

Average Fixed Cost

Fixed cost divided by the quantity of output

MFCL

For a competitive labor market, what is the firms MFC of an additional unit of labor?

Output Effect

For labor; Output rises so more labor is needed Price of Machinery Rises: LD will decrease if OE is greater Price of Machinery Falls: LD will increase if OE is greater

Substitution Effect

For labor; When labor can be replaced by machinery Price of Machinery Rises: LD will increase if SE is greater Price of Machinery Falls: LD will decrease if SE is greater

Total Cost Curves

Given that total fixed costs (TFC) are constant as output increases, the curve is a horizontal line on the cost graph. The total variable cost (TVC) curve slopes up at an accelerating rate, reflecting the law of diminishing marginal returns. The total cost (TC) curve is found by adding total fixed and total variable costs. Its position reflects the amount of fixed costs, and its gradient reflects variable costs.

Merit Good

Goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.

Imports

Goods coming into a country

Inferior Goods

Goods for which demand decreases as consumer income increases (Includes fast food, cheap clothes, etc.)

Normal Goods

Goods for which demand increases as consumer income increases (AKA Superior Goods)

Exports

Goods going out of a country

Private Good

Goods that are both excludable and rival in consumption

Public Good

Goods that are neither excludable nor rival in consumption

Common Resource

Goods that are rival in consumption but not excludable

Lorenz Curve

Graph showing how much the actual distribution of income differs from an equal distribution

Indifference Curve

Graphical representation of different combinations of goods and services that give a consumer equal utility or happiness.

Cartel

Group of firms who choose not to compete and act as a monopolist by maximizing collective profits together

Total Utility

Happiness gained from consumption of a certain amount of a good

Supply

How much of a good or service a producer is willing and able to produce at different prices.

Perfect Competition in the long run

However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits.

Law of Demand

INDIRECT relationship between price and quantity demanded.

Dominant Strategy

Ideal strategy no matter what your opponent does. Firms do NOT always have a dominant strategy. ** Better off doing one thing over another no matter what

Progressive Tax

If income increases, tax increases - Tax bracket is a range on income taxable

Constant Return to Scale

If output increases by that same proportional change as all inputs change

Monopolistic Competition

Imperfect competition where many firms sell differentiated products. Easy but not free ease of entry/exit.

GATT (General Agreement on Tariffs and Trade)

Implemented to further regulate world trade to aide in the economic recovery following the war. Main obj: reduce barriers of international trade.

Allocative Efficiency and DWL occurs...

In ANY market structure where P>MC

Market Economic System

In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.

Merit goods

In a free market, the supply curve reflects marginal private cost (MPC), and the demand curve reflects the marginal private benefit (MPB), or utility, expected from consumption. However, the expected marginal private benefit is likely to be much greater than the actual benefit. This is because individual consumers of merit goods fail to perceive the true benefit to them. Indeed, there is an information failure, which results in the consumer under-consuming. Hence, on the graph, the actual marginal private benefit is higher, and to the right of the expected benefit curve.

Diseconomies of Scale

Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.

Perfectly Elastic

In the extreme situation where a small price reduction causes buyers to increase their purchases from zero to all they can obtain. Thus the coefficient is infinite.

Equilibrium in perfect competition

In the short run under perfect competition, firms can make super-normal profits or losses.

Implicit Costs

Indirect opportunity costs

Income Elasticity of Demand

Income Elasticity of Demand: The income elasticity of demand measures the impact of a consumer's income on his or her demand for a product. If the product is a normal good, the income elasticity of demand will be a positive number; if the product is an inferior good, the income elasticity of demand will be a negative number. If income has a strong impact on the consumer's demand for the product, the income elasticity of demand will be a large number in absolute value; if income has a weak impact on the consumer's demand for the product, the income elasticity of demand will be a small number in absolute value.

(Economic) Growth

Increase of the inflation-adjusted market value of the goods and services produced by an economy over time.

Adjusted income

Individual's total gross income minus specific deductions

Demand-Pull Inflation

Inflation as gross domestic product rises and unemployment falls. Imbalance in the aggregate supply and demand (too much money chasing too few goods)

Implicit Cost

Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.

Explicit Cost

Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process.

Internal economies and dis economies

Internal economies and dis economies of scale are associated with the expansion of a single firm. The long run cost curve for most firms is assumed to be 'U' shaped, because of the impact of internal economies and dis economies of scale.

Command Economic System

Is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways.

Normative Statement

opinionated statement about "what ought to be"

Factor Market

Market in which firms purchase the factors of production from households

Factors of production

Land, Labor, Capital, and Entrepreneurship

Antitrust Laws

Laws designed to promote competition and fairness to prevent monopolies

Marginal Cost

opportunity cost of producing one more unit of a good

Profit Max. in Monopoly

MC=MR - Find revenue max price and continue until you hit demand - Also when you hit ATC -Profit= Pmax@d * Qmax

Least-Cost Rule

MPl/Pl=MPk/Pk l= labor and k= capital - Use MPl/MPk to find ratio - Find all applicable to ratio - Sum of all MP should satisfy amount

Profit Maximizing Output

MR=MC

Maximizing Utility

MUa/Pa = MUb/Pb = MUc/Pc... 1) 2)

Physical Capital

Man-made factors of production such as machinery, factories, roads, etc.

Marginal costs

Marginal cost is the cost of producing one extra unit of output. It can be found by calculating the change in total cost when output is increased by one unit.

Income

Money that an individual or business receives in exchange for providing a good or service or through investing capital.

Economies of Scale

Marginal decrease of cost, advantages of larger firms (Falling LRAC) - Specialization and efficiency

Cost Minimizing Rule

Marginal product per dollar spent on each factor is the same.

CR4 Ratio

Market Shares of top 4 firms added - Higher is closer to monopoly - Lower approaches perfect competition - Max is 100%

Free Market System

Market free from government intervention. Prices of goods and services are determined by the open market and consumers.

Price Ceiling

Maximum prices set by the government to a particular good or service.

Average Product of Labor (APl)

Measure of average labor productivity. APL = TPl/L. - At maximum when it intersects MPl

YED (Income Elasticity of Demand)

Measures the responsiveness of demand in response to a change in income.

PES (Price Elasticity of Supply)

Measures the responsiveness of quantity supplied to a change in price.

XE (Cross Elasticity)

Measures the responsiveness of the quantity demanded for a good to a change in the price of another good

The determinants of demand

Measuring the relationship between price and quantity demanded provides information which is used to create a demand schedule, from which a demand curve can be derived. Once a demand curve has been created, other determinants can be added to the model.

Price Floor

Minimum prices set by the government to a particular good or service.

Mixed Economic Systems

Mixed economies may have a distinct private sector, where resources are allocated primarily by market forces. Mixed economies may also have a distinct public sector, where resources are allocated mainly by government, such as defense, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such as healthcare and, which have both public and private provision.

Wages

Monetary compensation paid by an employer to an employee in exchange for work done.

Labor Equilibriums

Monopsony: MFC=MRPL Competitive: W=MRPL

Negative Externality

Negative affects someone when not involved in production of activity - Means there is an overallocation for those resources in the market - Solution is a tax on the one who produces the negative costs

Public Goods

Non-rival and non-excludable, consumption available to many

Analytical/ Positive Economics

Objective statements Ex: Unemployment is at 4.5% this year.

Perfect Price Discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

Currency Manipulation

Occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate and trade policy.

Market Failure

Occurs when a market's allocation of goods is not efficient.

Unemployment

Occurs when a person who is actively searching for employment is unable to find work

Economic Growth

Occurs when an economy's PPC increases due to one or more of the following: 1) Increase in quantity of resources 2) Increase in quality of current resources 3) Advancements in technology

Classical Unemployment

Occurs when real wages for jobs are set above the market-clearing level. It causes the number of job seekers to be higher than the number of vacancies

Structural Unemployment

Occurs when the labor market is not able to provide jobs for everyone who wants to work. There is a mismatch between the skills of the unemployed workers and the skills needed for available jobs. It differs from frictional unemployment because it lasts longer

Choices

One alternative is selected over another

Monopoly

One firm controls the entire market with one unique product. Extremely difficult ease of entry/exit

Factors Affecting Supply Elasticity

Only TIME. Inelastic in short run (changes harder to make in order to supply more) Elastic in long run (more changes made over longer period of time)

Aggregate Demand

Or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels

Aggregate Supply

Or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period

Explicit Costs

Out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials.

PED along a linear demand curve

PED on a linear demand curve will fall continuously as the curve slopes downwards, moving from left to right. PED = 1 at the midpoint of a linear demand curve.

Excise Tax

Per unit tax on production resulting in a vertical shift of supply curve by amount of tax 1) Increase government revenue 2) Decrease consumption of harmful good Tax * New Quantity - Creates loss of efficiency (MB>MC),

There are three extreme cases of PED.

Perfectly elastic, where only one price can be charged. Perfectly inelastic, where only one quantity will be purchased. Unit elasticity, where all the possible price and quantity combinations are of the same value. The resultant curve is called a rectangular hyperbola.

There are three extreme cases of PES.

Perfectly elastic, where supply is infinite at any one price. Perfectly inelastic, where only one quantity can be supplied. Unit elasticity, which graphically is shown as a linear supply curve coming from the origin.

Producer surplus

Producer surplus is the additional private benefit to producers, in terms of profit, gained when the price they receive in the market is more than the minimum they would be prepared to supply for. In other words they received a reward that more than covers their costs of production.

Determinants of supply

Production is the process of turning inputs of scarce resources into an output of goods or services. The role of a firm is to organise scarce resources to satisfy consumer demand in a profitable way. Supply is defined as the willingness and ability of firms to produce a given quantity of output in a given period of time, or at a given point in time, and take it to market.

Productive Efficiency

Production of maximum output for a given level of technology and resources

Allocative Efficiency

Production of the combination of goods giving the most net benefit to society. MB=MC

Productive efficiency

Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firm's short run average total cost curve. This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.

Consumer Goods

Products and services that satisfy human wants directly

Durable Good

Products that aren't consumed quickly and can be used over a period of time.

Average Tax Rate

Proportion of total income paid to taxes Total Taxes Due/ Total Taxable Income

Free Rider

Public/Free goods are plagued by this issue- people who, when not required to pay for a good or service, do not. Problems of a free-rider include: demand for a public good is not expressed by its market; no profit-maximizing firm, in turn, would be willing to produce a public good, yet many in the market may greatly desire it.

Shortage

QDemanded exceeds QSupplied. Price will rise. (Will always return to equilibrium in the long run)

Surplus

QDemanded is less than QSupplied. Price will fall. (Will always return to equilibrium in the long run)

Private Goods

Rival and excludable, consumed by only one person

Labor Market

Refers to the supply and demand for labor, in which employees provide the supply and employers the demand

Government Intervention

Regulations and laws set by the government to help regulate the economy.

Elasticity

Responsiveness of quantity to price

Price Discrimination

Selling at a different price to different consumers, can be achieved if: 1) Monopoly pricing power exists 2) Able to identify different groups of consumers 3) Able to prevent resale between consumers

Tradegy of the Commons

The "commons" is any shared resource, including air, water, energy sources, and food supplies. The tragedy occurs when individuals consume more than their share, with the cost of their doing so dispersed among all, causing the ultimate collapse—the tragedy—of the commons.

Indifference Curve

Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility.

PED (Price Elasticity of Demand)

Shows elasticity of the quantity demanded to a change in its price.

Budget Line

Shows the consumption bundles available to a consumer who spends all of their income; downward sloping

Free-Rider Problem

Some people receive benefit regardless of what they gave up

Gini Ratio

Space between equality and Lorenz curve -AreaA/(AreaA+AreaB) - Closer to 0= More equal

Perfectly Elastic

Straight horizontal line. Quantity responds enormously to changes in price.

Perfectly Inelastic

Straight vertical line. Quantity will not respond no matter what the change in price is.

Market structures

Structures are classified in term of the presence or absence of competition. When competition is absent, the market is said to be concentrated. There is a spectrum, from perfect competition to pure monopoly.

Normative/ Policy Economics

Subjective statements Ex: There should be less unemployment.

Total Welfare

Sum of consumer and producer surpluses-- free market equilibrium provides maximum combined gain to society

Total Surplus

Sum of the consumer and producer surplus.

Herfindahl Index

Sum of the squares of the top 50 firms' market shares - Higher is closer to monopoly - Max is 10 000

Total Cost

Sum of total fixed cost and total variable cost - Vertical distance b/n TC and TVC= TFC

Capital Goods

Tangible assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services

Recessive Tax

Tax rate falls as income rises

Direct Tax

Taxes directly paid to the government by the taxpayer

Adam Smith

The Father of Modern Economics who wrote the Wealth of Nations which said that the division of labor leads to increased productivity. He believed that an interconnected economy was important because the economy could grow faster in the same direction. He also created the idea of the "Invisible Hand" and believed self interest was important to make money.

IMF

The International Monetary Fund- an international organization of 189 countries. Objectives are to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity

Absolute Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Absolute Advantage

The ability to produce more of a given product using a given amount of resources

Tax Incidence

The actual division of the burden of a tax between buyers and sellers in a market.

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it

Supply and Demand

The amount of a commodity, product, or service available and the desire of buyers for it

Demand

The amounts of a good or service that buyers wish to purchase at various prices during some time period

Supply

The amounts of good or services that sellers will offer at various prices during some periods

Microeconomics

The branch of economics that studies how people make decisions and how these decisions interact

Gross Domestic Product (GDP)

The broadest quantitative measure of a nation's total economic activity. It represents the monetary value of all goods and services produced within a nation's geographical borders.

buffer stock ceiling and floors

The buffer stock managers are likely to establish a price ceiling, above which intervention selling will occur, and a price floor, below which intervention buying will take place.

Perfectly Inelastic

The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.

Federal Reserve

The central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Income Effect (Affects slope of demand curve)

The change in quantity demanded resulting from a change in the consumer's purchasing power (or real income).

Substitution Effect (Affects slope of demand curve)

The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.

Marginal Revenue Product of Labor

The change in revenue that occurs in response to hiring one additional worker. Serves as the firm's demand curve for labor (Wage is supply curve, perfectly elastic)

Marginal Factor Cost

The change in total factor cost resulting from a change in the quantity of factor input, found by dividing the change in total factor cost by the change in quantity of factor input.

Ceteris Paribus

The commonly used Latin phrase meaning 'all other things remaining constant.' The concept of ceteris paribus is important in economics because in the real world, it is usually hard to isolate all the different variables that may influence or change the outcome of what you are studying

Revenue maximization graph

The condition for revenue maximization is, therefore, to produce up to the point where MR = 0. This is also at the same level of output where PED = 1, namely at the mid-point of the average revenue/demand curve.

Elasticity

The degree to which consumers or producers change their demand/amount supplied in response to price/income changes.

Producer Surplus

The difference between the lowest price a producer sells a product for VS what the producer actually sells it for.

Excess Capacity

The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment

Consumer Surplus

The difference of what a consumer is willing to pay VS what the consumer actually pays.

Free Rider Problem

The difficulty groups face in recruiting when potential members can gain the benefits of the group's actions whether they join or not

Tax Incidence

The division of a tax burden between buyers and sellers.

Monetary Policy

The economic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government to achieve economic objectives like inflation, consumption, growth, and liquidity.

Marginal Social Benefit

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

Marginal Social Cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Marginal Revenue Product

The extra revenue produced by one more unit of labor. MRP = change in total revenue/ change in labor

Long run costs

The firm's long run average cost shows what is happening to average cost when the firm expands, and is at a tangent to the series of short run average cost curves. Each short run average cost curve relates to a separate stage or phase of expansion.

Circular Flow

The flow of goods and services in an economic system

Average Propensity to Consume

The fraction of income spent. It is computed by dividing consumption by income (sometimes, disposable income is used as the denominator instead), where C is the amount spent, Y is pre-tax income, and T is taxes. APtC= C/YT

Classical (Hayck)

The idea that private investment, rather than government spending, would promote sustainable growth

Marginal Product

The increase in output that arises from an additional unit of input

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen

Law of Diminishing Marginal Utility (Affects slope of demand curve)

The more one consumes of a good, the less additional utility that last unit consumed provides, therefore consumers are only willing to buy additional units of a good if the price decreases.

Total Revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Implicit Costs

The opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned.

Tax Rate

The percentage of income a person or company pays in taxes.

Concentration Ratio

The percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by x number of firms in the industry.

Break Even Price

The price at which economic profit is zero; price equals average total cost

Exchange Rates

The prices of a nation's currency in terms of another currency. An exchange rate has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.

Average Propensity to Save

The proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income (aka the savings ratio)

Marginal Benefit

the benefits of consuming one more unit of a good/service

Utility

The satisfaction or pleasure a consumer obtains from the consumption of good or service

The firm as price taker

The single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it.

Distribution of Income

The smoothness or equality with which income is dealt out among members of a society. If everyone earns exactly the same amount of money, then the income distribution is perfectly equal

Price Leadership

The strategy by which one or more dominant firms set the pricing practices that all competitors in an industry follow.

Economics

The study of scarcity and choice

Total Product of Labor (TPl)

The total quantity, or total output, of a good produced at each quantity of labor employed

Price Discrimination

the business practice of selling the same good at different prices to different customers

Frictional Unemployment

The time period in between jobs when a worker is searching for work or transitioning from one job to another

Quantity Demanded

The total amount of goods or services demanded at any given point in time. It depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium.

Tax Liability

The total amount of taxes you owe

Average Cost

The total cost divided by the quantity produced.

Labor Supply

The total hours that workers wish to work at a given real wage rate.

Average Variable Cost

The variable cost per unit produced

Minimum price for a negative externalizes of consumption

There are several remedies for negative consumption externalizes, including imposing indirect taxes, and setting minimum prices, imposing fines for over-consumption, controlling supply through a licensing system.

Taxing negative externalize of consumption

There are several remedies for negative consumption externalizes, including imposing indirect taxes, and setting minimum prices, imposing fines for over-consumption, controlling supply through a licensing system.

Perfect Competition and Efficiency

There is maximum allocative and productive efficiency: Equilibrium will occur where P = MC, hence allocative efficiency. In the long run equilibrium will occur at output where MC = ATC, which is productive efficiency.

C+G+I+(x-m)

This measures Aggregate Demand (AD) which is the total spending in an economy. C=consumer spending. G=government spending. I=investment. X=exports. M=imports.

Out of Work

Those who have not looked for work within the past four weeks are no longer counted among the

Areas for total costs

Total Fixed costs and Total Variable costs are the respective areas under the Average Fixed and Average Variable cost curves.

Revenue curves

Total revenue (TR), is the total flow of income to a firm from selling a given quantity of output at a given price, less tax going to the government. The value of TR is found by multiplying price of the product by the quantity sold. Average revenue (AR), is revenue per unit, and is found by dividing TR by the quantity sold, Q. AR is equivalent to the price of the product, where P x Q/Q = P, hence AR is also price. Marginal revenue (MR) is the revenue generated from selling one extra unit of a good or service. It can be found by finding the change in TR following an increase in output of one unit. MR can be both positive and negative.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs

Economic Profit

Total revenue minus total explicit AND implicit costs (purchased and opportunity costs)

Accounting Profit

Total revenue minus total explicit costs (purchased)

Average Revenue

Total revenue per unit - Equal to price= demand= MR in perfect competition

Average Tax Rate

Total taxes paid divided by total income

Rivalrous

Use of the good prevents its use by another.

Excludable

Use of the good requires some sort of mechanism for distribution (price system).

Central Bank

Usually responsible for the formulation of monetary policy and the regulation of member banks

Marginal Productivity Theory

Wage should be based on productivity - Some are born with more advantage

Expansionary Gap

When actual output exceeds potential output. In other words, the economy is temporarily operating above its long-run potential as measured by real GDP.

Negative consumption externalizes

When certain goods are consumed, such as demerit goods, negative effects can arise on third parties.

Socially Optimal

When d=MC

What qualifies technology as advanced?

When inventions make production efficient

Increasing Returns to Scale

When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale

Collusion

When rival companies cooperate for a mutual benefit

J.S. Mills

Wrote the Principles of the Political Economy which brought together many economist thoughts in one book.

Scarcity

When there is not enough of the resource available to satisfy all the various ways a society wants to use it

Trade Offs

When you give up something in order to have something else

Oligopoly

Where a market or industry is dominated by a smaller number of firms selling similar products. Difficult ease of entry/exit

Specialization

Where an individual concentrates their efforts on producing a limited variety of goods

Crowding Out

Where personal consumption of goods and services are reduced because of increased government spending using up available resources.

Equilibrium

Where the demand for a product is equal to the amount produced/supplied.

Consumer Sovereignty

Where the desires and needs of the consumer control the output of producers

Optimal Consumption

the consumption bundle that maximizes the consumer's total utility given his or her budget constraint

Treasury Secretary

Which member of the presidents cabinet has the job to print, coin and issue money plus collect taxes and pay the governments bills?

Supply and price

Why do supply curves slope upwards? There are a number of explanations of this relationship, including the law of diminishing marginal returns and increasing costs.

Product curves

With a small number of workers, output is low and a division of labor cannot be employed, and workers cannot specialize or develop new skills. However, marginal returns increase quickly as specialization occurs and efficiency increases. This creates the opportunity for labor to develop skills and become more productive. Eventually, marginal returns diminish as the effects of specialization and new skills wear off. This pattern has a considerable impact on the firm's short-run cost curves.

Positive Externalities

a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.

Negative Externalities

a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost

Long Run Industry Supply Curve

a curve that shows how the quantity supplied by an industry varies as the market price varies after all the possible adjustments have been made, including changes in plant size and the number of firms in the industry

Short Run Industry Supply Curve

a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rise above the low point on its average variable cost curve

Unitary Elasticity

a demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of -1)

Copyright

a document granting exclusive right to publish and sell literary or musical or artistic work

Monopsonist

a firm that has market power in the factor market, i.e., a wage-setter.

Economic Theory

a generalization summarizing what we think we understand about economic choices people make and performance of industries/entire economies

Complementary Goods

a good jointly consumed with another

Marginal Revenue Curve

a graphical representation showing how marginal revenue varies as output varies.

Marginal Cost Curve

a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced

Comparative Advantage

ability of a country to produce a good at a lower opportunity cost than another

Pigouvian Subsidy

a payment designed to encourage purchases and activities that yield external benefits

Per Unit Tax

a tax of a specific amount on each unit of a product sold

Negative Income Tax

a tax system that collects revenue from high-income households and gives subsidies to low-income households

Lump Sum Tax

a tax that is a constant amount (the tax revenue of government is the same) at all levels of GDP

Midpoint Method

a technique for calculating the percent change in which changes in a variable are compared with the average, or midpoint, of the starting and final values.

Positive Statement

a testable statement about "what is" or "how something works"

Efficiency Wages

above-equilibrium wages paid by firms to increase worker productivity

Inelastic Demand

abs value of Ed is less than 1

Quantity Effect

after a price increase, fewer units are sold, which tends to lower revenue

Internalizing the Externality

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

How is scarcity represented on a PPF?

as the downward slope

Opportunity Cost

best alternative sacrificed for chosen alternative

What effect does economic growth have on the PPF?

causes outward shift

Sources of Economic Growth (2)

changes in resources, changes in technology

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Absolute Advantage

country's ability to produce a good using fewer resources than another

Perfect Competition

equilibrium where MC=MR break even where MC=MR=ATC shutdown where P<AVC P=MC=MR

Post Hoc Fallacy

error in reasoning that one event causes another because first event occurred before second

Total Revenue Test

estimating price elasticity of demand by observing change in total revenue resulting from change in price

Marginal Analysis

examining the effects of additions/subtractions to a current situation and the trade-offs represented

Tradeoff

exchange of giving up one thing to get another

Assumptions of a PPF

fixed resources, fully employed resources, technology unchanged

Tradeoff v. Opportunity Cost

giving up one things for another v. the value

Substitution of Production

goods made using same resources

Expected Future Price

if price is expected to raise, demand today increases

Price Effect

inclination of people to buy less of something at higher prices than they would buy at lower prices

Inferior Goods

inverse relationship between income and demand

Price System

mechanism using forces of supply and demand to create equilibrium through increasing and decreasing price

Perfectly Elastic Demand

price elasticity of demand is infinite, looks like a horizontal line, small change in price brings a huge change in quantity demanded

Perfectly Inelastic Demand

price elasticity of demand is zero, looks like a vertical line, quantity demanded doesn't change according to price

Total Revenue decreases when....

price increases in an elastic range of demand curve

Total Revenue increases when....

price increases in an inelastic range of demand curve

Specialization

producing goods you have a comparative advantage in and then trading

Optimal Output Rule

profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

Monopoly

profit maximization where MC=MR Profit where MC=MR lines up with the demand (P-ATC)*Q P>MR=MC

Relative Price

ratio of money price of one good compared to another, the opportunity cost

Monopolistic Competition

short-run = has positive economic profit long-run= break even Profit= where ATC lines up with demand where MR=MC

Maximum Willingness to Pay Curve

shows highest price a consumer is willing to pay

Total Product Curve

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

Total Cost Curve

shows how total cost depends on the quantity of output

Minimum Supply Price Curve

shows lowest price a producer must receive in order to produce a number of output

Barrier of Entry

something that prevents other firms from entering an industry. Crucial in protecting the profits of a monopolist. There are four types of barriers to entry: control over scarce resources or inputs, increasing returns to scale, technological superiority, and government-created barriers such as licenses.

Microeconomics

study of choices individual/businesses make, the way those choices interact in markets, and the influence of governments