Econ Midterm
Preferences
A description of the benefit or cost we associate with each possible outcome
Economic rent
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Economies of scope
cost savings that occur when two or more products are produced jointly by a single firm, rather being produced in separate firms.
opportunity cost
when taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative
Equilibrium
A model outcome that is self-perpetuating. in this case, something of interest does not change unless an outside or external force is introduced that alters the model's description of the situation.
wage labor
A system in which producers are paid for the time they work for their employers
Utility
a numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued one when both are feasible
Utility
a numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible
Technology
a process taking a set of materials and other inputs, including that work of people and machines, to produce an output
Differentiated products
a product produced by a single firm that has some unique characteristics compared to similar products of other firms
natural monopoly
a production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market.
Flow
a quantity measured per unit of time, such as annual income or hourly wage
Diminishing
a situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase
Purchasing power parity
a statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies
If demand is highly elastic
a tax will cause a large reduction in sales
At any point on an iso profit curve the slope is given by:
- (P-MC)/Q = - profit margin/quantity
Process of building a model
1. construct a simplified description of the conditions under which people take actions. 2.describe in simple terms what determines the actions that people take 3. we determine how each of their actions affect each other 4. Determine the outcome of these actions. This is often an equilibrium 5. Try to get more insight by studying what happens to certain variables when conditions change
The GDP per capita of Greece was 22,494 in 2012 and 21966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 was
21966-22494/22494
Monopolies
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller
Monopoly
A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller
A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct/
A 20% increase in the price causes a 25% fall in demand: The percentage price increase is 100x2/10 = 20%. It causes a percentage decrease in demand of 100x5/20 = 25%. The elasticity of demand is approximately 1.25: The percentage price increase is 100x2/10 = 20%; the percentage decrease in demand is 100x5/20 = 25%. So the elasticity can be estimated as 25/20 = 1.25
Firm
A business organization, such as a corporation, limited liability company or partnership, that sells goods or services to make a profit
Technological progress
A change in technology that reduces the amount of resources required to produce a given amount of the output
Pareto improvement
A change that benefits at least one person without making anyone else worse off.
reservation indifference curve
A curve that indicates allocations (combinations) that are as highly valued as one's reservation option
Constrained Optimization
A decision-maker chooses the values of one or more variables: to achieve an objective subject to a constraint that determines the feasible set
causal
A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept
Developmental state
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies or particular industries, education and other public policies
Production Function
A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing
contracts
A legal document or understanding that specifies a set of actions that parties to the contract must undertake
Gini coefficient
A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it).
Figure 5.4 shows Angela and Bruno's feasible frontier, and Angela'a biological survival constraint. based on this figure, which of the following is correct?
A new technology that boosted grain production would result in a bigger technically feasible set: Technology that boosted grain production would increase the amount of grain that could be produced for any given number of working hours, shifting the feasible frontier up and thus expanding the technically feasible set.
shares
A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm's profit and to benefit when the firm's assets become more valuabl
Economic rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative
Economic Rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option)
economic rents
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option)
Comparative Advantage
A person or country has comparative advantage in the production of a particular good, if the cost of producing another good is lower than another person or country's cost to produce the same two goods
Absolute Advantage
A person or country has this the production of a good if the inputs it uses to produce this good are less than in some other person or country
Reservation option
A person's next best alternative among all options in a particular transaction
Political system
A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population
Democracy
A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses
gains from exchange
The benefits that each party gains from a transaction compared to how they would have fared without the exchange.
Industrial Revolution
A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy
Shapes of AC and MC curves
AC is downward-sloping at values of Q where the AC is greater than the MC. The AC is upward slowing where AC is less than MC
Pareto Criterion
According to the Pareto criterion, allocation A dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.
Figure 3.6 shows Alexei's indifference curves for free time and final grade. Which f the following is true?
Alexei is indifferent between the grade of 84 with 15 hours of free time, and the grade of 50 with 20 hours of free time. A where Alexei has the grade of 84 and 15 hours of free time, and D where Alexei has the grade of 50 with 20 hours of free time, are on the same indifference curve.
Figure 3.10 shows Alexei's feasible frontier and his indifference curves for final grade and hours of free time per day. Suppose that all students have the same feasible frontier, but their indifference curves may differ in shape and slope depending on their preferences. Use the diagram to decide which of the following are correct/
Alexei will choose a point where the marginal rate of substitution equals the marginal rate of transformation.
Pareto dominant
Allocation A pareto dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off
Biologically feasible
An allocation that is capable of sustaining the survival of those involved is biologically feasible
Pareto efficient
An allocation that is not pareto dominated by any other allocation is described as pareto efficient
Technically feasible
An allocation within the limits set by technology and biology
Capitalism
An economic system in which private property, markets, and firms play an important role
Budget Constraint
An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources
Willingness to pay (WTP)
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good
Figure 5.8 shows the Pareto efficiency curve CD for the interaction between Angela and Bruno. Which of the following statements is correct?
Angela's marginal rate of substitution is equal to the marginal rate of transformation at all points on the Pareto efficiency curve
In figure 5.10, Angela and Bruno are at allocation F, where she receives 3 bushels of grain for4 hours of work. From the figure, we can conclude that:
Any point in the area between G, H, and F would be a Pareto improvement; In area GHF, Angela is on a higher indifference curve that IC2 and Bruno has more grain that EF, so both are better off.
The figure depicts two demand curves D1 and D2. Based on this figure, which of the following statements are correct?
At E, demand curve d1 is less elastic than D2: At E, the price and quantity are the same on both demand curves, but D1 is steeper, so it is less elastic than D2. The elasticity is higher at E than at B: The slope is the same at E and C. but at E the price is higher and quantity is lower, so the elasticity is higher
Which of the following are examples of markets?
Auction websites such as eBay: an auction based market is still a market, just one in which the pricing mechanism works through bidding as opposed to a negotiated or listed price. touts selling tickets outside concert halls: a resale market is still a market, even though the goods in question have already been sold once before. Sale of illegal arms: an illegal market is still a market in the economic sense
Free ride
Benefiting from the contributions of others to some cooperative project without contributing oneself
Look again at Figure 3.1, which depicts the annual number of hours worked against GDP per capita in the U.S., France and the Netherlands, between 1870 and 2000. which of the following is true?
Between 1870 and 2000, French people have managed to increase their GdP per capita more than two-fold while more than halving the number of hours worked. The GDP per capita of France increased from roughly $2000 to $20000 while annual hours worked fell from over 3,000 to under 1,500
In Figure 5.9, D and F are the outcomes before and after the introduction of a new law that limits Angela's work time to four hours a day while requiring a minimum pay of 4.5 bushels. Based on this information which of the following statements are correct?
Both Angela and bruno receive economic rents at F: At F, Angela is above her reservation indifference curve and is thus receiving an economic rent. Bruno's reservation option is to receive nothing, so the grain he receives at F is an economic rent for him. As a result of the new law, Bruno has less bargaining power: At D, Bruno obtained rent equal to CD, and Angela obtained no rent. at F his rent is much lower. The law has increased Angela's bargaining power and reduced Bruno's
Which of the following are examples of private property
Computer belonging to your college: Although computers owned by the college may be used by many students, they are still property of the college, which requires payment (tuition) for access and can exclude their use by non students. Shares in a company: shares in a company represent a claim to that company's future profits; this claim can be sold, gifted, or realized as the owner wishes and represents income to which non-shareholders are not entitled
Which of the following statements is correct?
Consumer surplus is the difference between the consumers' willingness to pay and what they actually pay: Each consumer receives a surplus equal to the difference between the WTP and the price, and consumer surplus is the sum of the surpluses of all consumers
Normal profits
Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital
Incentives
Economic reward or punishment, which influences the benefits and costs of alternative courses of action
Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?
Every price-quantity combination lies on an isoprofit curve: You can calculate the profit for any combination of price and quantity, and drawn isoprofit curve through it by finding other points that give the same profit. Isoprofit curves slope downward when the price is above the unit cost: If the price is above the unit cost, then if output is increased the price must be lowered to keep profit constant, so isoprofit curve slopes downward
research and development
Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge
The figures show Alexei's production function and his corresponding feasible frontier for final grade and hours of work or free time per day. They show the effect of an improvement in his studying technique, represented by the tilting up of the two curves. Consider now two cases of further changes in Alexei's study environment: Case A. He suddenly finds himself needing to spend 4 hours a day caring for a family member. (You may assume that his marginal product of labor is unaffected for the hours that he studies). Case B. For health reasons his marginal product of labor for all hours is reduced by 10%. Then;
For case A, Alexei's feasible frontier shifts to the left: The feasible frontier shifts to the left and intersects the horizontal axis at 20 hours, since 4 hours a day are now spent on care, so any given number of hours committed to free time per day now corresponds to fewer hours worked and thus a lower mark. For case B, Alexei's feasible frontier rotates downward, pivoted at the intercept with the horizontal axis: The reduction in the marginal product results in a lower mark for every level of hours worked (except at zero) so the feasible frontier pivots around the intercept, rotating downwards
real GDP
GDP at constant prices. Prices corrected for inflation or deflation. Unit of currency stays same in different periods of time. If GDP in one year is the same as GDP in another year than the overall quantity of the output of goods and services has not changed and the growth rate of economy is zero
Which of the following variables have followed the so-called 'hockey-stick trajectory -- that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate
GDP per capita grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate. Labour productivity grows slowly or not at all in economies prior to industrialization, whereupon it begins to grow at an ever-increasing rate. The growth in atmospheric CO2 began from the mid-nineteenth century as a consequence of the burning of fossil fuels as the technologies introduced in the Industrial Revolution spread
Figure 5.5 shows Angela and Bruno's feasible frontier, and Angela's biological survival constraint. If Bruno can impose the allocation
His preferred choice will be where the marginal rate of transformation (MRT) on the feasible frontier equals the marginal rate of substitution (MRS) on the biological survival constraint: The distance between the feasible frontier and Angela's survival constraint, and thus Bruno's share, is maximized where MRS=MRT
Figure 5.3 shows Angela and Bruno's combined feasible set, and fur allocations that might result from an interaction between them. From the figure, we can conclude that
If Angela has very flat indifference curves, she may prefer G to the other three allocation: Angela's indifference curves are down-ward sloping. If the indifference curve through G was sufficiently flat, the other three points would all lie below it. It is possible that Angela is indifference between G and E: Angela could be indifferent between G and E -- one of her indifference curves could pass through both points
Which of the following statements is correct
If a firm's technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level: With constant returns, increasing the inputs leads to the same proportional increase in output If a firm's technology exhibits economies of scale, costs per unit will fall as the firm expands its production: since the firm can increase output with a less than proportional increase in inputs, its cost per unit will fall. If a firm's technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level: with decreasing returns, increasing the inputs leads to a less than proportional increase in output
Which of the following statements about the outcome of an economic interaction is correct?
If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off.
Figure 5.6 shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve. Based on this figure, which of the following is correct?
If the ration Angela gets from the government increases from 2 to 3 bushels of grain, her reservation indifference curve will be above her biological survival constraint whatever her biological survival constraint whatever her working hours: When the ration is 2 bushels, Angela's reservation option is z= (24,2). If it increases to 3 bushels, her reservation option is (24,3), which is on a higher indifference curve that lies above the survival constraint at all points. This will now be her reservation indifference curve.
In which of the following employment situations would the employment rent be high, ceteris paribus
In a job that provides many benefits, such as housing and medical insurance: if the employee loses the job, all these benefits would be lost, so the economic rent from employment is high When the worker is paid a high salary because the firm's customers know and trust her: This worker is paid a high salary because of firm-specific assets that will be lost if she leaves. Other firms would pay a lower salary so the economic rent is high
Which of the following statements is true?
In a labor contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract: A labor contract gives the employer the authority to direct the activities of the employee, whereas a sale contract transfers property rights and does not bind the parties to further actions
Disposable Income
Income available after taxes and receiving transfers from the government. Leaves out quality of social and physical environment, amount of free time. Goods and services that are not bought. Goods and services are produced within the household
!870 In Britain: Working hour and wages rose
Income effect: At the relatively low level of consumption in the period before 1870, workers' willingness to substitute free time for goods did not increase much when rising wages made higher consumption possible Substitution effect: But they were more productive and paid more, so each hour of work brought more rewards than before in the form of goods, increasing the incentive to work longer hours substitution effect dominated: Therefore before 1870 the negative substitution effect (free time falls) was bigger than the positive income effect (free time rises), so work hours rose.
20th century: rising wages and falling working hours.
Income effect: by the late nineteenth century workers had a high level of consumption and valued free time relatively more- their marginal rate substitution was higher - so the income effect of a wage rise was larger Substitution effect: this was consistent with the period before 1870. Income effect now dominates: When the income effect began to outweigh the substitution effect, working time fell
contracts are incomplete
Information is not verifiable: for a contract be enforceable, relevant information must be observable by both parties, but also verifiable by third parties such as courts of law. The court must be able to establish whether or not the requirements of the contract were met. Verifiable information is often unavailable Time and uncertainty; a contract is generally executed over a period of time. What B should do later may depend on things that are unknown when the contract is written. People are unlikely to be able to anticipate every possible thing that might happen in future. Measurement: many services and goods are inherently difficult to measure or describe precisely enough to be written into a contract. Absence of a judiciary: for some transactions there are not judicial institutions capable of enforcing contracts Preferences: Even where the nature of the goods or services to be exchanged would permit a more complete contract, a less complete contract might be preferred
Isoprofit Curves
Isoprofit curves slope downward at points where P is greater than MC Isoprofit curves slope upward at points where P is less than MC
If a tax causes a large fall in sales
It also reduces potential tax revenue
Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis, what will be the shapes of the curves?
Linear scale graph: an upward sloping curve with increasing slope (called convex shape). Ration scale graph: an upward-sloping straight line. An upward-sloping straight line on a ration scale graph means that the growth rate of the GDP per capita is constant. An upward sloping convex curve on a linear scale graph means that the GDP per capita increases by a greater and greater amount in absolute terms over time, consistent with a positive constant growth rate
Maria earns $12 per hour in her current job and works 35 hours a week. Her disutility of effort os equivalent to a cost of $2 per hour of work. If she loses her job, she will receive unemployment benefit equivalent to $6 per hour. Additionally, being unemployed has psychological and social costs equivalent to $1 per hour. Then:
Maria's employment rent if she can only get a job at a lower wage rate after 44 weeks of being unemployed is more than $7700: If she could get a job at the same wage after 44 weeks, Maria's employment rent = $5 9employment rent per hour) x 35 hours per week x 44 weeks = $7700. If the new job would have a lower wage, her employment rent would be higher than 7700
Gross Domestic Product
Monetary value of all finished goods and services produced by a country in a given time period
Effects of a wage increase
More income for every hour work: For each level of free time you can have more consumption and your MRs is higher: you are now more willing to sacrifice consumption for extra free time. This is the income effect -- you respond to additional income by taking more free time as well as increasing consumption The budget constraint is steeper: The opportunity cost of free time is now higher. In other words, the marginal rate at which you can transform time into income (the MRT)has increased. And that means you have an incentive to work more -- to decrease your free time. This is called the substitution effect.
The diagram depicts two alternative demand curves, D and D' for a product. Based on this graph, which of the following are correct?
On demand curve D', the firm can sell 70 units at a price of $3,000: When Q=70, the corresponding price on D' is $3000 At price $1,000, the firm can sell 40 more units of the product on D' than on D: D' can be seen as just a rightward shift of D by 40 units. So for any price, the firm can sell 40 more units on D' than on D.
Which of the following statements about the separation of ownership and control is true?
One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm's share price
A firm's cost of production is $ 12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?
Point (Q,P) = (2000,20) and (4000, 16) are on the same isoprofit curve: at (Q,P)= (2000, 20), profit = (20-12) x 2000 = $16000. At (Q, P) = (4000,16), profit = (16-12) x 4000 = $16000. Therefore, these two points are on the same isoprofit curve
Capitalism can be a dynamic economic system
Private incentives fro cost-reducing innovation: These are derived from market competition and secure private property Firms led by those with proven ability to produce goods at low cost Public policy supporting these conditions: Public policy also supplies essential goods and service that would not be provided by private firms A stable society, biophysical environment and resource base:
Firms profit
Profit = total revenue = total costs = PQ-C(Q)
This figure shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown?
Profit is greater when Q=20 than when Q=10: At all levels of output up to point E, the marginal revenue is greater than marginal cost. So profit increases as output increases -- it is higher at Q = 20 than Q = 10
Markets are characterized by a decentralization of power
Purchases and sales result from the buyers' and seller's autonomous decision. An 'order' in a market is a request for a purchase that can be rejected if the seller pleases
a wage rise:
Raises your income for each level of free time, increasing the level of utility you can achieve, increases the opportunity cost of free time. So it has two effects of your choice of free time: The income effect (because the budget constraint shifts outwards): the effect that the additional income would have if there were no change in the opportunity cost. The substitution effect (because the slope of the budget constraint, the MRT, rises): the effect of the change in the opportunity cost, given that new level of utility
Capitalist revolution
Rapid improvements in technology combined with the emergence of a new economic system
Too big to fail
Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks
Indifference curves:
Slope downward due to trade-offs: if you are indifferent between two combinations, the combination that has more of one good must have less of the other good Higer indifference curves correspond to higher utility levels: As we move up and to the right in the diagram, further away from the origin, we move to combinations with more of both goods Indifference curves are usually smooth: small changes in the amounts of goods don't cause big jumps in utility. Indifference curves do not cross: As you move to the right along an indifference curve, it becomes flatter
Relationship-specific assets
Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative
Look again at Figure 1.10, which shows a graph of GDP per capita for West and East Germany, Japan and Spain between 1950-1990.which of the following statements is correct?
Spain was able to grow at a higher growth rate than Germany between 1950-1990
Large firm may be more profitable than a small firm
Technological advantages: Large-scale production often uses fewer inputs per unit of output Cost advantages: in larger firms, fixed costs such as advertising have a smaller effect on the cost per unit. And they may be able to purchase their inputs at a lower cost because they have more bargaining power
Figure 5.15 shows the Lorenz curve for market income in the Netherlands in 2010
The Gini coefficient can be calculated as the proportion of area A to area A+B
Conspicuous consumption
The Purchase of goods of services to publicly display one's social and economic status.
Power
The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions.
Power
The ability to do and get the things we want in opposition to the intentions of others. Takes 2 main forms in economics: It may set the terms of an exchange: By making a take-it-or-leave-it offer. It may impose or threaten to impose heavy costs: Unless the other party acts in a way that benefits the person with power
Marginal product
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.
opportunity cost of capital
The amount of income an investor could have received by investing the unit of capital elsewhere
What is the marginal rate of substitution?
The amount of one goof that the consumer is willing to trade for one unit of the other. The slop of the indifference curve: the slope of the indifference curve represents the marginal rate of substitution: the trade-off between two goods that keeps utility constant
separation of ownership and control
The attribute of some firms by which managers are a separate group from the owners
Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. Which of the following statements is correct?
The average cost and the marginal cost curves coincide: Both the average and the marginal cost are 2 for all outputs, so the curves representing them coincide
Look again at Figure 1.11. Which of these conclusions is suggested by the graph?
The contrasting performance of Botswana and nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets, and firms). may also be necessary
Feasible frontier
The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other. constraint of choices
demand curve
The curve that gives the quantity consumers will buy at each possible price
Profit Margin
The difference between the price and the marginal cost.
Costs of working
The disutility of work: Employees must spend time doing things they would prefer not to do
employment rent
The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative
You are a taxi driver in Melbourne who earns $50 for a day's work. You have been offered a one-day ticket to the Australian Open for $40. As a tennis fan, you value the experience at $100. With this information, what can we say?
The economic rent of the day at the Open is $10. The economic rent of an action is its benefit minus its economic cost (out-of-pocket plus opportunity costs). Therefore, the economic rent is $100-$40-$50 = $10
Substitution effect
The effect that is only due to changes in the price or opportunity cost, given the new level of utility. Captures the idea that when a good becomes more expensive relative to another good, you choose to substitute some of the other good for it. It is the effect that a change in the opportunity cost would have on its own, for a given utility level
Income Effect
The effect that the additional income would have if there were no change in the price or opportunity cost.
Benefits of employment rents for owners and managers
The employee is more likely to stay with the firm: If she were to quit the job, the firm would need to pay to recruit and train someone else. They can threaten to fire the worker: Owners and managers exert power over employees because the employee has something to lose. The threat can be implicit or explicit, but it will make the worker perform in ways that she would not choose unless this was the case.
Capital goods
The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used
capital goods
The equipment, buildings, raw materials, and other inputs used in producing goods, and services, including where applicable any patents or other intellectual property that is used
Bargaining power
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction
bargaining power
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction
Look at figure 3.5 which shows Alexei's production function: how the final grade (the output) depends on the number of hours spent studying (the input). Free time per day is given by 2 hours minus the hours of study per day. Consider Alexei's feasible set of combinations of final grade and hours of free time per day, what can we conclude?
The feasible frontier is a mirror image of the production function above: Given the production function is just the feasible frontier except that it takes negative free time (hours of study) as its input, the farmers simply the latter mirrored across the horizontal axis and shifted horizontally. The marginal product of labor at 10 hours of study equals the marginal rate of transformation at 14 hours of free time: 10 hours of study is equivalent to 14 hours of free time given a 24-hour day, and the marginal product of labour (additional output per labor hour) is the same as the marginal rate of transformation (trade-off between extra output and labor). so these two values are equal
Which of the following are reasons why employment contracts are incomplete?
The firm cannot contract an employee not to leave The firm cannot specify every eventuality in a contract The firm is unable to observe exactly how an employees is fulfilling the contract
deadweight loss
a loss of total surplus relative to a pareto-efficient allocation
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and iso profit curves. The quantity-price combination at point E is (Q*, P*) = (32,5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P=$5440 but now produces 50 cars instead of 32. Which of the following is correct
The firm's profit is now reduced: The firm's profit is reduced by the cost of producing the extra 18 cars that now remain unsold.
Figure 3. 20 depicts a model of labor supply and consumption for the US in 1900 and 2013. The wage rate is shown to have increased between the two years. Which of the following are true
The income effect corresponds to the parallel shift in the budget constraint outwards due to the higher income. This is represented by the move from point a to c: The income effect is the effect of a higher income on the choice of free time which is shown by the parallel shift outwards of the budget constraint, and thus a move from A to C. As shown, the income effect dominates the substitution effect, leading to a reduction in the hours of work: with the indifference curves shown, the income effect of the wage increase is greater than the substitution effect so overall all free time increases and hours of work fall. If Americans had had different preferences, they might have responded to this wage rise by reducing their free time: With different indifference curves, the substitution effect could have dominated the income effect, leading to a reduction of free time between 1900 and 2013
Economic system
The institutions that organize the production and distribution of goods and services in an entire economy
Institutions
The laws and social customs governing the way people interact in society
Subsistence level
The level of living standards (measured by consumption or income) such that the population will not grow or decline
Figure 3.5 shows Alexei's production function, with the final grade (the output) related to the number of hours spent studying (the input) which of the following is true?
The marginal product and average product are approximately the same for the initial hour. Because there are no previous hours to consider, the average product for the initial hour is just the improvement produced by a single hour, which in turn approximates to the marginal product from 0 to 1 hours (the precise marginal product changes over this interval, reflected in the decreasing slop of the production function
Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?
The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers: close substitutability between goods implies competition between providers, which typically results in lower prices The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices: if the local retailers are driven out, the multinational will have more market power. It will face less elastic demand, and be able to raise prices without losing customers
Economic cost
The out-of-pocket cost of an action, plus the opportunity cost
Prince elasticity of demand
The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1 Elasticity = - % change in demand/% change in price
residual claimants
The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes).
The diagram depicts the marginal cost curve, the average cost curve and the iso profit curves of a firm. What can we deduce from the information in the diagram?
The price at c is 50: The profit level for the iso profit curve going through C can be calculated at Q=10, where AC=20, and P=70. So the profit is (70-20) x 10 = 500. At C, Q = 20, so profit per unit is (P-AC0=25. Since AC is 25, P must be 50
Constrained choice problems
The problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (Q*, P*) = (32,5,440) and the profit is $63360. Suppose that the firm chooses instead to produce Q=32 cars and sets the price at P=$5400. Which of the following statements is correct/
The profit is reduced to $62080: Since Q is still 32, production costs remain the same. Revenue falls by $40 on each car, so by $1280 in total. So profit is $63,360 - $1280 =$ 62,080
The table represents market demand Q for a good at different prices P. The firm's unit cost of production is $ 60. based in this information, which of the following is correct"
The profit-maximizing output is Q=400. At Q=400, profit = (180-60) x 400 = $48000. if you calculate the profit for each point on the demand curve you will see that profit is lower at the other points
Figure 7.11 depicts the demand curve for Beautiful cars, together with the Marginal cost and iso profit curves. Suppose that the firm decides to switch from P*=45440 and Q*=32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct/
The quantity of cars produced is reduced: At a higher price than P*, the maximum number of cars that can be sold is less than 32, and the firm will not produce more cars than it can sell
marginal rate of transformation
The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point it is the slope of the feasible frontier
Marginal rate of transformation
The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point it is the slope of the feasible frontier. The Demand curve is the feasible frontier, and its slope is the MRT of lower prices into greater quantity sold
Offshoring
The relocation of part of a firm's activities outside of the national boundaries in which it operates. It can take place within a multinational company or may involve outsourcing production to other firms.
Private property
The right and expectation that one can enjoy one's possessions in ways of one's own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners.
Ownership
The right to use and exclude others from the use of something, and the right to see the thing that is owned.
Pareto efficiency curve
The set of all allocation that are pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term
demand side
The side of a market on which those participating are offering money in return for some other good or service
Supply side
The side of a market on which those participating are offering something in return for money
Figure 3.15 depicts your budget constraint when the hourly wage is $15. Which of the following is true
The slope of the budget constraint is the negative of the wage (-15): For every additional hour of free time you have $15 less to spend on consumption, so the slope of the budget constraint is -15. The budget constraint is a feasible frontier with a constant marginal rate of transformation: The budget constraint is the feasible frontier of the available combinations of free time and consumption. Its slop is constant so the MRT is constant
Marginal rate of Substitution
The slope of the indifference curve. The trade-off that a person is willing to make between two goods.
Economics
The study of how people interact with each other and which their natural surroundings in providing their livelihoods and how this changes over time
What does UK GDP per capita measure?
The total output of the UK's economy divided by the country's population
Marginal rate of substitution
The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. The isoprofit curve is the indifference curve, and its slop is the MRS in profit creation, between selling more and charging more
Marginal rate of Substitution (MRS)
The trade-off that a person is willing to make between two goods. At any points, this is the slope of the indifference curve
Network economies of scale
These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output each of them, because they are connected to each other
diseconomies of scale
These occur when doubling all of the inputs to a production process less than doubles the output
Economies of Scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs
economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its output
firms represent a concentration of economic power
This is placed in the hands of the owners and managers, who regularly issue directives with the expectation that their employees will carry them out. An 'order' in the firm is a command
Principal-agent problems
This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced guaranteed in a binding contract
Average Product
Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labor put in). Slope = vertical distance/ horizontal distance
Substitutes
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other
reservation wage
What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job
Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC0 is correct
When AC=MC, the AC curve has a zero slope: When AC=MC, the cost of an additional unit equals the average cost of all existing units. Therefore, the new AC will be the same and the slope is zero
Tangent
When two curves share one point in common but do not cross. The tangent to a curve at a given point is an straight line that touches the curve at that point but does not cross it. Marginal product is the rate at which the grade increases, per hour of additional study -- the true marginal product is the slope of the tangent
Figure 5.7 shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve. B is the outcome under coercion, while D is the outcome under voluntary exchange when Bruno makes a take-it-or-leave-it offer. Looking at this graph, we can conclude that:
With a take-it-or-leave-it offer, Bruno''s economic rent is equal to the joint surplus: Bruno's reservation option is to receive nothing. Under voluntary exchange, Bruno receives the whole the surplus: the amount in excess of what Angela needs to either survivor be willing to work. So this is his economic rent
Currently you work for 40 hours per week at the wage rate of $20 an hour. Your free hours are defined as the number of hours not spent in work per week, which in this case is 24 hrs x 7 day - 40 hrs = 128 hrs per week. Suppose now that your wage rate has increased by 25%. If you are happy to keep your total weekly income constant, then
Your total number of free hours per week will increase by 6.25% The new rage rate is $20 x 40 hrs = $800. Therefore, your new total number of working hours is $800/$25 per hr = 32 hrs. Then your free time is now 24x7-32 = 136 hrs per week, an increase of (136-128)/128 = 6.25%
incomplete contract
a contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
Indifference Curve
a curve of the points which indicate the combinations of goods that provide a given level of utility to the individual
allocation
a description of who does what, the consequences of their actions, and who gets what as a result
Economic profit
a firm's revenue minus its total costs (including the opportunity cost of capital)
Concave
a function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function). Shape is produced when output increases as the input increases but the marginal product falls
Consumption goods
a good or service that satisfies the needs of consumers over a short period
unemployment benefit
a government transfer received by an unemployed person: Also known as: unemployment insurance
Lorenz Curve
a graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slop of one. The extent to which the curve falls below this perfect equality line is a measure of inequality
Deadweight loss
a loss of total surplus relative to a pareto-efficient allocation
Procedural judgements of fairness
an evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is).
Growth Rate
change in income/original level of income
What products should governments taxi if they wish to raise tax revenue
chose products with inelastic demand
firms profits depend on three things
costs of acquiring the inputs necessary for the production process output (how much these inputs produce) sales revenues received from selling goods or services
labor market
employers offer wages to individuals who may agree to work under their direction. economists say that employers are on the demand side of this market while employees are on the supply side.
Competition policy
government policy and laws to limit monopoly power and prevent cartels
asymmetric information
information that is relevant to the parties in an economic interaction, but is known by some and not by others.
Markets
means of transferring goods or services from one person to another. Markets are reciprocated: one's person's transfer of a good or service to another is directly reciprocated by a transfer in the other direction. Markets are voluntary: Both transfers -- by the buyer and the seller -- are voluntary because the things being exchanged are private property. So the exchange must be beneficial in the opinion of both parties. Markets have competition: a seller charging a high price will find that buyers prefer to buy from other competing sellers.
Hidden action problem
occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working
firm-specific assets
something that a person owns or can do that has more value in the individual's current firm than in their next best alternative
Profit margin
the difference between the price and the marginal cost
Marginal Cost
the effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point
markup
the price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good
Marginal rate of transformation
the slope of the feasible frontier. The quantity of some good that must be sacrificed to acquire one additional unit of another good
Division of labor
the specialization of producers to carry out different tasks in the production process
joint surplus
the sum of the economic rents of all involved in an interaction
Constrained choice problem
this problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce
Marginal Revenue curve
usually downward-sloping line. Profit = total revenue-total costs marginal profit = MR-MC So: If MR is greater than MC, the firm could increase profit by raising Q If MR is less than MC, the marginal profit is negative. It would be better to decrease Q
Benefits to working
wage income: this may be partially offset by an unemployment benefit or, in poorer countries, by the possibility of lower-paying self-employment or work on the family farm. Firm-specific assets: These include workplace friends, and perhaps the proximity of the workplace to your present home. Medical insurance: The employer may pay for the employee's healthcare in some countries The social status of being employed: The stigma of being unemployed is equivalent to a substantial financial cost for most people
Institutions
written and unwritten rules that govern: what people do when they interact in a joint project. The distribution of the products of their joint effort
