ECON 528

Lerner Index

A measure of the difference between price and marginal cost as a fraction of the product's price

Producing on the production function

Aligning incentives to induce maximum worker effect. Labor hired to work with endowment of capital

More is better property

Bundles that have at least as much of every good and more of some good are preferred to other bundles

Quantity produced

Cobb-Douglas Q=K^.5 * L^.5

Diseconomies of scale

Cost is increasing, quantity is increasing

Economic surplus

ES= consumer surplus + producer surplus

Specific tariff

Fixed amount of money per physical unit of the imported product. Relatively easy to apply and administer. Provides domestic producers more protection

Budget expenditure share

Goods that comprise a small share of consumer's budgets tend to be more inelastic than goods for which consumers spend a large portion of their incomes. Pens vs Gas

How can they be considered complements?

Human capital. MBA makes you more attractive to your employer

Below zero

Inferior good

Cobb Douglas Isoquants

Inputs are not perfectly substitutable, nor are they complimentary

Cobb-Douglas production function

K is fixed in the short run. Q is a multiplier of labor.

Lerner index measures profitability

L=(P-MC)/P

Cost minimization

Marginal product per dollar spent should be equal for all inputs. Slope of isoquant=slope of isocost. This helps us find the cheapest way to produce a large amount of quantity

Average product of capital

Measures the output of an average unit of capital.

Marginal product of capital

Measures the output produced by the last unit of capital. When capital is allowed to vary in the short run. MPk is the slope of the production function

Zero

Necessity

Above zero

Normal good

Elasticity is less than 1 but greater than 0

Normal good

Cost complementary

One action reduces the costs of another. The marginal cost of producing good 1 declines as more of good two is produced. Ex. Cow hides and steaks

Which is more elastic...peas or vegetables?

Peas because vegetables are a very broad topic

Conduct

Pricing, advertising, research and development, and merger activity

Economic profits

Profit - Opportunity cost

Accounting profits

Profit = Revenue - cost

Production function

Q=F(K,L) capital and labor The maximum amount of output that can be produced with k units of capital and L units of labor

Inelastic E<1

Quantity is not very responsive to price. I will buy it whether or not the price is low (GAS)

How can labor and capital be considered substitutes?

Robotics or contracting

Monopolistic environment

The demand for a companys product is the entire demand because they are the only one operating in the area. They have total control over price

Employing the right level of inputs

When labor or capital vary in the short run, to maximize profit a manager will hire. Looking at value the worker brings

Crowding Out

You have too many people but not enough machines. It gives us diminishing returns

Manager

a decision maker: Labor and capital (inputs of production), Inventory (Supply)

Complementary goods

a decrease in good X leads to an increase in good Y ( Peanut butter and jelly)

Substitute goods

a decrease in price X leads to a decrease in the consumption of good Y (coffee vs tea)

Monopolistic competition

a few firms competing as price setters. Good for consumers because of lower prices and more variety. Bad for society and manager because there will be zero economic profits in the long run

Contracts

a legal document that creates an extended relationship between a buyer and a seller

Shutdown rule

a profit maximizing firm should continue to operate if its operating loss is less than its fixed costs.

Economics

a social science that examines conditions of scarcity and how individuals respond to scarcity. (Shortages; time and other resources)

Tariff

a tax levied on a product when it crosses national boundaries

Rothschild index is a value

between 0 (perfect competition) and 1 (monopoly)

Inferior good

buy less if you have more money

Normal good

buy more if you have more money

Leontief Isoquants (makes an L)

capital and labor are perfect complements. Used in fixed-proportions. There is no input substitutions along isoquants

Linear isoquants say

capital and labor are perfect substitutes

Elasticity equation

change in quantity/Quantity divided by change in supply/supply OR supply/quantity * change in quantity/ change in supply

Use supply and demand analysis to

clarify the big picture (the general impact of a current event on equilibrium prices and quantities) ; organize an action plan (needed changes in production, inventories, raw materials, human resources, marketing plans)

Compound tariff

combination of specific and ad valorem tariffs

Producer - producer rivalry

compete over market share

Consumer - producer rivalry

compete over price and value

consumer - consumer rivalry

compete over quantity

Completeness property

consumer is capable of expressing preferences between all possible bundles

Cost of production

cost=money spent=(wage * labor) + (rent * K) C=wL+rK

Economies of scale

costs are decreasing while quantity is increasing

Transaction costs

costs of acquiring an input over and above the amount paid to the input supplier. Everything above and beyond the w

Slope of isoquant

curved line

Time

demand tends to be more inelastic in the short term than in the long run. Time allows consumers to seek out available substitues. (looking for the cheapest gas prices in town because you aren't empty yet)

The structure-conduct-performance paradigm

each feature of the market impacts the next decision to be made

When an industry is composed of many firms,

each producing similar products, the Rothschild index will be close to zero

Anything above one is

elastic and luxury

Monopolies are not efficient in the long run but

encourage innovation

Negative marginal returns

fire people

Ad valorem tariff

fixed percentage of the value of the imported product. Distinguish among small differentials in product quality

Opportunity cost

foregone benefits from alternatives. What is the value of the best alternative?

Increasing marginal return

hire more people

Linear isoquants

imply that inputs are substituted at a constant rate, independent of the input levels employed. Choose the cheapest input

anything below one is

inelastic

Elasticity is less than 0

inferior good

Determinants of supply

input prices, number of firms entering and exiting, taxes, substitutions

Economies of scope

it is cheaper to produce the two outputs jointly instead of separately.

Accounting costs

labor, inventory, capital/assets, research and development, patents

Tariff avoidance

legal utilization of the tariff system to one's own advantage. Reduces the amount of tariff that is payable by means that are within the law

Above one

luxury

Elasticity is greater than 1

luxury good

Monopolies

many are local; the demand for the firm's product is the market demand curve; firm sets price when then affects the quantity demanded

The goal of managerial economics is to

maximize profit

Rothschild index

measures the elasticity of industry deman dfor a product relative to that of an individual firm. R=elasticity of demand for the total market divided by elasticity of demand for the product of an individual firm

Average product of labor

measures the output of an average worker. How can you maximize your productivity?

Marginal product of labor

measures the output produced by the last worker. The slope of the short-run production function

The feedback critique

no one-way casual link. Conduct can affect market structure. Market performance can affect conduct as well as market structure

Market structure

number of firms, industry concentration, technological and cost conditions, demand conditions, ease of entry and exit

"Steady state"

once we reach this equilibrium, the market should stop changing

Free entry

other firms enter, and their new brands steal market share. This reduces the demand for your product until economic profits are ulimately zero

Point of cost minimization

point where slope of isocost and slope of isoquant meet

Price as a function of quantity demanded

price = demand * quantity

Norminal tariff rate

published in the country's tariff schedule. Applies to the value of a finished product that is imported into a country

Elastic E>1

quantity is very responsive to price. I will buy more if the price is low

what is the shape of an isoquant

reflects the ease with which a producer can substitute among inputs while maintaining the same level of output. Goal: find the lowest cost point on isoquant

the role of government

regulations and arbitration

A lerner index closer to 1 indicates

relatively weak price competition; the firm has market power. Ex. Microsoft Office 2007

Transaction costs include

search costs, negotiation costs, other required investments or expenditures

Perfect competition

short run profits leads to entry; entry increases market supply and drives the market price down which increases the market quantity; long run economic profits are zero

Market supply curve

shows the amount of a good that will be produced at alternative prices

Market demand curve

shows the amount of a good that will be purchased at alternative prices, holding other factors constant

Slope of isocost

straight line

Effective tariff rate

takes into account the nominal tariff rate on a finished product

export tarif

tax imposed on an exported product, often used by developing nations

Import tariff

tax levied on an imported product

Measuring profitability

the ability of a firm to mark-up its prices above cost reflects that firm's power.

Isoquant

the combinations of inputs (K,L) that yield the producer the same level of output. This is the long run approach to production

The law of demand

the demand curve is downward sloping

Consumer surplus

the difference between the actual price and the price people are willing to pay (feeling like you got a good deal means that the consumer surplus was high)

Consumer equilibrium

the equilibrium consumption bundle is the affordable bundle that yields the highest level of satisfaction

Consumer preferences

the goods and services consumers actually consume

Price ceilings

the maximum legal price that can be charged (gasoline prices in the 1970's)

Price floors

the minimum legal price that can be charged (minimum wage)

Available substitues

the more substitutes available for the good, the more elastic the demand

Market equilibrium

the point where quantity demanded = quantity supplier

Consumer opportunities

the possible goods and services consumers can afford to consume

Slope of an isoquant

the rate at which two inputs are substituted while maintaining the same output level

Managerial economics

the study of how managers make decisions based off preferences shaped by scarce resources.

law of supply

the supply curve is upward sloping (measures the costs of production)

When the slope goes downward

there is an increase in quantity demanded

If price is too low

there will be a shortage

If price is too high

there will be a surplus

What is elasticity used for?

they are measures of the responsiveness of quantity to a given market change

Revenue tariff

to generate tax revenues. Placed one either exports or imports

Protective tariff

to reduce the amount of imports entering a country. Allows an increase in the output of import-competing producers

Elasticity

tools you can use to quantify the impact of changes in prices, income, and advertising on sales and revenues

Vertical integration

when a firm shuns other suppliers and chooses to produce an input internally. I do it myself

Spot exchange

when the buyer and seller of an input meet, exchange, and then go their separate ways