C718 - MicroEconomics -1

Market exchange that affects a 3rd party who is outside or "external" to the exchange; sometimes called a "spillover"

Externality

Marginal utility

Extra satisfaction from an additional unit

Marginal utility

Extra satisfaction from an additional unit all other things unchanged

Production Possibilities Curve Shifters

1. Change in the quantity or quality of resources 2. Change in technology 3. Trade

Determinants of Supply

1. Input Prices (resource prices cream for ice cream) 2. Prices of other goods (substitution in production - pants vs. shirts) 3. Producers Expectations (>future price = >future supply = <current supply) 4. Technology (improves productivity and >supply) 5. Number of sellers

What two policy types does Macroeconomics use to pursue these goals?

1. Monetary Policy 2. Fiscal Policy

Problems with the CPI

1. Substitution Bias - As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket. The result is that CPI may be higher than what consumers are really paying. 2. New Products - The CPI market basket may not include the newest consumer products. This may result in CPI measuring prices but not the increase in choices. 3. Product quality - The CPI ignores both improvements and decline in product quality. The result is that CPI may suggest that prices stay the same though the economic well-being has improved significantly.

What are three broad economics questions that all economies must answer?

1. What goods and services should be produced? 2. How should the goods and services should be produced? 3. Who consumes these goods and services?

Ceteris Paribus

A Latin phrase that means, "all other things unchanged."

the demand curve.

A change in the price of a good or service causes a change in the quantity demanded—a movement along ___

income elasticity of demand

A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand.

Perfectly Elastic

A situation in which the price elasticity of demand is infinite.

constant

A value that does not change

perfectly inelastic.

A vertical demand curve reflects demand that is

accounting profit vs. economic profit?

Accounting profit is the monetary costs a firm pays out and the revenue a firm receives. ... Accounting profit = total monetary revenue- total costs. Economic profit is the monetary costs and opportunity costs a firm pays and the revenue a firm receives. Economic profit = total revenue - (explicit costs + implicit costs). Economic profit is always less than accounting profit.

information about products and their prices

Advertising provides ____. Even critics of advertising generally agree that when advertising advises consumers about the availability of new products, or when it provides price information, it serves a useful function

marginal rate of substitution

The maximum amount of one good a consumer would be willing to give up in order to obtain an additional unit of another

A point on the demand curve shows:

The maximum price that people are willing to pay for another unit of a good.

cross-price elasticity of demand

The measure economists use to describe the responsiveness of demand for a good or service to a change in the price of another good or service

Deadweight Loss (DWL)

The reduction in total surplus that occurs as a result of market inefficiency.

increase , decrease

An ____ in demand, will cause the equilibrium price to rise; quantity supplied will increase. A ____ in demand will cause the equilibrium price to fall; quantity supplied will decrease.

increase, decrease.

An _____ in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A ____ in supply will cause the equilibrium price to rise; quantity demanded will decrease.

inequitable

An ______ allocation of resources implies that the distribution of income and wealth is inequitable. Judgments about equity are normative judgments.

Tacit Collusion (Price Leadership - Game Theory)

An unwritten, unspoken understanding through which firms agree to limit their competition. Ex: Firms may begin following the price leadership of a particular firm, raising or lowering their prices when the leader makes such a change. The price leader may be the largest firm in the industry, or it may be a firm that has been particularly good at assessing changes in demand or cost.

Output per unit of variable factor

Average Product

Constant Returns to Scale

Average costs are constant as output increases.

Economies of Scale

Average costs decrease as output increases.

Canada has comparative advantage in cheese, the U.S. has comparative advantage in steel.

Based on the table above, which country has comparative advantage in which good?

Another person or firm who legally pledges to repay some or all of the money on a loan if the original borrower does not do so.

CO-signer

Consumer Price Index

CPI, for short, is the most commonly used measurement of inflation for consumers. The base year is given an index of 100, and to compare, each year is given an index number as well. CPI equals the price of market basket divided by the price of market basket in base year times 100.

Price Setting Power

Can the individual firms in the market for a product have any control over the price they charge?

Substitution effect

Change in a consumer's consumption of a good in response to an income-compensated price change

Income effect

Change in consumption of a good resulting from the implicit change in income because of a price change

the change in output (ΔQ) divided by the change in units of labor (ΔL)

The slope of the total product curve for labor equals

Total Method

Choose the Q where the difference between Total Revenue and Total Cost is the greatest.

Entrepreneurship

Combining of activities of other productive resources to produce goods and services, take risk and introduce new methods and new products. Profit is the reward for entrepreneurship

Situation in which the long run average cost stays the same over an output range

Constant returns to scale

When an insurance policy holder must pay a small amount for each service, before insurance covers the rest

Copayment

2.1// What causes DEMAND to change and what causes QUANTITY DEMANDED to change?

DEMAND TO CHANGE> the 5 main demand factors QUANTITY OF DEMANDED> change in price

Moral Hazard

Deductibles, co-payments, and coinsurance can help companies with which insurance risk? Adverse selection Moral Hazard Symmetric information

Graphical representation of a demand schedule

Demand curve

Equilibrium

Equilibrium is where marginal benefit is equal to marginal cost.

Charges that must be paid for factors of production, such as labor and capital

Explicit Cost

Economic Cost (opportunity costs)

Explicit costs + Implicit costs =

Economic Cost

Explicit costs plus Implicit costs equals Economic cost or opportunity costs

2.1// Define dmand factors & what are the different factors

Factors that causes an increase or decrease in a product's demand. AKA causes the demand curve to shift (left or right) 1) # of buyers 2) income (normal Vs inferior products) 3) prices of other products (complementary Vs substitute products 4) consumer preference (trends) 5) consumer expectations (future prices)

In oligopoly markets it is always true that the higher the number of firms competing, the lower the equilibrium market price.

False

The higher the price elasticity of demand, the more likely it becomes that a duopoly market is a Cournot duopoly.

False

A factor of production whose quantity cannot be changed during a particular period

Fixed factor of production

An alternative measure of concentration is found by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares

Herfindahl-Hirschman Index (HHI).

12% When the price elasticity of demand is unit elastic, the percent change in price will cause an equivalent percent change in QD.

How much will quantity demanded decrease if demand is unit elastic and there is a 12% increase in price? 15% 13% 12% 10%

You can apply the marginal decision rule to answer this question.

How shall a firm decide what mix of capital, labor, and other factors to use?

If the marginal cost of an activity exceeds the marginal benefit, the decision maker will gain by reducing the activity.

If the marginal cost of an activity exceeds the marginal benefit, the decision maker will gain by ______ the activity.

complements; a decrease

If two goods are ________, then an increase in the price of one leads to ________ in the quantity demanded of the other.

Marginal Revenue

In competitive markets, price will equal ______ ______. The increase in total revenue from a 1-unit increase in quantity is marginal revenue. Thus marginal revenue (MR) equals the slope of the total revenue curve.In perfect competition, a firm's marginal revenue curve is a horizontal line at the market price.

setter

In the monopsony model there is one buyer for a good, service, or factor of production. A monopsony firm is a price ____ in the market in which it has monopsony power.

Capital

Is all aids to production that are human creations rather than resources found in nature. Payments to capital are called interest

Economies of Scale

Labor Specialization & Managerial specialization - workers are more efficient if they work on one task

Diseconomies of Scale

Large firms often have problems with communication and cooperation, which can cause the ATC to rise

The economic concept of scarcity includes which of the following?

Limited resources

Monopsony

Market with only one buyer

4 concerts and 3 sporting events This combination is on the budget line since the cost would be (4 concerts × 100) + (3 sporting events × 200) = $1,000. You know that Mike prefers concerts to sporting events, so this is a better choice than any other affordable combination that has more sporting events than concerts.

Mike has a budget of $1,000 to spend on entertainment for the next 6 months. His preferred activity is going to concerts, which cost $100 each, but also likes attending professional sporting events, which cost $200 each. Given his budget of $1000 and those prices for concerts and sporting events, what combination below of both activities maximizes Mike's utility? 3 concerts and 4 sporting events 1 concert and 4 sporting events 4 concerts and 3 sporting events 2 concerts and 4 sporting events

Above Equilibrium

Minimum wage or a price floor on wheat will cause a surplus in the market if the governments set the price ______ the _________ price.

A firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult

Monopoly

Which industry economic model is identical to short-run equilibrium for a monopolistically competitive firm?

Monopoly

What is the term for when a game theory scenario has a stable solution?

Nash Equilibrium

A good for which demand increases when income increases

Normal Good

rises falls negative

Panel (b) shows that marginal product ___over the range of increasing marginal returns, ___over the range of diminishing marginal returns, and becomes ___over the range of negative marginal returns. Average product rises when marginal product is above it and falls when marginal product is below it.

Price (point) elasticity of demand

Percentage change in quantity demanded / percentage change in price

Monopoly Characteristics

Perfect Competition or Monopoly? The monopoly firm determines price; it is a price setter. Price is greater than marginal cost.

the government to fund such work directly

Policy #1 Government Spending on Research and Development -If the private sector does not have sufficient incentive to carry out research and development, one possibility is for

Cooperation between government-funded universities, academies, and the private sector can spur product innovation and create whole new industries.

Policy #3: Cooperative Research

Government laws to regulate prices instead of letting market forces determine prices

Price Controls

A legal minimum price.

Price Floor

What is a monopolist able to do to maximize profits?

Produce output where MR = MC and charge a price from the demand curve

Group that shares roughly the same risks of an adverse event occurring.

Risk groups

All supply curves are based in part on seller expectations about future market conditions. Many decisions about production and selling are typically made long before a product is ready for sale.

Seller Expectations

PPF (Productions Possibility Frontier)

Shows you combinations of two goods production given resources. Production efficiency exists on the ___

Sum of consumer surplus and producer surplus

Social surplus

Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers.

Spillover

Graphical representation of a supply schedule

Supply curve

Supply-Side Failures and Negative Externalities

Supply side market failure External Costs A third party Example : Pollution, having music you hate drifting in your window The firm does not pay the full cost of producing its output.

Market Equilibrium

Supply, or Marginal Cost, equals Demand, or Marginal Benefit

pollution tax; marginal external cost

Suppose a firm pollutes a river when it produces a product. To achieve the efficient amount of output, a government could impose a ________ that equals the ________ of the pollution.

The amount by which the quantity supplied exceeds the quantity demanded at the current price.

Surplus

Unemployment

Surplus of labor (caused by minimum wage)

Scientific Method

Systematic set of procedures through which knowledge is created.

Sum of total variable cost and total fixed cost

TC

Graph showing the firms lowest cost per unit at each level of ouput, assuming that all factors of production are variable

Th long-run average cost (LRAC)

price elasticity of demand

The _____ measures the responsiveness of quantity demanded to changes in price; it is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

Demand

The _____ schedule and _______ curve show the relationship between the PRICE of a product and the QUANTITY DEMANDED demand shifts the curve. Is both the demand schedules and demand curves. includes consumer preferences, prices of related goods, and services, income, demographic characteristics (population size and buyer expectations) Demand curves slope downward

make zero economic profit.

The absence of barriers to entry in monopolistic competition means that in the long run firms

greater

The absolute value of the price elasticity of demand is ____when substitutes are available, when the good is important in household budgets, and when buyers have more time to adjust to changes in the price of the good.

Consumer Surplus

The amount a buyer is willing to pay for a good - the amount the buyer actually pays for it. The area on the graph that is under the demand curve, and above the price.

marginal product

The amount by which output rises with an additional unit of a variable factor

marginal utility

The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged

Budget Line

The amount of two products you can purchase with a set amount of money.

producer surplus

The amount that a seller is paid for a good minus the seller's actual cost

The marginal product of capital is:

The change in total output from using one more unit of capital.

Accounting Profit

The difference between total revenue and explicit cost.

Four

There are ___ market structures Perfect Competition Monopolistic Competition Oligopoly Competition Pure Monopoly/monopoly

Implicit Costs

They represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store. ______ ______ also allow for the depreciation of goods, materials, and equipment that are necessary for a company to operate.

Utility-Maximizing Rules

This rule states that the consumer will allocate income is such a way that marginal utility of product A divided by the price of A equals marginal utility of product B divided by the price of B.

In a Betrand oligopoly, in which all firms have constant marginal costs and produce a strictly positive quantity, the equilibrium outcome is always efficient.

True

Real Wage

Wage adjusted for inflation.

A Surplus happens

When quantity demanded is LESS than quantity supplied

2.2// Define Supply Curve

a graph that shows the possible combos of price and quantities supplied of a product

fixed factor of production

an input (quantity of a factor) that cannot be changed in the short run or period of time ex blg

equilibrium price

equilibrium price in any market is the price at which quantity demanded equals quantity supplied.

productive efficiency

given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good.

Total fixed cost (TFC)

is cost that does not vary with output.

Marginal Benefit

the amt by which an addtl unit of activity increases its total benefit. the amount by which the extra french fries increase your satisfaction, or the extra revenue the firm expects to bring in by hiring another worker.

1.2// Self- interest motive

the assumption that consumers act to maximize their own welfare

margin

the current level of an activity

Elasticity

the ratio of the percentage change in a dependent variable to a percentage change in an independent variable.

economic profits

total revenues minus explicit and implicit costs

Demand curve

A demand curve thus shows the relationship between the price and quantity demanded of a good or service during a particular period, all other things unchanged.

Variable

A factor that can change

Elasticity of Demand

A measure of how consumers react to a change in price.

Production Possibilities Curve or Frontier

A model that shows alternative ways that an economy can use its scarce resources.

Quantity Supplied

The amount a seller is wiling and able to sell at a given price.

Law of Supply

As price increases the quantity supplied increase, other things equal. As price decreases the quantity supplied decreases. Price and quantity supplied move in the same direction.

Marginal Product

The amount by which output rises with an additional unit of a variable factor.

Excess Capacity

The amount by which the efficient scale exceeds the quantity that the firm produces.

The Velocity of Money

Average times a dollar is spent and re-spent in a year.

A decrease in supply

Will cause a leftward shift of the supply curve

A game in which there is a dominant strategy for each player

dominant strategy equilibrium

tendency of marginal utility to decline beyond some level of consumption during a period

law of diminishing marginal utility

Range over which each additional unit of a variable factor adds more to total output than the previous unit

Increasing marginal returns

10000

Kathleen owns a firm and she made $20,000 economic profit and $30,000 accounting profit last year. She paid $15,000 in wages and $18,000 in rent last year. What is Kathleen's implicit cost?

Marginal Analysis

Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity.

Number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period.

Total utility

taxes, markets, property rights

Market-oriented environmental policies include ___, ___, and ___ so that those who impose negative externalities must face the social cost.

Institutions that bring together buyers and sellers

Markets

Variable Costs

Materials and most labor costs

Variable Costs

Materials and most labor costs for raw materials, salaries of production workers, and utilities

Bowed out PPF

Means the presence of increasing opportunity costs

Monopoly Characteristics

Perfect Competition or Monopoly? Firms produce where marginal cost equals marginal revenue and charge the corresponding price on the demand curve.

Monopoly Characteristics

Perfect Competition or Monopoly? The equilibrium solution is inefficient because price is greater than marginal cost.

Monopoly Characteristics

Perfect Competition or Monopoly? The firm faces the market demand curve; marginal revenue is below market demand

External Costs

Society's Cost - Firm's Cost =

opportunity cost

measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative

In a ----------, the equilibrium solution does not maximize consumer and producer surplus because price is greater than marginal cost.

monopoly

taker, setter

perfectly competitive firm is a price ______, the monopoly firm is a price _____

what are the different extreme cases of demand elasticity

perfectly elastic demand & perfectly inelastic demand

Marginal Cost

the amount by which an additional unit of an activity increases its total cost. You will pay more to supersize your McDonald's order; the firm's labor costs will rise when it hires another worker.

1.1// ceteris paribus

the assumption that all other things remain equal

When a player's best strategy is the same regardless of the action of the other player

dominant strategy

a change in the price of an apple.

A change in the demand for apples could result from any of the following EXCEPT

Efficiency condition

A competitive market with well-defined and transferable property rights

Consumer's Budget Constraint

A consumer's budget constraint shows the combination of two goods that a person can purchase given her income and the prices of the goods. The trade-off between two goods.

perfectly elastic.

A horizontal demand curve reflects demand that is

Monopoly

A market containing a large number of buyers but one seller where entry is blocked is called

Consumer Expectations

A rise in the expected FUTURE price of a good increases the CURRENT demand for that good.

Efficiency condition

A situation that requires a competitive market with well-defined and transferable property rights.

As a consumer consumes more and more of a good or service, its marginal utility ______.

falls

s a consumer consumes more and more of a good or service, its marginal utility ______.

falls

1.1// what is the economic problem

having unlimited wants but limited resources with which to satisfy them

Land

includes all natural resources used in the production process: minerals,water,forest, oil, temperature, and soil quality. Rent is the income paid to land

marginal cost exceeds marginal benefit.

An overproduction means that

Variable

is something thats value CAN change.

Surplus

is the amount by which quantity supplied exceeds quantity demanded at the current price. The initial effect of a decrease in demand is a ______. Only occurs if the current price exceeds the equilibrium price NOT at the equilibrium price

Total cost (TC)

is the sum of total variable cost and total fixed cost.

Average total cost (ATC)

is total cost divided by quantity; it is the firm's total cost per unit of output.

command-and-control regulation

laws, which specify allowable quantities of pollution and which also may detail which pollution-control technologies must be used

negative statement

makes a value argument - opinion of speaker can not prove

total revenue

market price times the quantity the firm produces. the curve is linear upward sloping curve, the greater the price greater the curve

opportunity cost includes

Both implicit and explicit cost

Graphically shows the combination of two goods a consumer can buy with a given budget

Budget Line

the quantity of the good consumed at different prices.

You can derive a demand curve from an indifference map by observing ____________

1-Determine the demand, marginal revenue, and marginal cost curves. 2-Select the output level at which the marginal revenue and marginal cost curves intersect. 3-Determine the price at which that output can be sold from the demand curve.

You can then determine a monopoly firm's profit-maximizing price and output by following three steps:

Negative

Your neighbor paints his house a hideous color. Negative or positive externality

Market

____ demand curves are found by summing horizontally the demand curves of all consumers in the market

Economic Growth

_____ _____ Results from better or more technology, labor and capital quality. It shifts the PPF outward.

Producer surplus

_____ is the gap between the price for which producers are willing to sell a product, based on their cost, and the market equilibrium price.

Deadweight loss

______ is loss in total surplus that occurs when the economy produces at an inefficient quantity

Capital

_______ consists of tools, instruments, machines, buildings, and other items that businesses use to produce goods and services.

Total surplus

_______ is larger at the equilibrium quantity and price than it will be at any other quantity and price

price discrimination

Charging different consumers different prices or charging a given consumer different prices depending on the quantity purchased is discrimination

Down

Consumer Surplus increases if the price goes _____

How are prices determined under perfect competition?

price is determine by the market

Situation that requires a competitive market with well defined and transferable property rights.

Efficiency condition

marginal costs.

Efficiency requires that consumers confront prices that equal ______

Firms

Hire and use factors of production.

At the utility maximizing solution, the consumer's marginal rate of substitution (the absolute value of the slope of the indifference curve) is equal to the ------- of the two goods.

price ratio

downward

If a firm faces a __-sloping demand curve, marginal revenue is less than price.

linear, below steep

If a monopoly firm faces a linear demand curve, its marginal revenue curve is also ____, lies ___ the demand curve, and is twice as ___ as the demand curve.

Situation where either the buyer or seller or both are uncertain about the qualities of what is being bought and sold

Imperfect information

A cost that is included in the economic concept of opportunity cost but that is not an explicit cost.

Implicit Costs

Utility

Is the satisfaction a consumer receives from consuming a good or service

Direct Controls Market

Laws to limit an activity or set emission standards. The government allows company's to ______ for externality rights.

Planning period over which a firm can consider all factors of production as variable

Long Run

Under what conditions would a perfectly competitive firm choose to shut down in the short run?

Loss that is more than its FC

A firm that acts as a price setter

Monopoly power

Total benefit of an activity minus its opportunity cost

Net Benefit

Households

Own and sell factors of production

TRUE

Price floors and price ceilings often lead to unintended consequences.

Consumer goods

Products created for direct consumption

Public Goods

Provided by the government for free.

Quantity buyers are willing and able to buy of a good or service at a particular period, ceteris paribus

Quantity Demanded

change in demand

shift of the demand curve (see page 18)

an unwritten, unspoken understanding through which firms agree to limit their competition

tacit collusion

Tacit Collusion

tacit collusion, an unwritten, unspoken understanding through which firms agree to limit their competition. Firms may, for example, begin following the price leadership of a particular firm, raising or lowering their prices when the leader makes such a change.

whereas the perfectly competitive firm is a price ----, the monopoly firm is a price ----.

taker; setter

To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is ------ to the budget line.

tangent

surplus

the amount by which the quantity supplied exceeds the quantity demanded at the current price. There is, of course, no surplus at the equilibrium price; a surplus occurs only if the current price exceeds the equilibrium price.

2.3// define marginal utility

the amount of additional utility gained from an additional unit of good/service u just bought

2.1// Quantity Demanded

the amount of product consumers are willing to buy at each price, quantity is the dependent variable

marginal cost

the cost of producing one more unit of a good

deadweight loss

the loss in net benefits (surplus) resulting from a failure to carry out an activity at the efficient level.

increasing marginal returns

the marginal product of a variable resource increases as each additional unit of that resource is employed

Total utility

the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer's total utility, the greater that consumer's level of satisfaction.

Total utility

the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption

1.2// Opportunity Cost

the utility that could have been gained by choosing the next best alternative

What two tools do economists use to analyze problems?

theories and models

Average Variable Cost

variable cost / quantity of output

AVC (Average Variable Cost)

variable cost/quantity

Theory

well-tested explanation that unifies a broad range of observations and becomes law

3 better defined property rights

what happens on your property ex train sparks and fire on your property should you have to build a fix, endangered species on your property prohibits land use

Moral Hazard

when people have insurance against a certain event, they are less likely to guard against that event occurring.

average revenue

which is total revenue divided by quantity

Oligopoly

° Few firms. - Each firm has a large market share. - Interdependent. - Incentive to collude. ° Barriers to entry. Ex: Breakfast cereal (Kellogg, General Mills, Post & Quaker = 78% of market).

goods and services market

a market in which firms are sellers of what they produce and households are buyers

Imperfect competition

a price greater than marginal cost which generates an inefficient allocation of resources

Positive Statement

a statement of fact or a hypothesis

dependent variable

a variable (often denoted by y ) whose value depends on that of another. it responds

Independent Variable

a variable that can change

Dependent Variable

a variable that responds to change

3market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services based on private enterprise ( means of production resources and businesses re owned and operated by private individuals or individual groups. businesses supply goods and services based on demand. Brings buyers and sellers of goods or services together.

When the benefits of producing a good or service spill over to other people, rather than just the buyer, the spillover is referred to as

an external benefit.

1.3// Define Economic Growth

an increase in an economy's total output of goods and services

price takers

buyers and sellers must accept the price the market determines

The price elasticity of demand between A and B is thus 3.00.

Suppose Point A shows a price of $0.80, and a quantity demand of 40,000 rides per day. Suppose point B shows a price fall of $0.70, and you want to report the responsiveness of the quantity demanded. At the new price, the quantity demanded rises 60,000 per day (point B). Compute the elasticity by computing the percentage changes in price and in quantity demanded between points A and B.

Four Firm Concentration Ration

The % of total industry revenue accounted for by the four largest firms.

1.3// Law of increasing opportunity cost

concept that as more of one item is produced, the opportunity cost of additional units of that product rises

The price elasticity of supply measures:

The extent to which the quantity supplied of a good changes when the price of a good changes, other things remaining the same.

Number of Buyers

The fifth determinant of demand. An increase in the number of buyers will shift the demand curve to the right.

Indifference Curve

The marginal rate of substitution. The consumer's preferences are represented by the consumer's indifference curve.

Opportunity cost defined

The measure of the cost of a particular good in terms of what is Given up to produce that good.

Law of diminishing marginal utility

The more you have the less you'll want. Each additional unit of a good provides less utility. This law explains the downward sloping of the demand curve.

long run

The planning period over which a firm can consider all factors of production as variable

Utility

The term used to define Happiness.

Social surplus

Total surplus

The costs associated with the use of variable factors of production, see also TVC

Variable Costs

The diamond-water paradox

Water is vital for life but it is in great supply. That is why its marginal utility and price are low. Diamonds are rare. As a result, their marginal utility and price are high. The marginal utility of diamonds is greater than that of water.

Scarcity

We have unlimited wants but limited resources

Zero profits result for all firms. In a highly competitive market, each firm lowers its price to increase market share, which leads to zero economic profits for all firms.

What is most likely to happen when oligopolists compete aggressively against each other? Costs are driven lower for all firms. All firms end up acting like monopolistic competitors. All firms end up acting like imperfect competitors. Zero profits result for all firms.

Individual

_______ demand curves reflect utility maximizing adjustment by consumers to changes in price

constraint

a boundary that limits the range of choices that can be made.

Circular Flow Diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

demand curve (marginal benefits curve)

a graph of the relationship between the price (vertical axis) of a good and the quantity demanded (horizontal axis) during a particular period all other things unchanged. represents the demand schedule. Negative slope of the demand curve suggest a key behavioral relationships of economics all other things unchanged.

price setter

a producer that can set a price for a product, rather than accepting the market price- absence of rivals gives much more price setting power

change in supply

a shift in the supply curve

2.3// what are the effects of changes in demand on equilibrium

an increase ↑ in demand = causes the equilibrium (both values of price&quantity) to rise↑ a decrease ↓ in demand = causes equilibrium (both values of price&quantity) to fall ↓

hypothesis

assumption of a relationship between two or more variables that could be proven to be false. A statement is not a hypothesis if no conceivable test could show it to be false.

2 marketable permits program

cap and trade - a program in which a city or state government issues permits allowing only a certain quantity of pollution. (divided to firms and can be free or sold and amount of permits can be reduced each year, the amount of pollution allowed per permit can be reduced)

marginal cost formula

change in TC/change in Q

fallacy of false cause

fallacy of false cause

budget line

shows graphically the combinations of two goods a consumer can buy with a given budget.

Resources

the inputs used to produce goods and services

economic profit

total revenue minus total cost

Factors of Economic Growth

- discovery of more resources - investment in new capital goods - technical progress increase productivity - increase in size and skill of workforce - relocating scarce resources

A Factor of production whose quantity can be changed during a particular period

Variable factor of production

Nominal Wage

Wage measured by dollars rather than purchasing power.

Complementary Goods

-are jointly consumed -enhances enjoyment of both goods -a rise in price of one good will cause a decrease in demand for the other good -cross elasticity has a -sign

1.1// Economic Model and facts

-generalizations/ simplifications of the economic reality ^ has 2 variables- independent & dependent ^has 2 kinds of relationships- indirect & direct -classified as either positive (emperial) or normative

Substitute Goods

-have opposite relationship -they replace each other - if two goods are substitutes a rise in price for one good will increase the demand for the other good -cross elasticity has a + sign

Perfectly elastic demand curve

-horizontal -greatly effected by price -changes to price is infinite -changes in price effects quantity

Perfectly inelastic demand curve

-is Not responsive to price - is vertical -quantity demanded is constant regardless of price -when E= 0 there will not be a change in quantity demanded

1.3// What does 'The Production Possibilities Model' do?

-it illustrates the tradeoffs that society faces in using its scarce resources

1.4// what are the different economic systems & explain each

1) Traditional: focuses on non-economic concerns, have tight social constraints 2) Market: consumer centered, non gov, create inequality & instability 3) Command: equalized income but gov controlled, lack of freedom

exclusive property right, transferable property right

2 Characteristics required of the marketplace to achieve an efficient allocation of resources.

Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tons of leather are produced?

300 tons

Mary Andrews's demand curve for apples, d, can be derived by determining the quantities of apples she will buy at each price. . Those quantities are determined by the application of the marginal decision rule to utility maximization. At a price of $2 per pound, Mary maximizes utility by purchasing ____ of apples per month. When the price of apples falls to $1 per pound, the quantity of apples at which she maximizes utility increases to 12 pounds per month.

5 pounds

Midpoint Method

= % change in quantity demanded DIVIDED BY % change in price

cross elasticity of demand formula

= % change in quantity demanded of good A DIVIDED BY % change in price of good B

Price elasticity of supply formula

= % change in quantity supplied / % change in price

Determinant

A factor that decisively affects the nature or outcome of something.

positive statement

A statement of fact or a hypothesis

Increase Removing price control measures will eliminate deadweight loss, thereby increasing social surplus.

What effect will removing price control measures have on an economy's social surplus?

Indifference curves show?

All combinations of two goods or services among which a consumer is indifferent

Budget Line

All combinations of two products one can purchase with a set amount of money.

variable

All costs are --------- in the long.

Tradeoff

An exchange- giving up one thing to get something else.

Perfect Competition

Another word for pure competition or competitive markets

implicit cost

Are those additional cost implied by the alternatives given up

Left

As a result of a change in determinants, that causes demand to decrease, the demand curve will shift to the ____

Right

As a result of a change in determinants, that causes demand to increase, the demand curve will shift to the ____

The production possibilities frontier has a curved shape because of which law?

As additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline, represented in a downward curve.

Law of Supply

As price increases the quantity supplied increase, other things equal. As price decreases the quantity supplied decreases. Price and quantity supplied move in the same direction.

Law of Demand

Consumers buy more of a good when its price decreases and less when its price increases. Price and quantity demanded move in opposite directions.

GDP

Consumers plus Investments plus Government plus Net Exports

Long-Run Average Cost

Cost per unit of output incurred when all factors of production or inputs can be varied.

A Change in Market Equilibrium due to Change in Demand

During Valentine's Day, the demand for candy increases and the cost of producing candy also increases because of special packaging for the holiday. What is the net effect on the equilibrium price and quantity of candy due to these changes?

3.2// explain the different demand elasticity

ELASTIC demand: the % change in quantity demanded is greater than the % change in price INELASTIC demand: the % change in quantity demanded is less than the % change in price UNIT-ELASTIC demand: the % change in quantity demanded = the % change in price

Long Run ATC (average total cost)

Economies of Sales Diseconomies of Scale Constant Returns to Scale

Situation in which the long-run average cost declines as the firm expands its output

Economies of scale

The allocation of resources when the net benefits of all economic activities are maximized

Efficient

cap and trade, pollution charges, marketable permits, better-defined property rights

Examples of market-oriented environmental policies, also referred to as _____ programs, include ____, ____, and ____.

Property right that allows its owner to prevent others from using the resource

Exclusive property right

Land, Labor, Capital, Entrepreneurship

Factors of production - resources used to produce goods and services (4)

marginal revenue (MR) = marginal cost (MC).

For a perfectly competitive firm, profit maximization occurs when output is such that

Asymmetric Information

When one of the parties has more information about the quality or price of the good than the other. Ex: Selling your car that you know is a lemon.

Common resources

Goods that are non excludable but rival in consumption?

public goods

Goods that are nonrival in consumption and not subject to exclusion

Allocation Efficiency

When the mix of goods being produced represents the allocation that society most desires.

Efficiency

When the net benefits of all economic activities are maximized

Firms

Hire and use factors of production. Produce and sell good s and services.

Total Revenue Price x Quantity

How do you calculate Total Revenue?

Entrepreneurship

Human resources that organize or put labor, land and capital together to produce final goods and services

What is the definition of scarcity?

Human wants for goods, services, resources that exceed what is available.

equilibrium price, equilibrium quantity. $6 per pound, 25 million

When you combine the demand and supply curves for a good in a single graph, the point at which they intersect identifies the ____ and ____. Here, the equilibrium price is ___. Consumers demand, and suppliers supply, ____ pounds of coffee per month at this price.

increase , left

When you compute the income elasticity of demand, you are looking at the change in the quantity demanded at a specific price. You are thus dealing with a change that shifts the demand curve. An ____in income shifts the demand for a normal good to the right; it shifts the demand for an inferior good to the ____.

supply of memory chips increases.

If the number of companies producing memory chips increases, then the

Monopoly

In ________, the equilibrium solution does not maximize consumer and producer surplus because price is greater than marginal cost.

Overt collusion

In the simplest form of collusion, overt collusion, firms openly agree on price, output, and other decisions aimed at achieving monopoly profits.

Production Inefficiency

Inside the PPF (More of either good can be produced without forgoing the other good)

Production Inefficiency

Inside the PPF. More of either good can be produced without forgoing the other good.

Method that households and firms use to prevent any single event from having a significant detrimental financial effect.

Insurance

Protect the right of inventors to produce and sell their inventions. (Patents)

Intellectual property rights

positive

Investments in private education raise your country's standard of living. Negative or positive externality

A shortage

Is created when the price ceiling is set BELOW the market clearing price

Quantity Supplied

Is the amount of a good or service SELLERS are willing and able to sell at a specific price during a certain time period

marginal revenue

Is the change in revenue from selling one more unit

economic profit

Is the difference between total revenue and the total of explicit and implicit costs of production

labor

Is the physical and mental work of human beings and wages are payments labor receives for its productive services

Monopoly

Is where is a single seller of a product with no close substitutes

Demand Side Failures and Positive Externalities

It is not possible for Tom to make the people who get the spill-over benefit from his education pay him. This is an example of ______ _______.

monopoly and oligopoly.

Long-run economic profits are most likely to be earned in

Perfect Competition

Many buyers and sellers, number of firms are large, types of goods are homogeneous, entry barriers are free entry and exit, there is no nonprice competition, EXP : Agriculture

Monoplisitic Competition

Many firms, types of goods are differentiated, there is some price control, free entry and exit barriers, use of advertising and brand names as nonprice competition (EXP : Retail Trade)

Amount by which an additional unit of an activity increases its total cost.

Marginal Cost

Utility Maximization

Marginal Cost equals Marginal Revenue

Amount by which output rises with an additional unit of a variable factor

Marginal Product

If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased. If the marginal benefit is less than the marginal cost, the quantity should be reduced.

Marginal decision rule

If the marginal social cost of producing a ton of cement is $4,000 and the marginal private cost is $3,500, then the

Marginal external cost of producing a ton of cement is $500.

positive negative zero

Marginal revenue is ____ in the elastic range of a demand curve, ___ in the inelastic range, and ___ where demand is unit elastic.

The elasticity of demand is used to:

Measure how responsive consumers are to a change in price.

4 categories of resources

Natural resources (land) Labor (human capital) Capital (machinery, factories, equipment) Entrepreneurship

A perfectly competitive firm is making positive economic profits. How does the market reach long-run equilibrium?

New firms will enter the market shifting the Supply Curve right. Market price will decrease and profits will to return to 0 economic profit production takes place at the lowest possible cost per unit and that all economic profits and losses are eliminated.

Positive externailites

New technology often has positive externalities; that is, there are often spillovers from the invention of new technology that benefit firms other than the innovator.

negative marginal returns

Now the total product curve is downward sloping, and the marginal product curve falls below zero.When additional units of a variable factor reduce total output, given constant quantities of all other factors, the company experiences negative marginal returns

falls lowest falls average variable cost plus average fixed cost

Panel (d) shows that marginal cost ___over the range of increasing marginal returns, then rises over the range of diminishing marginal returns. The marginal cost curve intersects the average total cost and average variable cost curves at their ____points. Average fixed cost ___as output increases. Note that average total cost equals ___.

Perfect Competition Characteristics

Perfect Competition or Monopoly? The firm's demand and marginal revenue curve is a horizontal line at the market price.

Situation where a 3rd party, benefits from a market transaction by others

Positive Externality

AR > AC

Positive economic profit per unit is equal to

payment made to an insurance company

Premiums

A firm that sets or picks price based on its output decision

Price Setter

Opposite

Price and Quantity demanded move in opposite directions.

A legal maximum price

Price ceiling

False Equilibrium is an economic condition. While price ceilings and price floors may result in increased supply or demand, they do not change the equilibrium.

Price ceilings and price floors change the equilibrium price.

Where marginal revenue is positive, demand is -------. Where marginal revenue is negative, demand is --------. Where marginal revenue is zero, demand is ---------.

Price elastic; price inelastic; unit price elastic

Ratio of the percentage change in quantity

Price elasticity of supply

Perfect competition

Price is determined by demand and supply; each firm is a price taker. This is an example of

Perfect Competition Model

Price is determined by the interaction of demand and supply; buyers and sellers are price takers.

Dollar value of all benefits to a new product or process invented by a company that can be captured by the investigating company

Private benefits

When the estimated rates of return go primarily to an individual; i.e earning interest on a savings account

Private rates of return

Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would:

Produce some research, but less than the efficient amount.

Relationship between factors of production and the output of a firm

Production function

Set of rules that specify the ways in which an owner can use a resource

Property Rights

the legal rights of ownership on which others are not allowed to infringe without paying compensation

Property Rights

antitrust laws natural monopolies

Public policy toward monopoly consists of ___ and regulation of ____.

Refer to the graph, identify the long-run equilibrium price and quantity (p*, q*). (Hint: what is true in long-run equilibrium?)

Q = 5 P = $11

The quantity sellers are willing to sell of a good or service at a particular price during a particular period, ceteris paribus

Quantity supplied

Dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and society as a whole.

Social benefits

Microeconomics

Study of small economic units such as individuals, firms, and industries

The government use what to encourage positive externalities?

Subsidies

Laurie maximizes her net benefit by reducing her time studying economics to 2 hours. The change in her expectations reduced the benefit and increased the cost of studying economics. Two hours studying economics is the point at which marginal benefits equals marginal costs and is the "right" (efficient) amount.

Suppose Laurie Phan still faces the exams in economics and in accounting, and she plans to spend a total of 5 hours studying for the two exams. However, she revises her expectations about the degree to which studying economics and accounting will affect her scores on the two exams. She expects studying economics will add somewhat less to her score, and she expects studying accounting will add more. The result is the following graph of marginal benefits and marginal costs. If Laurie still spends 3 hours studying economics, will this be the "right" amount? If not, what would be the "right" amount?

30

Suppose the price of a box of cereal rises by 10% and the price elasticity of demand is 1.5. Calculate the drop in boxes of cereal sold after the price increase. Assume 200 boxes of cereal were sold daily before the price was increased.

Total Cost Formula

TC = TFC + TVC

Total Cost

TC = Total Fixed Cost + Total Variable Cost

Full Employment Output

The Real GDP created when there is no cyclical unemployment. The U.S. is at full employment when there is 4-6% unemployment.

Substitution effect

The _______ of a price change, changes consumption in a direction opposite to the price change

Comparative Advantage

The ability of a country to produce a good at a LOWER COST than another country can.

Absolute Advantage

The ability to produce a good USING FEWER INPUTS than another producer.

Terms of Trade

The agreed upon conditions that would benefit both countries.

Quantity Supplied

The amount a seller is willing and able to sell at a given price.

marginal benefit

The amount by which an additional unit of an activity increases its total benefit

marginal cost

The amount by which an additional unit of an activity increases its total cost

consumer surplus

The amount that individuals would have been willing to pay, minus the amount that they actually paid

Marginal Cost

The cost of producing one more unit of a good.

Marginal Costs

The cost of producing one more unit of a good.

Total Variable Cost

The cost of the variable factor of production used by a firm - The cost of labor.

Market Equilibrium

The cross between the supply curve and the demand curve.

Herfindahl-Hirschman Index.

The degree to which a few firms dominate an industry can be measured using a concentration ratio or a __________

Demand

The demand schedule and demand curve show the relationship between the PRICE of a product and the QUANTITY DEMANDED.

Producer Surplus

The difference between the current market price and the cost of production for the firm. Below the price and above the supply curve.

Outward shift to the Right on PPF

The economy is growing

Externalities (positive and negative)

The effect of a market exchange on a third party who is outside or "external" to the exchange. Ex: - Building a concert venue near neighborhood for country music. - They can be negative or positive. If you hate country music, then having it waft into your house every night would be a negative ________. If you love country music, then what amounts to a series of free concerts would be a positive ________.

Patent (Government) Barrier to Entry

The exclusive right to sell a particular good for some period of time.

Technology

The fourth determinant of supply. __________ always improves productivity and increases supply.

people cannot be excluded from consuming public goods even if they don't pay for them.

The free-rider problem exists because

marginal revenue

The increase in total revenue from a 1-unit increase in quantity

Marginal Revenue (MR)

The increase in total revenue from a 1-unit increase in quantity.

The supply curve is upward sloping because of:

The increasing marginal cost.

markets

The institutions that bring together buyers and sellers.

exceeds , excess

The intersection of demand (D) and supply (S) would be at the equilibrium point E0. However, a price floor set at Pf holds the price above E0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs ___ the quantity demanded Qd. There is ___supply, also called a surplus.

deadweight loss

The loss in net benefits resulting from a failure to carry out an activity at the efficient level

deadweight loss

The loss in net benefits resulting from a failure to carry out an activity at the efficient level; loss in total surplus that occurs when the economy produces at an inefficient quantity

total output from employing one more worker.

The marginal product of labor is the change in

Investment

The money spent by businesses to improve their production

reduces higher

The monopoly firm's market power ___ consumers' choices and may result in ____ prices, but there may be advantages to monopoly as well, such as economies of scale and technological innovations encouraged by the patent system.

less

The more responsive the supply of apartments is to changes in price (rent in this case), the ___ rents rise when the demand for apartments increases.

Law of diminishing marginal utility

The more you have the less you'll want. Each additional unit of a good provides less utility. This law explains the downward sloping of the demand curve. holds as addtl increments of resources are are to a certain purpose, the marginal benefit from those adtl increments will decline.

The supply curve for an industry, such as coffee, includes all the sellers in the industry. A change in the number of sellers in an industry changes the quantity available at each price and thus changes supply.

The number of sellers

Breakeven Point

The point at which the costs of producing a product equal the revenue made from selling the product.

lower ,

The price elasticity of demand varies between different pairs of points along a linear demand curve. The lower the price and the greater the quantity demanded, the ____the value of the price elasticity of demand.

greater

The price elasticity of supply is ___when the length of time under consideration is longer because over time producers have more options for adjusting to the change in price.

more less

The price-discriminating firm will adjust its prices so that customers with___ elastic demand pay lower prices than customers with ____elastic demand.

Quantity Demanded

The quantity buyers are willing and able to buy at a particular price during a particular period.

how many firms will survive

The range of output over which firms experience economies of scale, constant return to scale, or diseconomies of scale is an important determinant of ____ in a particular market.

increasing marginal returns

The range over which marginal products are increasing

factors of production

The resources available to the economy for the production of goods and services

Economics

The study of how humans make decisions in the face of scarcity.

What is the definition of economics?

The study of how humans make decisions in the face of scarcity.

Macroeconomics

The study of the economy as a whole or economic aggregates

Social (Total) Surplus

The sum of consumer surplus and producer surplus.

Social Surplus

The sum of consumer surplus and producer surplus.

There is a change in supply that increases the quantity supplied at each price

The supply curve shifts to the right. At a price of $6 per pound, the quantity supplied rises from the previous level of 25 million pounds per month on supply curve S1 (point A) to 35 million pounds per month on supply curve S2 (point A′). What is being shown in the graph?

Supply

The supply schedule (shows relationship between price and quantities supplied at different prices during a particular period all other things unchanged) and supply curve ( graph) show the relationships between the price of a product and the quantity supplied. The both show the same thing.

Law of Diminishing Marginal Utility

The tendency of marginal utility to decline beyond some level of consumption during a period. This law implies that all goods and services eventually will have downward-sloping marginal utility curves. It is the law that lies behind the negatively sloped marginal benefit curve for consumer choices.

Consumer Expectations

The third determinant of demands. Consider how this determinant effects demand today, and demand in the future. A rise in the expected FUTURE price of a good increases the CURRENT demand for that good.

Producer Expectations

The third determinant of supply If you expect that in the future the price of your product will go up, you will want to sell your product in the future. This will cause the supply of your product today to go down and the supply of your product in the future to go up. (If you think your stock will be of more value tomorrow, you will wait until tomorrow to sell it.)

The Marginal Product of Labor is the Change in:

The total output from employing one more worker.

Capital, Consumption

The two types of product any company can product are _______ goods and _________ goods.

What is the definition of opportunity cost?

The value of something that is given up by choosing one alternative over another. What you lose when you choose.

dependent variable

The variable that responds to the change

price elasticity, slope

The______ of demand is the ratio of the percentage change in quantity to the percentage change in price. The _____of a demand curve, for example, is the ratio of the change in price to the change in quantity between two points on the curve.

2

There are __ types of government interventions for negative externalities

Five

There are ___ factors of demand (or determinants) Price of the Given Commodity: It is the most important factor affecting demand for the given commodity,Price of Related Goods,Income of the Consumer,Tastes and Preferences, Expectation of Change in the Price in Future:

exceeds

There is no surplus at the equilibrium price; a surplus occurs only if the current price ____ the equilibrium price.

Theory of Consumer Behavior

description of how consumers allocate incomes among different goods and services to maximize their well-being

Maximizing Utility Formula

(MUx/Px) = (MUy/Py)

Refer to the figure of a monopolistically competitive firm, what are the profit-maximizing quantity and price?

Q1 and A

Price Elasticity of Supply Formula

(%▲ Qs)/ (%▲P) Short Run: • Inelastic Long Run: • Elastic

1.3// Economic Contraction occurs when:

-the PP curve shifts INWARDS <- -the economy moves from a point on the PP curve to a point WITHIN the area bounded by the curve

1.3// Economic Growth occurs when:

-the PP curve shifts OUTWARDS -> due to improvement on resources/tech - the economy moves from a point within the area bounded by the curve to the curve ITSELF

1.3// what does the production possibilities CURVE show

-the range of possible output combos for an economy -highlights scarcity of resources -has a concave shape, reflecting the law of increasing opportunity cost

False A change in income will lead to a shift of the demand curve, not a movement along the curve.

A change in consumers' income leads to a change in quantity demanded of a good. True False

a shift of the demand curve

A change in a demand shifter causes a change in demand

define perfectly elastic demand & perfectly inelastic demand

PERFECTLY ELASTIC DEMAND: demand for which a product's price remains constant regardless of quantity demanded, so there is a HORIZONTAL demand curve PERFECTLY INELASTIC DEMAND: demand for a which a product's quantity demanded remains constant regardless of price, so there is a VERTICAL demand curve

Patient protection and affordable care act; Indiviual mandate- required to have insurance or pay a fine. Each state is required to have health insurance exchanges, where insurances compete for business. Employer mandate- all employers with more than 50 employees must offer health insurance to their employees.

PPACA

Sunk Cost

A cost that has already been committed and cannot be recovered.

Consumer surplus is gained when?

A customer pays less than his or her personal value for a good or service

Hypothesis

A testable prediction, often implied by a theory

Surplus

Greater quantity supplied than quantity demanded. The initial effect of a decrease in demand is a surplus.

How do you calculate elasticity of demand?

% change in quantity demanded divided by % change in price

Elasticity Coefficient formula

% change in quantity of good A DIVIDED BY % change in price of good B

3.1// Price elasticity of demand

(demand elasticity) -the responsiveness of a product's quantity demanded (consumers) to a change in its price

Price elasticity of demand is greater than 1. Quantity demanded changes by a larger percentage than price, therefore total revenue will change in the direction of the quantity change.

-Price elastic -Quantity demanded changes by a(the) ____ % (of)than price. -What direction does total revenue change in the direction of?

Price elasticity of demand is equal to 1 Price and quantity demanded change by the same percentage and total revenue does not change

-Unit price elastic -Quantity demanded changes by a(the) ____ % (of)than price. -What direction does total revenue change in the direction of?

1.3// What makes the Production Possibilities Curve shift to the right -> ?

-increase in resources, productivity, tech

Functions of prices

-informing -directing -motivating

economic profit formula

= total revenue - explicit costs - implicit costs

Marginal Cost formula

=change in Total Cost DIVIDED BY change in Quantity

Average fixed cost (AFC) formula

=total fixed cost DIVIDED BY quantity

Key Economic Assumptions

1. Society has unlimited wants and limited resources 2. Due to scarcity, choices must be made. Every choice has a cost. 3. Everyone responds to incentives and acts in their own self-interest. 4.Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. 5. Real-life situations can be explained and analyzed through simplified models and graphs.

Four productive resources are

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

Four factors of production

4 categories: labor-human capital (physical or intellectual can be a gift (athletic) or developed training, education, experience), natural resources-land (can be found in nature, and can be used in production of goods/svc oil, fracking, gas, forest, land tree wind water minerals NOT crops they are grown by people) can not be made/culivated by humans, capital-machinery, factories, equipment (money is NOT a resource), entrepreneurship

Accounting Profit

A cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. (Total Revenue - Explicit Cost)

long-run average cost decreases.

As output increases, economies of scale occur when the

Law of Demand States

As price decreases quantity demanded increases

Additional costs incurred by 3rd parties outisde the production process when a unit of output is produced.

Additional external costs

Indifference curve

An ______ shows combinations of 2 goods that yield equal satisfaction.

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost will increase.

Determinants

Demand will change if their is a change in the _______ of demand (influences on buying plans), other things equal.

Capital Goods

Created for indirect consumption; products that create consumer goods

Perfect Monopolisitc

Both ______ and _______ have strong price competition.

Equals the percentage in the quantity demanded of a good or service at a specific price divided by the percentage change in the price of a related good or service.

Cross price elasticity of demand.

1.4// what type of goals are there and explain each

Complementary VS Conflicting economic goals may be complementary: when success in reaching one goal makes another goal easier to achieve (ex. economic growth + full employment) conflicting economic goals: when reachin one goal makes it harder for another one to be met (ex. full employment + price stability)

If two goods are complements, an increase in the price of one will lead to a reduction in the demand for the other—the cross price elasticity of demand is negative

Complements

Requires we know the % changes in price and in quantity demanded. Found by calculating between 2 points on a demand curve.

Computing price elasticity of demand

Quantity Demanded

The amount a consumer is WILLING and ABLE to purchase at a given price.

If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that good _______________ the quantity demanded by __________ percent. A. Increases; 20 B. Decreases; 2 C. Decreases; 10 D. Decreases; 20 E. Increases; 2

D. Decreases; 20

Social surplus

Economic surplus

People or firms who consume public goods without contributing to the cost of their production?

Free riders

Sprivate, E0, Ssocial, E1

If the firm takes only its own costs of production into account, then its supply curve will be ____, and the market equilibrium will occur at __. Accounting for additional external costs of $100 for every unit produced, the firm's supply curve will be ___. The new equilibrium will occur at .

Total Product (TP)

Is the amount of output that a firm produces in units

reduction ,increase , elastic , rises, falls

Moving from point A to point B implies a _____ in price and an _____ in the quantity demanded. Demand is _____ between these two points. Total revenue, shown by the areas of the rectangles drawn from points A and B to the origin, _____ . When you move from point E to point F, which is in the inelastic region of the demand curve, total revenue ____.

Non-Exludability

No one can be prevented from using what is available.

collusion

One way to avoid the uncertainty firms face in oligopoly is through ____. This may be overt, as in the case of a cartel, or tacit, as in the case of price leadership.

Tax imposed on the quantity of pollution that a firm emits; also called a pollution tax

Pollution charge

If quantity demanded is LESS than quantity supplied

Prices will fall

Up

Producer Surplus increases if the price goes _____

Comparative Advantage

The producer with the lowest opportunity cost.

Determinants of Demand - Income

This determinant of demand

Total Fixed Cost Formula

Total cost - Total variable cost

overt collusion

firms openly agree on price, output, and other decisions aimed at achieving monopoly profits

law of diminishing returns

holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become smaller and smaller. (this is also why the PPF is curved, rather than straight)

If quantity demanded EXCEEDS quantity supplied

prices will rise

2.3// Define Market Equilibrium

the stable point at which demand & supply curves intersect

improvement, increase, more, right

An _____ in technology usually means that fewer and or less costly inputs are needed. If the cost of production is lower, the profits available at a given price will _____, and producers will produce ____. With more produced at every price, the supply curve will shift to the ____, meaning an increase in supply.

decrease , left, increases , right

An increase in factor prices should _________ the quantity suppliers will offer at any price, shifting the supply curve to the _____ . A reduction in factor prices ________the quantity suppliers will offer at any price, shifting the supply curve to the _____.

False An increase in supply would shift the supply curve to the right.

An increase in supply is shown as a shift to the left of a supply curve. True False

right, left.

An increase in the number of sellers supplying a good or service shifts the supply curve to the ____; a reduction in the number of sellers shifts the supply curve to the ____.

An increase in the quantity of a good or service demanded at each price is shown as an increase in demand.

Here, the original demand curve D1 shifts to D2. Point A on D1 corresponds to a price of $6 per pound and a quantity demanded of 25 million pounds of coffee per month. On the new demand curve D2, the quantity demanded at this price rises to 35 million pounds of coffee per month (point A′). What is being shown in this graph.

System where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals; business managed independently by a company or individuals rather than by the state.

Private Enterprise

A variable that can change the quantity of a good or service supplied at each price. including (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers

Supply shifter

At point A on the curve, 25 million pounds of coffee per month are demanded at a price of $6 per pound. At point B, 30 million pounds of coffee per month are demanded at a price of $5 per pound.

This is a demand schedule; it shows quantities of coffee demanded per month in the US at particular prices, all other things unchanged. The data IS then plotted on the demand curve. What is plotted at point A & B?

it assumes that the goods and services produced by firms are differentiated

This model differs from the model of perfect competition in one key respect:

percentage of output accounted for by the largest firms in an industry

concentration ratio

Economics

the study of how humans make decisions in the face of scarcity

Accounting profit formula

total revenue - explicit costs

net benefit

the difference between the marginal benefit and the marginal cost of an option

Economic Profit

the difference between total revenue and total cost.

private benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company

What does Macroeconomics perspective focus on?

the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation.

2.1// Define 'Change in Quantity Demanded'

the effect of a price change on quantity demanded. (ex. increase $ in strawberries, lower quantity demanded)

marginal product

the extra output or change in total product caused by the addition of one more unit of variable input

Fallacy of False Cause

the incorrect assumptions that one event causes another because the two events to occur together.

allocative efficiency

the particular mix of goods a society produces represents the combination that society most desires.

allocative efficiency

the particular mix of goods and services most highly valued by society (most desires)

income elasticity of demand

the percentage change in quantity demanded at a specific price divided by the percentage change in income that produced the demand change, all other things unchanged:

Factors of Production

• Land • Labor • Capital • Entrepreneurship

When a firm is operating INSIDE the PPF

-a firm is not using its resources efficiently -the firm will need to increase production for one or both items being produced -represents unemployed resources

Principle of diminishing marginal return

-applies in the short run -if more and more variable input is added to a fixed input, after a while the additions to output will not be as large

Monopolistic competition

Is characterized by many firms selling differentiated products. It is easy for firms to enter or exit the market

Quantity Demanded

Is the amount of a good or service consumers are willing and able to buy at a specific price during a certain time period

Oligopoly

Is when there are only a few firms competing imperfectly because there are few firms. They are interdependent

where each player takes the best possible action given the action(s) of the other player(s)

Nash equilibrium

Situation where a 3rd party, suffers from a market transaction by others.

Negative Externality

The cross elasticity of demand for coffee and creamer is likely to be:

Negative because they are complements.

Range over which additional units of a variable factor reduce total output, given constant quantities of all other factors.

Negative marginal returns

Do price ceilings and floors change demand or supply?

Neither price ceilings nor price floors cause demand or supply to change. They simply set a price that limits what can be legally charged in the market. Remember, changes in price do not cause demand or supply to change. Price ceilings and price floors can cause a different choice of quantity demanded along a demand curve, but they do not move the demand curve. Price controls can cause a different choice of quantity supplied along a supply curve, but they do not shift the supply curve.

Suppose that the demand for ambulance service is perfectly inelastic. This would mean that a 50% increase in price would lead to:

No change in quantity demand.

Common Goods (Resources)

Non-Excludable Rivalry These are characteristics of _____ ______ Example : Fish, Air

Public Goods

Non-Excludable Non-Rivalry These are characteristics of _____ ______ Example: Freeways and Roads Provided by the government for free. Examples : National Defense, Public Fireworks, Lighthouses

A good whose demand rises as income rises. (Income elasticities are positive) -ie; housing, seafood, boogie shit.

Normal good

the two sets of curves measure different relationships. horizontal. horizontal

Notice that the various cost curves are drawn with the quantity of output on the horizontal axis. The various product curves are drawn with quantity of a factor of production on the horizontal axis. The reason is that _____. Product curves show the relationship between output and the quantity of a factor; they therefore have the factor quantity on the ____axis. Cost curves show how costs vary with output and thus have output on the ___axis.

Licenses issued by government agencies, which indicate that a worker has completed a certain type of education or passed a certain test.

Occupational licenses

market equilibrium

Occurs at that price for which quantity demanded by consumers is equal to quantity supplied by producers aka the ''Market clearing price''

importance of household budgets

One reason price changes affect quantity demanded is that they change how much a consumer can buy; a change in the price of a good or service affects the purchasing power of a consumer's income and thus affects the amount of a good the consumer will buy. This effect is stronger when a good or service is important in a typical household's budget. A change in the price of jeans, is probably more important in your budget than a change in the price of pencils. Suppose the prices of both were to double. You had planned to buy four pairs of jeans this year, but now you might decide to make do with two new pairs. A change in pencil prices, in contrast, might lead to very little reduction in quantity demanded simply because pencils are not likely to loom large in household budgets. The greater the importance of an item in household budgets, the greater the absolute value of the price elasticity of demand is likely to be.

Opportunity Cost Calculation

Opportunity cost of what get = Productivity give up / Productivity get When calculating opportunity cost, always put the other good in the numerator. Ex: - Opportunity cost of Onions? (Number of potatoes/number of onions). - Opportunity cost of Potatoes? (Number of Onions/Number of Potatoes).

Law of Demand Negative, Reverse

Other things equal, as price falls the quantity demanded rises. As price rises the quantity demanded falls. This relationship is a _____ or ______ relationship cause downward sloping curve

below , below

Panel (a) shows the marginal benefit curve of Figure 5.1 "The Benefits of Studying Economics." The total benefit of studying economics at any given quantity of study time is given approximately by the shaded area ___the marginal benefit curve up to that level of study. Panel (b) shows the marginal cost curve from Figure 5.3 "The Marginal Benefits and Marginal Costs of Studying Economics." The total cost of studying economics at any given quantity of study is given approximately by the shaded area ____the marginal cost curve up to that level of study.

Trading

People and nations can gain from specializing in the production of goods in which they have a comparative advantage and then trading.

If the demand for a good is elastic:

People substantially decrease the quantity demanded if the price rises by a small amount.

Perfect Competition Characteristics

Perfect Competition or Monopoly? Entry forces economic profit to zero in the long run.

Perfect Competition Characteristics

Perfect Competition or Monopoly? Large number of sellers and buyers producing a homogeneous good or service; easy entry.

Perfect Competition Characteristics

Perfect Competition or Monopoly? The equilibrium solution is efficient because price equals marginal cost.

Monopoly Characteristics

Perfect Competition or Monopoly? Because entry is blocked, a monopoly firm can sustain an economic profit in the long run.

Perfect Competition Characteristics

Perfect Competition or Monopoly? Determined by demand and supply; each firm is a price taker. Price equals marginal cost.

Perfect Competition Characteristics

Perfect Competition or Monopoly? Firms produce where marginal cost equals marginal revenue

Monopoly Characteristics

Perfect Competition or Monopoly? Large number of buyers, one seller; entry is blocked.

Price elasticity of demand is infinite. Even the slightest price change has enormous effects on quantity demanded.

Perfectly elastic

Price elasticity of demand is zero % change in quantity demanded stays the same no matter the % change in price. Theorhetically extreme/unrealsitic (Insulin)

Perfectly inelastic

fallacy of false cause

Reaching the incorrect conclusion that one event causes another because the two events tend to occur together

Below Equilibrium

Rent controls or a price ceiling on gasoline will cause a shortage in the market if the government sets the price ______ the ________ price.

Returns to the Factors of Production

Rent, wages, interest and profit (net revenue-net costs)

Factors of Production

Resources available to the economy for the production of goods and services. 1. Natural 2. Labor 3. Capital 4. Entrepreneurship

Tariffs

Taxes on imported goods Reduce efficiency of resource allocation Raises revenue for countries that impose them

Technology

Technology always improves productivity and increases supply.

Maintenance costs constitute the variable costs associated with building the road. In order to answer the first four parts of the question, you will need to compute total revenue, marginal revenue, and marginal cost, as shown at right: The total revenue is the P times the quantity at each point as shown in the chart below. The marginal revenue and marginal cost is the additional revenue and cost for one more million trips. The profit maximizing quantity and price is the point where MR = MC = 0.60. Using the midpoint convention, the number of trips will be 2.5 million and the price (toll) will be $0.85 per trip. icturePo

The Toll Road Company is considering building a toll road. It estimates its linear demand curve shown below. Assume that the fixed cost of the road is $0.5 million per year. Maintenance costs, which are the only other costs of the road, are also given in the table. 1. Calculate the total revenue at each price (Tolls per trip). 2. Calculate the marginal revenue and marginal cost. 3. What is the profit maximizing quantity and price using the midpoint convention?

table needed pg 63

The Whatzits Company is planning to develop new household gadgets. The following table shows the company's demand for financial capital for research and development, based on expected rates of return from sales. Every investment also yields an additional 5% social benefit. If the going interest rate is 9%, how much will Whatzits invest in research and development if it receives the social benefits of its investment? pg 63

long-run average cost lowest

The ___ (LRAC) curve is derived from the average total cost curves associated with different quantities of the factor that is fixed in the short run. The LRAC curve shows the ____cost per unit at which each quantity can be produced when all factors of production, including capital, are variable.

cross price elasticity

The ___ of demand measures the way demand for one good or service responds to changes in the price of another. It is the percentage change in the quantity demanded of one good or service at a specific price divided by the percentage change in the price of another good or service.

income elasticity,

The ___ of demand reflects the responsiveness of demand to changes in income. It is the percentage change in quantity demanded at a specific price divided by the percentage change in income.

Indifference Curve

The consumer's preferences are represented by the consumer's ________ ___________. The marginal rate of substitution

Total Fixed Cost

The cost of a firm's factors of production (land, capital, and entrepreneurship). Does not change as output changes.

perfectly inelastic, perfectly elastic, 1.00 , 0.50

The demand curve in Panel (a) is _____ . The demand curve in Panel (b) is ____. Price elasticity of demand is _____ all along the demand curve in Panel (c), whereas it is ___ all along the demand curve in Panel (d).

Income effect

the ___ of a price change reinforces the substitution effect if the good is normal; it moves consumption in the opposite direction if the good is inferior

monopoly power

the ability of a firm to make it impossible for rival firms to compete with it, either through advertising or in some other way

property rights

the ability of an individual to own and exercise control over scarce resources

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 than someone else for the same resource inputs.

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price. Slope of total revenue. Vertical/Horizontal

marginal product of labor

the additional output a firm produces as a result of hiring one more worker

marginal benefit

the amount by which an additional unit of an activity increases its total benefit.

marginal cost

the amount by which an additional unit of an activity increases its total cost.

shortage

the amount by which the quantity demanded exceeds the quantity supplied at the current price.

market

the institution that brings together buyers an sellers

Oligopoly

the market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.

shutdown point

the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run

each firm faces a downward-sloping demand curve.

A characteristic common in both oligopoly and monopolistic competition is:

Perfectly inelastic

A completely vertical demand curve. This means that price changes have no effect on quantity demanded.

Normative Statement

A statement that makes a value judgment. Ex: - We ought to do more to help the poor. - People in the USA should save more. - Corporate profits are too high.

Mixed Economies

A system with free markets but also some government intervention

A good for which demand decreases when income increases

Inferior good

How does a firm in a perfectly competitive environment adjust its output to price changes in the short run?

It adjusts its output so that MC = MR.

A gas station lowers the price of gasoline. The price elasticity of demand for gasoline is 0.2. What happens to the gas station's total revenue?

It decreases.

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 shows the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed.

The case when people engage in riskier behavior with insurance than they would if they did no have insurance

Moral hazard

Opportunity Cost

Most desirable alternative given up when a choice is made.

Benefit, Cost

Net benefit = total ____ - total _____

A change in technology alters the combinations of input or the types of inputs required in the production process.

Technology

Situation in which a firm has a high ratio of labor to capital

Labor intensive

Constant

A value that does not change

Disinflation

Prices increasing at slower rates.

Implicit Costs

The income you would have earned.

Total Costs(TC)

Fixed costs + variable costs (TFC+TVC=)

Equilibrium

Where marginal benefit is equal to marginal cost

margin

current level of activity

market oriented environmental tools

l policies create incentives to allow firms some flexibility in reducing pollution. The 3 main categories of market-oriented approaches to pollution control are pollution charges, marketable permits, and better-defined property rights.

Explain market efficiency using marginal benefit and marginal cost.

market efficiency is when marginal B = marginal C

How would a perfectly competitive firm use the marginal decision rule to determine the profit-maximizing quantity of output?

takes the market price, $0.40 and selects an output at which MR equals MC. Economic profit per unit is the difference between price and ATC ($0.14); economic profit is profit per unit times the quantity produced ($0.14 × 6,700 = $938).

opportunity cost

the idea that people make choices that maximize the value of objectives that serve their self-interes

Moral Hazard

when people engage in riskier behavior with insurance than they would if they did not have insurance.

Characteristics of the Monopoly Model

• Barriers to entry

Ratio of the percentage change in a dependent variable, to a percentage change in an independent variable.

Elasticity

benefit or satisfaction that a person gets from the consumption of a good or service.

Utility is the

If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good, the income elasticity of demand equals ________ and the good is ________ good.

-1/2; an inferior.

market demand

A firm's ability to exploit economies of scale is limited by the extent of ____ for its products.

80 percent

26- Suppose the price of a box of cereal rises by 40% and the price elasticity of demand is 2. What is the percentage change in the quantity demanded?

Consider the last purchase of two goods by a consumer. A bag of chips costs $1.75 and the marginal utility is 20. A cup of chili costs $2.50. What must the marginal utility of chili be for the consumer to maximize total utility? 50 29 35 48

29 This is the value at which the marginal utility divided by the price is equal for both goods. MU / P = 29/ 2.50 = 11.6 for chili, and 11.4 (20 / 1.75) for chips.

1. Command and control regulation offers no incentive to improve quality of the environment beyond the standard set by a particular law. Once regulation has been satisfied, polluters have 0 incentive to do better. 2. It is inflexible. Usually requires the same standard for all polluters, and pollution control technology as well. Meaning there is no distinctions between firms that it would be easy and inexpensive to meet the pollution standard—or to reduce pollution even further—and firms that might find it difficult and costly to meet the standard 3. They are written by legislators and the EPA, they are subject to compromises in the political process. Existing firms often argue (and lobby) that stricter environmental standards should not apply to them, only to new firms that wish to start production. Consequently, real-world environmental laws are full of fine print, loopholes, and exceptions.

3 Difficulties with command and control environmental regulation

Oligopoly

A market structure in which a few large firms dominate a market.

Trade off

ALL the alternatives that we give up when we make a choice

Situation where the seller or buyer has more information than the other regarding the quality of the item being sold

Asymmetric information

35 million, 15 million, shortage

At a price of $4 per pound, the quantity of coffee demanded is ___ pounds per month and the quantity supplied is ___ pounds per month. The result is a ____ of 20 million pounds of coffee per month.

market economy

Economic decisions are made by individuals or the open market.

In order for markets to achieve efficient outcomes, property rights must be (choose 2): • Exclusive • Complete • Legal • Private • Transferable

Exclusive and transferable.

The Natural Rate of Unemployment

Frictional and structural unemployment are present at all times because people will always be between jobs or replaced by technology. So, the economy is doing great if there is only frictional and structural unemployment. Equals frictional plus structural unemployment. The amount of unemployment that exists when the economy is healthy and growing.

analytical approach through which strategic choices can be assessed.

Game theory

Trade off

Giving up one thing to get something else caused by scarce resources

direct government funding of R&D, tax incentives for R&D, protection of intellectual property, and forming cooperative relationships between universities and the private sector

Government has a variety of policy tools for increasing the rate of return for new technology and encouraging its development, including

Indifference Curve

Graph that shows combination of two goods that yield equal levels of utility

Shortage

Greater quantity demanded than quantity supplied. The initial effect of an increase in demand is a shortage.

(Health maintenance organization) Organization that provides healthcare and is paid a fixed amount per person enrolled in the plan- regardless of how many services are provided

HMO

Profit = Total Revenue - Total Cost

How do you measure profit

perfect competition

Is a market structure in which firms sell identical products each with a small market share, all firms are price takers, there are many buyers &sellers, and both have complete info about the product & price. They have the ability to enter or exit the market

What is an example of factors of production?

Land, Capital

Which level of output maximizes profit by a monopolistic competitor?

MR=MC

A market in which there is only one buyer of a good, service, or factor of production

Monopsony is the buyer's counterpart of monopoly. Monopoly means a single seller; monopsony means a single buyer.

rent, wages, interest, and profit or loss

Payments to the factors of production are

To reduce negative externalities policy makers create what tool?

Regulations and impose legal restrictions

Amount by which the quantity demanded exceeds the quantity supplied at the current price

Shortage

When the estimated rates of return go primarily to society; ie, providing free education

Social rate of return

GDP Deflator

The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers. GDP Deflator equals Nominal GDP divided by Real GDP times 100.

Marginal Benefit

The change in the total benefit that occurs when a person consumes another unit of the good.

10

Theresa runs a factory that makes lie detectors in Detroit, Michigan. This month, Theresa's 34 workers produced 690 lie detectors. Suppose Theresa adds one more worker and, as a result, her factory's output increases to 700. Theresa's marginal product of labor from the last worker hired equals

Opportunity Cost

What must be given up to obtain something that is desired.

Perfectly elastic demand

When the demand curve is a horizontal line

Property Rights

a set of rules that specify the ways in which an owner can use a resource.

Perfectly competitive firms produce where marginal cost equals marginal revenue. Monopoly firms produce where marginal cost equals marginal revenue and charge the corresponding price on the ----------.

demand curve

There are 3 categories of price elasticities of demand. If the price elasticity of demand is greater than 1, demand is termed ---- -----. If it is equal to 1, demand is ----- ------ -----. And if it is less than 1, demand is ----- ---------.

price elastic; unit price elastic; price inelastic

Buyer expectations as a demand shifter

expect gas to go up tomorrow buy gas today, expected new tech of tv,computer can slow down sales, goods that can be easily stored or consumption can be postponed are strongly affected by buyer expectations. Shift the entire demand curve to the right if buy today for future exp. Shift the entire demand curve to right if demand decrease hold off on purchase like tv.

What is the study of strategy that uses an analytical approach to understand how an oligopoly firm makes decisions that determine the payoffs they receive?

game theory

1.3// Production Possibilities schedule/curve

graph/table that shows the possible output combos for an economy

2.3// The role of price

if there's a shortage or surplus, the price in a competitive market changes until equilibrium is attained

law of diminishing marginal utility

implies that all goods and services eventually will have downward-sloping marginal utility curves

In the health insurance market, moral hazard occurs when:

insured people adopt an unhealthy lifestyle.

equalibrium price

intersection of the demand curve and the supply curve. Quantity demanded equals the quantity supplied.

exclusive property rights

one that allows its owner to prevent others from using the resource.

exclusive property right

one that allows its owner to prevent others from using the resource. The owner of a house, for example

transferable property right

one that allows the owner of a resource to sell or lease it to someone else. In the absence of transferability, no exchange could occur.

normative statement

one that makes a value judgment. Such judgment is the opinion of the speaker; no one can "prove" that the statement is or is not correct.

capital intensive

production processes that use a high ratio of capital to labor inputs

Purchasing power

refers to the quantity of goods and services that can be purchased with a given budget.

concentration ratio

reports the percentage of output accounted for by the largest firms in an industry. The higher the concentration ratio, the more the firms in the industry take account of their rivals' behavior. The lower the concentration ratio, the more the industry reflects the characteristics of monopolistic competition or perfect competition.

Theory

representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation.

Production Possibilities Frontier

represents the point at which a country's economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.

1 pollution changes

tax imposed on the quantity of pollution that a firm emits. offers incentive to reduce emissions as long as costs are less than the tax dep on cans

transferable property right

that allows the owner of a resource to sell or lease it to someone else.

marginal decision rule

to maximize the net benefit of an activity, a decision maker should increase an activity up to the point at which marginal benefit equals marginal cost.

How do economists assume individuals make choices?

whatever will serve their own self-interest

Average Total Cost (ATC) formula

= total cost DIVIDED BY quantity

change in quantity supplied

A change in price causes a movement along the supply curve

A normal good

A good which demand increases as income increases

downward

Because products in a monopolistically competitive industry are differentiated, firms face _______-sloping demand curves

Loss in net benefit resulting from a failure to carry out an activity at the most efficient level; Loss in social surplus that occurs when a market produces an inefficient quantity.

Deadweight Loss

Identify and explain the deadweight loss in the case of underproduction. Use a graph in your answer.

Deadweight loss is lost consumer/producer surplus that would occur in an efficient market. refer to notes

Real GDP

Expressed in constant dollars...adjusts for inflation.

Price Controls

Government-imposed limits on the prices that producers may charge in the market.

price inelastic

If the absolute value of the price elasticity of demand is less than 1, then demand for the product is ________.

Capital Goods

Infrastructure, Roads, Buildings, Freeways, Streets and so on

Households

Own and sell factors of production Buy and consume goods and services.

Give an example of a price ceiling. Explain its effect on the market using a graph.

Price ceiling - a maximum allowable price Rent control is a price ceiling. Keeps the demand and supply below equilibrium on a graph and creates a shortage

PPC and PPF

Production Possibilities Curve is equivalent to Production Possibilities Frontier

Income

Rent plus wages plus interest plus profit

Externality

The effect of a market exchange on a third party who is outside or "external" to the exchange is called an externality. Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers.

production funtion

The relationship between factors of production and the output of a firm

Economics

The science of scarcity

Marginal Benefit

What you gain when you get one additional unit of something.

Scientific Method

a systemic set of procedures through which knowledge is created

What is the long-run economic profit for a monopolistically competitive firm? Explain.

decrease in demand and increase in cost economic profit will equal 0 This is due to new competition entering and providing substitues

1.4// Explain command economy & pros and cons

economic system, based on PUBLIC OWNERSHIP & central planning, gov controlled PROS: income distribution, economic growth CONS: inefficiencies, planning difficulties, lack of freedom

economies of scale

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

Average Fixed Cost

fixed cost divided by the quantity of output produced

Utility maximization requires seeking the ____ total utility from a given budget.

greatest

change in quantity demanded

movement along the demand curve showing that a different quantity is purchased in response to a change in price. Price alone does not determine quantity. 2 variables. a change in quantity demanded is not a change or shift in the demand curve: it is a movement along the demand curve.

constant returns to scale

occur when long-run average cost stays the same over an output range.

The substitution effect of a price change changes consumption in a direction ------- to the price change.

opposite

Explicit costs

out-of-pocket costs, that is, payments made to factors of production such as labor and capital. (wages, or rent, for example)

The outcome of a strategic decision

payoff

Why are price controls inefficient?

prevent a market from adjusting to its equilibrium price and quantity, and thus will create an inefficient outcome (shortage/surplus)

The utility of a good or service is determined by how much _____a particular consumer obtains from it. Utility is not a quality inherent in the good or service itself.

satisfaction

1.4// Consumer sovereignty:

the effect of consumers wants/needs on production decisions

1.4// Laissez Faire , the invisible hand

the government should not intervene with economic activity

net benefit

the total benefit of the activity minus its opportunity cost. Economists maintain that in order to maximize net benefit, consumers and firms evaluate each activity at the margin—they consider the additional benefit and the additional cost of another unit of the activity. Should you "supersize" your order at McDonald's? Will the additional beverage and the additional french fries be worth the extra cost? Should a firm hire one more worker? Will the benefits to the firm of hiring this worker be worth the additional cost of hiring him or her?.

define 'Total Revenue' and what is the equation

the total income earned from a product -product's price X quantity demanded P x QD=TR

independent variable

the variable that induces a change

Utility is maximized when ____________ equal the budget available and when the ratios of marginal utility to price are equal for all goods and services a consumer consumes; this is the ____________

total outlays utility-maximizing condition.

Average Revenue (AR)

total revenue divided by the quantity of the product sold

average revenue

total revenue divided by the quantity sold

how does each elasticity demand affect total revenue

when demand is ELASTIC: its when a price change causes total revenue to change in the opposite direction when demand is INELASTIC: its when a price change in price causes total revenue to change in the same direction when demand is UNIT-ELASTIC: its when a price change does not affect total revenue

Utility-Maximizing Rules

when total outlays equal the budget available and when the ratios of marginal utilities to price are equal for all goods and services. This rule states that the consumer will allocate income is such a way that MU (marginal utility) of product A/price of A = MU of product B/price of B

Determinants of the Price Elasticity of Demand

• Availability of substitutes • Importance of the item in household budgets • Time

Reducing Effects of Asymmetric Information

• CarFax • Collateral/cosigners • Professional licenses

model of demand and supply

uses demand and supply curves to explain the determination of price and quantity in a market. The logic of the model of demand and supply is simple. The demand curve shows the quantities of a particular good or service that buyers will be willing and able to purchase at each price during a specified period. The supply curve shows the quantities that sellers will offer for sale at each price during that same period. By putting the two curves together, you should be able to find a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will offer for sale.

utility is maximized when total outlays equal the budget available and when the ratios of marginal utilities to prices are equal for all goods and services

utility maximizing condition

What is excess capacity?

when a business produces less than it actually could

social rate of return

when the estimated rates of return go primarily to society; for example, providing free education

Nash Equilibrium

where each player takes the best possible action given the action(s) of the other player(s).

Consumer Surplus Formula

willingness to pay / price

Scientific Method

A logical, systematic approach to the solution of a scientific problem

Total Revenue Formula

Price x Quantity

Marginal Product (MP)

The change in total output that is produced by a unit change in input

1.1// utility

the satisfaction gained from any action

Key takeaways

•The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves. •A surplus exists if the quantity of a good or service supplied exceeds the quantity demanded at the current price; it causes downward pressure on price. A shortage exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price; it causes upward pressure on price. •An increase in demand, all other things unchanged, will cause the equilibrium price to rise; quantity supplied will increase. A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease. •An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease. •To determine what happens to equilibrium price and equilibrium quantity when both the supply and demand curves shift, you must know in which direction each of the curves shifts and the extent to which each curve shifts. •The circular flow model provides an overview of demand and supply in product and factor markets and suggests how these markets are linked to one another.

Income Elasticity of Demand Formula

(%▲Q)/(%▲I) Normal Goods: • Income increase, Qd increases. • Income elasticity has a positive sign. Inferior Goods: • Income increases, Qd decreases. • Income elasticity has a negative sign.

Price Elasticity of Demand Formulas

(%▲Qd)/(%▲P) Take the absolute value (the answer is always positive).

Cross Elasticity of Demand Formula

(%▲Qx)/(%▲Oy) Substitute Goods: • Pcoke increases, Qd pepsi increases. • Same direction • Cross elasticity has a positive sign Complementary Goods: • Phot dogs ^ Qd buns decreases. • Opposite direction. • Cross elasticity has a negative sign.

True These are all examples of market-oriented methods to reducing pollution.

(T/F) The three main categories of market-oriented approaches to pollution control are pollution charges, marketable permits, and better-defined property rights.

1.1// what do the different economic sectors determine?

(the sectors are: households, businesses, gov, foreign markets) -unemployment rate - level of prices - total economic output

Price floors

- minimum limits on prices established by govt unit - price that can NOT be undercut

price ceiling

- upper limits imposed by a govt unit - price that can NOT be exceeded

Price elasticity is less than 1 Quantity demanded changes by a smaller % than price, therefore total revenue will move in the direction of the price change. .

-Price inelastic -Quantity demanded changes by a(the) ____ % (of)than price. -What direction does total revenue change in the direction of?

2.1// The Demand curve

-downward slope theres a demand schedule & and a demand table which is a: a table or a graph that shows the possible combos of prices & quantity demanded of a product

1.4// define traditional economy

-economic system in which economic decisions are made on the basis of custom

2.1// Normal products VS inferior products

-part of the 'income' in demand factors. Normal products: products whose demand changes DIRECTLY w/ income (when income increases, curve shifts> right. ex, luxury inferior products: products whose demand changes INVERSELY w/ income (when income decreases, curve shifts < left). ex, second hand suit to expensive suit

2.1// Substitute Vs Complementary

-part of the 'prices of other products' in demand factors Substitute products: products that can be consumed in place of one another, rise in other product's price, causes curve shift >to right Complementary products: products that are consumed together, rise in other product's price causes curve shift <to left. ex price of car goes^ so demand for gas goes down

1.3// Explain the points out of the PP curve and the points inside the curve

-points inside the curve is INEFFICIENT (resources are not being fully used) - points outside the curve is UNATTAINABLE (not enough resources, production can only happen here if economy grows

Things that effect the demand curve

-price -changes in ceteris paribus -taste -income -wealth of group -expectations -size of group

unitary elastic demand curve

-price elasticity demand is unitary - equal to 1 -unit elastic -changes in price brings about the same percentage change in quantity demanded

1.3// explain the role of scarcity

-scarcity occurs when people want more something than is actually available -forces people to make choices

Market demand curve

-shows what quantities will be demanded by all consumers in a certain market at various prices - sum of all individual demand curves

Affects of Supply

-technology -# of suppliers -natural disasters -prices of related goods -prices of productive services -expectations abt the future

1.1// Define 'Economics' & explain each branch

-the study of how to distribute scarce resources to make choices Has 2 branches: A) Microeconomics: the branch of economics that focuses on the behavior of individuals in various markets B) Macroeconomics: the branch of econ that takes a wide ranging view of the economy, studying the behavior of economic sectors. (household, businesses, government, foreign markets)

1.2// what do economists assume about consumers?

-they think rationally -they want to maximize their own utility (satisfaction)

Factors that effect price elasticity

-time -many substitutes -less brand loyalty

3 broad types of economies

-traditional economy -command/planned economy -market economy

monopsony power

. A buyer has monopsony power if it faces an upward-sloping supply curve for a good, service, or factor of production. For example, a firm that accounts for a large share of employment in a small community may be large enough relative to the labor market that it is not a price taker. Instead, it must raise wages to attract more workers. It thus faces an upward-sloping supply curve and has monopsony power.

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0- In 1 hour, Jean can bake 6 cakes and wash no cars, or wash 2 cars and bake no cakes. During the same hour, Dan can bake 4 cakes and wash no cars, or bake no cakes and wash 4 cars. Currently, Jean is spending half of the time baking cakes and half of the time washing cars. Dan is also splitting the time baking cakes and washing cars. What is the total number of baked cakes and washed cars in 1 hour by both Jean and Dan under the current circumstances?

2.2// what are the different supply factors

1) # of producers (an ↑ of producers, can cause shift>) 2) resource prices (an ↑of Rprice, cause < shift) 3) state of technology (an ↑ in tech, cause > shift) 4)prices of related products(an ↓ in related, cause>shift) opposite^ 5) changes in nature (better weather, cause > shift) 6) producers expectations (if farmer expect prices will soon fall, they will try to supply more right now so cause > shift.

1.1// what are the different economic resources & explain each

1) NATURAL resources: resources from nature used in production (ex. raw materials, land) 2) CAPITAL resources: processed materials used in production (ex. buildings, equipment) 3)HUMAN resources: a) Labour-human effort employed in production b) Entrepreneurship- risk-taking, innovation necessary for production

what are the different factors that affect price elasticity of demand

1) Portion of consumer incomes(ex.TVs on boxing day) 2) Access to substitutes(the more narrowly a product is defined, the more elastic demand will be) so like if nike shoes increases prices by alot, the QD will change in % a lot so it would be elastic 3)Necessities VS luxuries (sportscar/yachts tend to be elastic) 4) time

Increasing Marginal Returns

A level of production in which the marginal product of labor increases as the number of workers increases.

1.3// The Production Possibilities Model is based on several assumptions, what are they?

1) an economy only produces 2 products 2) resources & technology are fixed 3) All economic resources (natural, capital, human) are used at their fullest capacity

1.4// what are the major economic goals?

1) economic efficiency (maximizing resources) 2) economic growth 3) Income equity (fairness) 4) full employment 5) viable balance of payments (balance of im&exports) 6) price stability (no inflation/deflation) 7) environmental stability

1.4// what are the questions society must answer

1) what to produce 2) how to produce 3) to whom to produce

If the government taxes an industry that creates pollution, the tax - i. decreases the pollution. ii. increases the price of the product produced by the firms. iii. decreases the quantity of the good produced.

1, 2, and 3.

2 conditions to achieve efficiency (wight benefis and costs to max net benefit)

1-marketplace must be competitive or function as if it were 2-concerns property rights (producer must possess rights to goods ans services they produce and consumers posses property rights to goods/svc when bought)( set of rules that specify the ways in which an owner can use a resource)

3 features of economic approach

1. Economists give special emphasis to the role of opportunity costs in their analysis of choices. 2. Economists assume that individuals make choices that seek to maximize the value of some objective and that they define their objectives in terms of their own self-interest. 3. Individuals maximize by deciding whether to do a little more or a little less of something. Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue

Three Types of Unemployment

1. Frictional unemployment - temporary unemployment or being between jobs. Seasonal unemployment is a specific type of frictional unemployment which is due to time of year and hte nature of the job. 2. Structural unemployment - Changes in the labor force make some skills obsolete. These workers do not have transferable skills and these jobs will never come back. Workers must learn new skills to get a job. 3. Cyclical Unemployment - Unemployment caused from a recession. As demand for goods and services falls, demand for labor falls and workers are fired.

A college student often purchases candy bars or bags of potato chips between classes; he tries to limit his spending on these snacks to $8 per week. A bag of chips costs $0.75 and a candy bar costs $0.50 from the vending machines on campus. He has been purchasing an average of 6 bags of chips and 7 candy bars each week. He is a careful maximizer of utility and he estimates that the marginal utility of an additional bag of chips during a week is 6. In your answers use B to denote candy bars and C to denote potato chips. How much is he spending on snacks? How does this amount compare to his budget constraint? What is the marginal utility of an additional candy bar during the week?

1. He is spending $4.50 (= $0.75 × 6) on potato chips and $3.50 (= $0.50 × 7) on candy bars, for a total of $8. His budget constraint is $8. 2. In order for the ratios of marginal utility to price to be equal, the marginal utility of a candy bar must be 4. Let the marginal utility and price of candy bars be MUB and PB, respectively, and the marginal utility and price of a bag of potato chips be MUC and PC, respectively. Then you want: MUC / PC = MUB / P B You know that PC is $0.75 and PB equals $0.50. You are told that MUC is 6. Thus: 6 / 0.75 = MUB / 0.50 Solving the equation for MUB, you find that it must equal 4.

Profit Maximization: Output and Price Decisions

1. Profit is maximized when MR = MC 2. The profit-maximizing output is 125 pairs of Tommy jeans per day. 3. The profit-maximizing price is $75 per pair 4. ATC is $25 per pair 5. The firm makes an economic profit of $6250 a day

1. To produce 9 jackets, Aclome uses 4 units of labor. 2. In the long run, Aclome will substitute capital for labor. It cannot make this adjustment in the short run, because its capital is fixed in the short run.

1. Suppose Aclome Clothing is operating with 20 units of capital and producing 9 units of output at an average total cost of $67, as shown in Figure 8.8 "Marginal Cost, Average Fixed Cost, Average Variable Cost, and Average Total Cost in the Short Run." How much labor is it using? 2. Suppose it finds that, with this combination of capital and labor, MPK / PK > MPL / PL. What adjustment will the firm make in the long run? Why does it not make this same adjustment in the short run?

Causes of Inflation

1. The Government prints too much money. Goverments that keep printing money to pay debts end up with hyperinflation. 2. Demand - Pull Inflation - Too many dollars chasing too few goods. An overheated economy with excessive spending but same amount of goods. 3. Cost - Push Inflation - Higher production costs increase prices. A negative supply shock increases the costs of production and forces producers to increase prices.

Two Ways to Maximize Profits

1. The Total Method 2. The Marginal Method

Total cost = 60,000 + 50,000 + 140,000 = 250,000. With an output of 20,000 units, average total cost = total cost/output = 250,000 / 20,000 = ($12.50).

A company's yearly expenses consist of rent of $60,000, utilities of $50,000, and payroll of $140,000. It will produce 20,000 units this year. What is this company's total average cost? $3.00 $9.50 $12.50 $5.50

Price Floor

A legal minimum on the price at which a good can be sold. They prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Ex: - Minimum wage

Economy must as 3 scarcity questions and how to allocate resources

1. What should be produced? Using the economy's scarce resources to produce one thing requires giving up another. Producing better education, for example, may require cutting back on other services, such as healthcare. A decision to preserve a wilderness area requires giving up other uses of the land. Every society must decide what it will produce with its scarce resources. 2. How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. Should a firm employ a few skilled workers or a lot of unskilled workers? Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or recycled raw materials to make their products? 3. For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. For example, representatives of the poorest nations on earth often complain that energy consumption per person in the United States is 17 times greater than energy consumption per person in the world's 62 poorest countries. Critics argue that the world's energy should be more evenly allocated. Should it? That is a "for whom" question.

unit elastic.

20- If a 10 percent price increase generates a 10 percent decrease in quantity demanded, then demand is

Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. In the absence of any government regulation, how many tons of leather will be produced?

400 tons

income elasticity of demand formula

= % change in quantity demanded DIVIDED BY % change in income

Elasticity formula

= % change in the dependent variable DIVIDED BY % change in the independent variable

Marginal Utility (MU)

= change in total utility / change in quantity consumed

Total revenue formula

= price x quantity

Average Variable Cost (AVC) formula

=total variable cost DIVIDED BY quantity

Budget Line

A _____ shows combinations of 2 goods, a consumer is able to consumer, given a budget constraint

consumer's budget constraint

A ______ ______ _____ shows the combination of two goods that a person can purchase given her income and the prices of the goods. The trade-off between two goods. a restriction that total spending on the two goods cannot exceed the budget available

Lemon

A _____is a product that turns out, after the purchase, to have low quality. When the seller has more accurate information about the quality of the product than the buyer, the buyer will be hesitant to buy, out of fear of purchasing one

monopsony power

A buyer has monopsony power if it faces an upward-sloping supply curve for a good, service, or factor of production.

Price Taker

A buyer or seller that is unable to affect the market price. No price setting power. Ex: Potatoes - Lots of buyers, sellers, easy entry/exit, identical product, and plenty of price information.

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A car maker wants to raise the price of model T cars by 15% due to increased cost of production. Can you help this car maker to figure out by how many cars his sales for model T cars will drop if the price elasticity of demand is 2 and the quantity demanded was 200 per day?

technology as a supply shifter

A change in technology alters the combinations of inputs or the types of inputs required in the production process. An improvement in technology usually means that fewer and/or less costly inputs are needed. If the cost of production is lower, the profits available at a given price will increase, and producers will produce more. With more produced at every price, the supply curve will shift to the right, meaning an increase in supply. EXComputers are much smaller and are far more powerful than they were only a few years ago—and much cheaper to produce. The result has been a huge increase in the supply of computers, shifting the supply curve to the right. While you might usually think of technology as enhancing production, declines in production due to problems in technology are also possible. Outlawing the use of certain equipment without pollution-control devices has increased the cost of production for many goods and services, thereby reducing profits available at any price and shifting these supply curves to the left.

change in supply

A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left (decrease of supply) or right (increase of supply).

Strategic Choice

A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account

Buyers may assume that the lower price implies lower quality.

A computer shop has a lot of used laptops that are not selling. The owner decides to cut the prices of the laptops to sell a greater quantity. In a market with imperfect information, what may buyers assume about these low-price used laptops? Buyers may assume that the lower price is temporary and they should take advantage of the deal. Buyers may assume that the lower price implies lower quality. Buyers may assume that the lower price implies that the company is not doing well.

Externalities

A cost or benefit of producing a product is passed onto someone else or spills over to a third party outside the exchange. Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers

Externalities

A cost or benefit of producing a product is passed onto someone else or spills over to a third party.

marginal decision rule

A firm chooses its factor mix in the long run on the basis of the _____; it seeks to equate the ratio of marginal product to price for all factors of production. By doing so, it minimizes the cost of producing a given level of output.

many other firms produce identical products.

A firm in perfect competition is a price taker because

Economies and Diseconomies of Scale

A firm is said to experience economies of scale when long-run average cost declines as the firm expands its output. A firm is said to experience diseconomies of scale when long-run average cost increases as the firm expands its output. Constant returns to scale occur when long-run average cost stays the same over an output range.

downward-sloping horizontal upward-sloping

A firm may experience economies of scale, constant returns to scale, or diseconomies of scale. Economies of scale imply a ______ long-run average cost (LRAC) curve Constant returns to scale imply a _____LRAC curve. Diseconomies of scale imply an ______ LRAC curve.

natural monopoly.

A firm that confronts economies of scale over the entire range of output demanded in an industry is a

natural monopoly

A firm that confronts economies of scale over the entire range of outputs demanded in its industry

natural monopoly.

A firm that confronts economies of scale over the entire range of outputs demanded in its industry

Natural Monopoly Goods

A firm that confronts economies of scale over the entire range of outputs demanded in its industry Excludable Non-Rivalry These are characteristics of _____ ______ ______ Example : Cable Television, Internet, electricity, water, natural gas

excess capacity

A firm that operates to the left of the lowest point on its average total cost curve has excess capacity.

price setter

A firm that sets or picks price depending on its output decision is called a ____. A price setter possesses monopoly power.

Dominant Strategy Equilibrium

A game in which there is a dominant strategy for each player. The same strategy regardless of the strategies of other players.

Inferior good

A good for which demand decreases when income increases

Cartel

A group of firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms.

Law of Demand

A higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded.

Perfectly elastic

A horizontal demand curve. This means that even the smallest price changes have enormous effects on quantity demanded.

theory

A hypothesis that has not been rejected after widespread testing and that wins general acceptance

price ceiling

A legal maximum on the price at which a good can be sold

Price Ceiling

A legal maximum on the price at which a good can be sold. They prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Ex: - Price ceiling on apartment rents. - Gas

price floor

A legal minimum on the price at which a good can be sold

Decreasing Marginal Returns

A level of production in which the marginal product of labor decreases as the number of workers increases.

at a price of $2.80, the quantity demanded and quantity supplied are both 7,500 units of bread. At that price and quantity, the market is in equilibrium. If the country decided to set a price ceiling at $2.40, then 8,000 units would be demanded, and 6,400 units would be supplied. A shortage is equal to quantity demanded minus quantity supplied. This would therefore lead to a shortage of 1,600 units (8,000 − 6,400). At a price of $2.00, the shortage would be 3,000 units. If there were a price ceiling at $3.60, however, there would be no effect on the market. The equilibrium price is $2.80, which is already below the price ceiling of $3.60.

A low-income country decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor. The conditions of demand and supply are given. What are the equilibrium price and equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at $2.40? At $2.00? At $3.60?

Monopoly

A market in which there are many buyers but only one seller. ° No close substitutes ° Barriers to entry

Monopsony

A market in which there is only one buyer of a good, service, or factor of production

monopsony

A market in which there is only one buyer of a good, service, or factor of production is called a monopsony. Monopsony is the buyer's counterpart of monopoly. Monopoly means a single seller; monopsony means a single buyer.Thus, compared to a competitive market, a monopsony solution generates a lower factor price and a smaller quantity of the factor demanded. Like any firm with market control, monopsony does not efficiently allocate resources. Thus, they create deadweight loss.

Natural Barrier to Entry

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

Perfect Competition

A market with a large number of firms producing identical (homogeneous) goods or services, a large number of buyers and sellers, easy entry and exit in the industry, and complete information about prices in the market.

thin market. thick market

A market with few buyers and sellers is referred to as a _____ A market with many buyers and sellers is called a _____.

Cross Elasticity of Demand (XED)

A measure of how much the demand for a product changes when there is a change in the price of another product.

Income Elasticity of Demand

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

barriers to entry.

A monopolist can make an economic profit in the long run because of

a large number of firms and easy entry and exit.

A monopolistically competitive industry features some of the same characteristics as perfect competition:

excess

A monopolistically competitive industry will have some _________ capacity, which may be viewed as the cost of the product diversity that this market structure produces.

less

A monopoly firm produces an output that is ____ than the efficient level. The result is a deadweight loss to society, given by the area between the demand and marginal cost curves over the range of output between the output chosen by the monopoly firm and the efficient output.

Change in quantity demanded

A movement along a demand curve that results from a change in price

Mike purchases fewer boxes of cookies when his income falls. Cookies must be:

A normal good.

Why is the demand curve perfectly elastic in perfect competition?

A perfect elasticity of demand refers to a situation where any increase in price forces the demand to drop. Therefore, perfect competition firms will exhibit a horizontal line in its individual demand curve, because exact substitutes are available in the market.

sell all of its output at the prevailing market price

A perfectly competitive firm can

Excludability

A person can consume a product if (s)he is willing and able to pay for the product.

Positive Externalities

A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected.

same direction

A positive income elasticity of demand means that income and demand move in _____ direction.

How does a market eliminate shortages and surpluses?

A price higher than the equilibrium price increases the quantity supplied and reduces the quantity demanded, causing a surplus --> (>price = >surplus). A price lower than the equilibrium price increases the quantity demanded and reduces the quantity supplied, causing a shortage --> (<price = >demand).

Moral Hazard Problem

A problem that arises when people don't have to bear the negative consequences of their actions.

Scarcity

Exist when ther is not enough of something (product,service, resource) to satisfy everyone's wants

Charge lower prices on tickets to students and higher to business travelers Correct! Price discrimination refers to the charging of different prices to different consumers based on differences in the price elasticity of demand.

A recently hired CEO for an airline is tasked with increasing profits, so a strategy of price discrimination is implemented based on multi-part pricing for flights. Which of the following could the CEO do to price discriminate? Charge lower prices on tickets to business people and higher prices to students Charge a higher price for first class and less for coach Charge higher prices to both students and business travelers for checking baggage Charge lower prices on tickets to students and higher to business travelers

Budget Constraint

A restriction that the total spending cannot exceed the budget available. Ex: - Suppose that in addition to movies, Henry enjoys concerts, and the average price of a concert ticket is $10. He must select the number of movies he sees and concerts he attends so that his monthly spending on the two goods does not exceed his budget.

Change in demand

A shift in a demand curve

Market Equilibrium

A situation in which quantity demanded equals quantity supplied. The initial effect of an increase in demand is a shortage. The initial effect of a decrease in demand is a surplus.

Perfectly Inelastic

A situation in which the price elasticity of demand is zero.

Production Efficiency

A situation in which we cannot produce more of one good or service without producing less of something else. (Trade Off)

efficiency condition

A situation that requires a competitive market with well-defined and transferable property rights.

Positive Statement

A statement of fact or a hypothesis. A factual claim about how the world actually works Ex: - It is raining outside. - Microsoft is the largest producer of operating systems for personal computers in the world.

demand shifter

A variable that can change the quantity of a good or service demanded at each price the demand shifters are likely to include (1) consumer preferences, (2) the prices of related goods and services, (3) income, (4) demographic characteristics, and (5) buyer expectations.

supply shifter

A variable that can change the quantity of a good or service supplied at each price. Supply shifters include (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers.

supply shifter

A variable that can change the quantity of a good or service supplied at each price. supply shifters include (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers. When these other variables change, the all-other-things-unchanged conditions behind the original supply curve no longer hold. Let's look at each of the supply shifters.

perfectly inelastic, Perfectly elastic

A vertical supply curve is said to be ________. A horizontal supply curve is said to be __________.

Refer to graph to answer the following and show on the graph, What is the profit-maximizing quantity of output if the price is $30? What is the average total cost of that quantity? What is the firm's profit per unit? What is their total profit?

A) profit maximizing Q = 38 B) ATC curve crosses over the MR curve = $20 C) profit per unit = P -ATC = 30 - 20 = $10 D) total profit = 38 units x $10 = $380

Private Goods

Exludability Rivalry These are characteristics of _____ ______ Example : Shoes

formulas

ATC = TC/Q You will also discuss average variable costs (AVC), which is the firm's variable cost per unit of output; it is total variable cost divided by quantity. AVC = TVC/Q You are still assessing the choices facing the firm in the short run, so you assume that at least one factor of production is fixed. Finally, you will discuss average fixed cost (AFC), which is total fixed cost divided by quantity, AFC = TFC/Q Marginal cost (MC) is the amount by which total cost rises with an additional unit of output. It is the ratio of the change in total cost to the change in the quantity of output. MC=ΔTC/ΔQ

The long run

Adjustable plant size and adjustable number of plants. Firms can enter and exit the market anytime. The planning period over which a firm can consider all factors of production as variable

When groups with inherently higher risks than the average person seek out insurance, straining the insurance system

Adverse selection

Adverse Selection

Adverse selection is a term commonly used in economics, insurance, and risk management that describes a situation where market participation is affected by asymmetric information.

Traditional Economy

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.

The coach will buy more burgers and fewer hotdogs. With the price change in hamburgers, the marginal utility per dollar for hamburgers is now greater than the marginal utility per dollar for hotdogs. The coach will, therefore, buy more hamburgers and fewer hotdogs to maximize utility.

After a game, suppose a sports team stops for lunch at a local hamburger and hotdog stand. They have $40 dollars to spend with hamburgers costing $4 each and hotdogs costing $2 each. The coach decides to buy 6 hamburgers and 8 hotdogs to maximize utility and given the budget constraint. When the coach goes to order, the price of hamburgers has been reduced to $2 each. In order to maximize utility, how will the coach's order change given the reduction in price of hamburgers from $4 to $2 in order to still maximize utility? The coach will buy more burgers and fewer hotdogs The coach will buy more hotdogs and fewer burgers. The coach will buy more of both burgers and hotdogs. The coach will not change the order.

the $10 he could have earned at his job.

Ali decides to attend the one-hour review session for microeconomics instead of working at his job. His job pays him $10 per hour. Ali's opportunity cost of attending the review session is

Indifference Curve

All combinations of goods/services that a person is ______ to. Equally satisfied with any choice on the curve.

Seller Expectations as a supply shifter

All supply curves are based in part on seller expectations about future market conditions. Many decisions about production and selling are typically made long before a product is ready for sale. Changes in seller expectations can have important effects on price and quantity. Consider, for example, the owners of oil deposits. Oil pumped out of the ground and used today will be unavailable in the future. If a change in the international political climate leads many owners to expect that oil prices will rise in the future, they may decide to leave their oil in the ground, planning to sell it later when the price is higher. Thus, there will be a decrease in supply; the supply curve for oil will shift to the left.

Explicit Costs

All the costs the firm is legally obligated to pay. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs.

Total Product

All the goods and services produced by a business during a given period of time with a given amount of input.

Production possibilities curve/ frontier (PPF)

Also known as Society's choice curve shows combinations of two goods that can be produced in an economy with fixed resources and technology

they provide no incentive for going beyond the limits they set; they offer limited flexibility on where and how to reduce pollution; and they often have politically-motivated loopholes.

Although Command-and-control regulations have helped to protect the environment, they have three shortcomings:

Ownership Barrier to Entry

An ______ barrier to entry occurs if one firm owns a significant portion of a key resource

Herfindahl-Hirschman Index (HHI)

An alternative measure of concentration is found by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares to derive a Herfindahl-Hirschman Index (HHI).

Hypothesis

An assertion of a relationship between two or more variables that could be proven to be false.

Economic Profit

An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned.

Command Economy

An economic system in which the government controls a country's economy.

command economy

An economic system in which the government controls a country's economy.

2command economy

An economic system in which the government controls a country's economy. centeralized structure= lord over the land

Agricultural Economy

An economy based on farming, or earning most of its money from farming

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion. Elements of command, market, and traditional

1traditional economy

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next. ex occupations stay in the family agricultural economy where things are done the sames as they have always been done. Neg- little economic progress or development.

Efficiency, competitive, transferable property rights

An efficient allocation of resources is one that maximizes the net benefit of each activity. It is expected to be achieved in markets that satisfy the _____ condition, which requires a _____ market and well-defined, _____.

increase ,

An examination of the demand for local television advertising with respect to the price of local radio advertising revealed that the two goods are clearly substitutes. A 10% increase in the price of local radio advertising led to a 10% ____ in demand for local television advertising, so that the cross price elasticity of demand for local television advertising with respect to changes in the price of radio advertising was 1.0

2.3// Define shortage & what happens when a product is in shortage

An excess of quantity demanded over quantity supplied -excess demand, & price is pushed up ↑

2.3// Define surplus & what happens when a product is in surplus

An excess of quantity supplied over quantity demanded -excess supply, & price is pushed down↓

sunk cost

An expenditure that has already been made and that cannot be recovered

sunk cost.

An expenditure that has already been made and that cannot be recovered

When logging in the Pacific Northwest destroys forests that hikers would have used for eco-tourism, the destruction of the trails is an example of

An external cost.

Income Compensated Price Change

An imaginary exercise in which we assume that when the price of a good or service changes, the consumer's income is adjusted so that he or she has just enough to purchase the original combination of goods and services at the new set of prices.

Right Left

An increase in supply will shift the supply curve to the _______. A decrease will shift the supply curve to the ______.

Number of sellers

An increase in the _________ will increase supply.

Number of Buyers

An increase in the number of buyers will shift the demand curve to the right.

Number of Sellers

An increase in the number of sellers will increase supply.

Positive cross price elasticity Positive cross price elasticity means that as the price of one good goes up, the demand for a different good rises. These two goods are substitutes.

An increase in the price of carrots has led to greater demand for asparagus. What type of elasticity is this an example of? Positive cross price elasticity Negative cross price elasticity Income elasticity for normal goods Income elasticity for inferior good

Complementary Goods

An increase in the price of one product decreases the demand for another good. (If the price of hot dogs increases, people will buy fewer hot dog buns.)

Substitute Goods

An increase in the price of one product increases the demand for another product. (An increase in the price of Coke increases the demand for Pepsi.)

Substitute Goods

An increase in the price of one product increases the demand for another product. An increase in the price of Coke increases the demand for Pepsi.

shift your budget line outward.

An increase in your income will likely to

among which the consumer is indifferent.

An indifference curve shows all combinations of two goods

monopolistic competition.

An industry with a large number of firms, differentiated products, and free entry and exit is called

monopoly

An industry with a single firm in which entry is blocked is called a

Average Product (AP)

An input is simply the total product divided by the number of units of the input employed

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

Perfect Competition

Another word for pure competition or competitive markets. There are many buyers and sellers, anumber of firms are large, types of goods are homogeneous, entry barriers are free entry and exit, there is no non-price competition. Example: agriculture

1. The increased wage will shift the total variable cost curve upward; the old and new points and the corresponding curves are shown at the right of Figure 8.11.

Answer to 46.-1

2. The total variable cost curve has shifted upward because the cost of labor, Aclome's variable factor, has increased. The marginal cost curve shows the additional cost of each additional unit of output a firm produces. Because an increase in output requires more labor, and because labor now costs more, the marginal cost curve will shift upward. The increase in total variable cost will increase total cost; average total and average variable costs will rise as well. Average fixed cost will not change.

Answer to 46.-2

Capital Goods Consumption Goods

Any country that produces a lot in _______ goods will grow much faster than any country that produces a lot in ___________ goods.

Consumption Goods

Any country that produces a lot in capital goods will grow much faster than any country that produces a lot in consumption goods.

Society's Total Cost Marginal Social Cost

Any government intervention on negative externalities is to ensure that the total benefit is = _____ _______ ____ OR the marginal benefit = _____ _____ _____

Human Capital

Any skills or knowledge gained by a worker through education and experience.

explicit costs

Are accounting cost or money outlays

Law of Supply states

As quantity supplied of good/service in a given time period is generally positively related to its price criteris paribus

A student has been studying algebra for 1.5 hours and is debating whether to study 1 more hour or go to the gym to exercise. When is this student making this decision, according to economists?

At the margin

the price ratio of the two goods.

At the utility-maximizing solution, the consumer's marginal rate of substitution (the absolute value of the slope of the indifference curve) is equal to _____________

The marginal benefit rule says that you can maximize the net benefit of any activity by choosing the quantity at which marginal benefit equals marginal cost.

At what quantity, is the net benefit of an activity maximized.

The price elasticity of demand for a good or service will be greater in absolute value if many close substitutes are available for it. If there are lots of substitutes for a particular good or service, then it is easy for consumers to switch to those substitutes when there is a price increase for that good or service If a good has no close substitutes, its demand is likely to be somewhat less price elastic.

Availability of Substitutes

Diseconomies of Scale

Average costs increase as output increases. The larger you are, the more managers have to hold pointless meetings to show you what you are working on while your work is sitting at your desk.

Total fixed cost diveded by quantity

Average fixed cost AFC

Ratio of output to the number of units of labor (QIL) Equation 8.2 fig.

Average product of labor

In the long run, a monopolistic competitive firm will reach the zero-profit solution when the demand curve is tangent to what other curve?

Average total cost

Total cost divided by quantity;it is the firm's total cost per unit of output

Average total cost ATC

Total variable cost divded by quantity; it is the firm's total variable cost per unit of output

Average variable costs AVC

If the percentage change in price is 10 percent and the demand is elastic, then the percentage change in the quantity demanded: A. Is greater than 0 but less than 10 percent. B. Is larger than 10 percent. C. Equals 0 percent. D. Equals 10 percent. E. Cannot determine with this information.

B. Is larger than 10 percent.

Laws that specify allowable quantities of pollution and = may detail which pollution-control technologies must be used.

Command-and-control regulation

Characteristic of a particular market that block the entry of new firms in a monopoly market

Barriers to entry

Why is a monopolist considered socially inefficient in its production?

Because a monopoly firm charges a price greater than marginal cost, consumers will consume less of the monopoly's good or service than is economically efficient.

If a price floor benefits producers, why does a price floor reduce social surplus?

Because the losses to consumers are greater than the benefits to producers, so the net effect is negative. Since the lost consumer surplus is greater than the additional producer surplus, social surplus falls.

DPrivate, DSocial, $52 million

Big Drug faces a cost of borrowing of 8%. If the firm receives only the private benefits of investing in R&D, then its demand curve for financial capital is shown by ___, and the equilibrium will occur at $30 million. Because there are spillover benefits, society would find it optimal to have $52 million of investment. If the firm could keep the social benefits of its investment for itself, its demand curve for financial capital would be ___and it would be willing to borrow ___.

decrease, fall, less, falls, rises, stays the same

Both the demand and the supply of coffee _____. Since decreases in demand and supply, considered separately, each cause equilibrium quantity to ____, the impact of both decreasing simultaneously means that a new equilibrium quantity of coffee must be ___than the old equilibrium quantity. In Panel (a), the demand curve shifts farther to the left than does the supply curve, so equilibrium price ___. In Panel (b), the supply curve shifts farther to the left than does the demand curve, so the equilibrium price ___. In Panel (c), both curves shift to the left by the same amount, so the equilibrium price _____.

1.4// what are transition economies and what are some countries

Brazil Russia India China all show high rates of economic growth+increase in average incomes

PxQx+PyQy<(=)B

Budget constraint for 2 goods X and Y equation:

Restriction that total spending cannot exceed the budget available.

Budget constraint.

In the used car market, adverse selection is a problem primarily when:

Buyers cannot determine the quality of a used car.

The price elasticity of demand is a measure of:

Buyers' responsiveness to changes in the price of a product.

By observing a consumer's response to a change in price, you can derive the consumer's demand curve for a good. Panel (a) shows that at a price for horseback riding of $50 per day, Janet Bain chooses to spend 3 days horseback riding per semester. Panel (b) shows that a reduction in the price to $25 increases her quantity demanded to four days per semester. Points X and Z, at which Janet maximizes utility at horseback riding prices of $50 and $25, respectively, become points X′ and Z′ on her demand curve, d, for horseback riding in Panel (b).

By observing a consumer's response to a change in price, you can derive the consumer's demand curve for a good. Panel (a) shows that at a price for horseback riding of $50 per day, Janet Bain chooses to spend 3 days horseback riding per semester. Panel (b) shows that a reduction in the price to $25 increases her quantity demanded to four days per semester. Points X and Z, at which Janet maximizes utility at horseback riding prices of $50 and $25, respectively, become points X′ and Z′ on her demand curve, d, for horseback riding in Panel (b).

pollution emissions, specific pollution-control technologies

Command-and-control regulation sets specific limits for ______ and/or ____ that must be used.

Game Theory

Evaluates alternate strategies when the outcome depends not only on each individual's strategy but also that of others.

Step 1. First you have to calculate the costs. You can take what you know about explicit costs and total them: Office rental: $50,000 Law clerk's salary: $35,000 Total explicit costs: $85,000 Step 2. Subtracting the explicit costs from the revenue gives you the accounting profit. Revenues: $200,000 Explicit costs: $ 85,000 Accounting profit: $115,000 But these calculations consider only the explicit costs. To open his own practice, Fred would have to quit his current job, where he is earning an annual salary of $125,000. This would be an implicit cost of opening his own firm, as this is what Fred would give up to open his firm—this is his next best alternative that would be lost. Step 3. To determine economic profit, you need to subtract both the explicit and implicit costs to determine the true economic profit: Economic profit = total revenues - explicit costs - implicit costs = $200,000 - $85,000 - $125,000 = -$10,000 per year Fred would be losing $10,000 per year. That does not mean he would not want to open his own business, but it does mean he would be earning $10,000 less than if he worked for the corporate firm. He is not making enough at his own firm to cover the salary he gave up from his corporate job. Implicit costs can include other things as well. Maybe Fred had to take money out of savings to buy the office furniture for his own firm. In this case, the opportunity cost of his saving would also be an implicit cost that would be subtracted from economic profits.

Calculating Implicit Costs Consider the following example. Fred currently works for a corporate law firm. He is considering opening his own legal practice, where he expects to earn $200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for $50,000 per year. A law clerk could be hired for $35,000 per year. If these figures are accurate, would Fred's legal practice be profitable?

Situation in which a firm has a high ratio of capital to labor

Capital Intensive

Quantity Demanded vs. Demand

Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand.

Barriers to Entry

Characteristic of a particular market that blocks the entry of new firms in a monopoly market. • Economies of scale • Special advantages of location • High sunk costs • Dominant position in the ownership of inputs • Government restrictions

Marginal Method

Choose the Q where Marginal Revenue is equal to Marginal Cost.

When an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost.

Coinsurance

Something valuable-often property or equipment- that a lender would have a right to seize and sell if the loan is not repaid

Collateral

What type of economy receives economic decisions passed down from a government authority and where resources are owned by the government?

Command

Which concept describes when a country can produce a good at a lower opportunity cost than another country?

Comparative advantage refers either to when a country can produce a good at a lower cost in terms of other goods or when a country has a lower opportunity cost of production.

innovate. incentive

Competition creates pressure to _____. However, if new inventions can be easily copied, then the original inventor loses the _____to invest further in research and development.

Price elasticities of demand are negative, value of the price elasticity is constant along the demand curve.

Constant Unit Elastic

A boundary that limits the range of choices that can be made.`````

Constraint

Pure public goods are:

Consumed automatically by all members of a community simultaneously

Extra benefit consumers receive from buying a good or service, measured by: what the individuals would have been willing to pay - the amount that they actually paid.

Consumer Surplus

Which concept is described as the difference between the demand curve and the market price?

Consumer surplus

Describe consumer and producer surplus.

Consumer surplus - the extra benefits a consumer receives from buying a G/S X = willing to pay - actual cost Producer surplus - the extra benefits producers receive from selling a G/S X = actual received priced - willing to sell price

Price, Market equilibrium price.

Consumer surplus is the gap between the ____ that consumers are willing to pay, based on their preferences, and the _______

fixed costs

Costs that do not vary with the quantity of output produced ex salaries and overhead

Quasi-Public Good

Could be provided by the private sector through the market system. Exclusion is possible. Positive Externalities.

Quasi-Public Good

Could be provided by the private sector through the market system. Exclusion is possible. Positive Externalities. Libraries, Museums, Parks, Post Offices

Zero Economic Profit

Covering all my costs. Not a bad place to be. Usually making an accounting profit.

A surplus is

Created by the price floor

5. Which of the following influence the price elasticity of demand? (Choose 2) * A. The availability of complements. B. Whether or not the good is normal. C. Resource allocation method. D. Availability of substitutes. E. Proportion of income spent on good.

D. Availability of substitutes. E. Proportion of income spent on good.

The terms elastic and inelastic apply to price elasticity of demand. They are not used to describe income elasticity of demand or cross price elasticity of demand.

Difference in elastic and inelastic?

comparing the marginal cost and marginal benefits when making a decision.

Decision making on the margin involves

Deflation

Decrease in general prices or a negative inflation rate. Deflation is bad because people will hoard money and financial assets.

diminishing marginal returns

Decreasing satisfaction or usefulness as additional units of a product are acquired. When each additional unit of a variable factor adds less to total output, the firm is experiencing diminishing marginal returns.

Amount that the insurance policyholders must pa out oftheir own pocket before insurance coverage pays anything

Deductibles

Market Efficiency

Demand & consumers' willingness to pay are in line. No under production or overproduction

price inelastic, unit price elastic, price elastic

Demand is ____ if the absolute value of the price elasticity of demand is less than 1; it is _____ if the absolute value is equal to 1; and it is ____ if the absolute value is greater than 1.

Price elastic, price inelastic, unit price elastic

Demand is _____ ______ in the upper half of any linear demand curve and ______ _______ in the lower half. It is ____ _______ at the mid point.

upper, lower , lower

Demand is price elastic in the ____ half of any linear demand curve and price inelastic in the ____half. It is unit price elastic at the ____.

Variable that can change the quantity of a good or service demanded at each price

Demand shifter

Marginal benefit is the utility gained by spending additional $ on a good. Marginal cost is the utility lost by spending $ less on another good.

Difference in marginal benefit and marginal cost

Perfectly inelastic demand: the change in quantity is zero for any percentage change in price, demand curve in this case is vertical. Price inelastic demand: the percentage change in quantity is less than the percentage change in price, not that the change in quantity is zero. The demand curve itself is still downward sloping.

Difference with price inelastic and perfectly inelastic.

A change in supply results from a change in a supply shifter and implies a shift of the supply curve to the right or left. A change in price produces a change in quantity supplied and induces a movement along the supply curve. A change in price does not shift the supply curve.

Differences between a change in supply, and change in price.

W/ income elasticity of demand and cross price elasticity of demand you are primarily concerned with whether the measured value of these elasticities is positive or negative. Income elasticity of demand, tells you whether the good or service is normal or inferior. Cross price elasticity of demand tells you whether two goods are substitutes or complements.

Differences/similarities in income elasticity of demand and cross price elasticity of demand.

Which types of products do firms operating in an oligopolistic market produce, depending on the industry?

Differentiated or homogenous products

range over which each additional unit of a variable factor adds less to total output than the previous unit.

Diminishing marginal returns

Situation in which the long-run average cost increases as the firm expands its output

Diseconomies of scale

Neither price ceilings nor price floors cause demand or supply to change. They simply set a price that limits what can be legally charged in the market. Price ceilings and price floors can cause a different choice of quantity demanded along a demand curve, but they do not move the demand curve. Price controls can cause a different choice of quantity supplied along a supply curve, but they do not shift the supply curve.

Do price ceilings and floors change demand or supply?

1. monopoly 2. perfect competition 3. monopoly 4. monopoly 5. monopoly

Do the statements below better describe firms operating in a perfectly competitive market or firms that are monopolies? -The demand curve faced by the firm is downward-sloping. -The demand curve and the marginal revenue curves are the same. -Entry and exit are relatively difficult. -The firm is likely to be concerned about antitrust laws. -Consumer surplus would be increased if the firm produced more output.

Assuming that people obey the price ceiling, the market price will be below equilibrium, which means that Qd will be more than Qs. Buyers can only buy what is offered for sale, so the number of transactions will fall to the Qs at the price ceiling. This is easy to see graphically. By analogous reasoning, with a price floor the market price will be above the equilibrium price, so Qd will be less than Qs. Since the limit on transactions here is demand, the number of transactions will fall to the Qd at the price floor. Note that because both price floors and price ceilings reduce the number of transactions, social surplus is less.

Does a price ceiling increase or decrease the number of transactions in a market? Why? What about a price floor?

On the assumption that the coffee market is competitive and that it is characterized by well-defined exclusive and transferable property rights, the coffee market meets the efficiency condition. That means that the allocation of resources shown at the equilibrium will be the one that maximizes the net benefit of all activities. The net benefit is shared by coffee consumers (as measured by consumer surplus) and coffee producers (as measured by producer surplus).

Draw a hypothetical supply and demand curve for coffee to show the market in equilibrium. Now show the areas of consumer and producer surplus. Using the concept of surplus, what determines efficiency in this market?

higher and to the right, lower and to the left, B,A,C

Each indifference curve suggests combinations among which the consumer is indifferent. Curves that are ___ are preferred to those that are ___. Here, indifference curve _is preferred to curve _, which is preferred to curve _

NASH Equilibrium

Each player chooses the best possible strategy, given the other players action. ________ is not the vest outcome for either player. Collusion is difficult to achieve b/c there is always incentive to cheat.

Market Economy

Economic decisions are made by individuals or the open market.

Economic Growth

Economic growth results from better or more technology, labor, and capital quality. It shifts the Productions Possibility Frontier outward.

Asymmetric information means that:

Either the buyer has information that the seller does not have or the seller has information that the buyer does not have.

-Countries with patents already in place, inventors receive 1/3 - 1/2 of the total economic value of their inventions. -In fast-moving/ high-tech industries, patents may be almost irrelevant due to tech advancing so quickly. -Not every idea can be protected with a patent/copyright. - Patents may cover too much/grant too easily. (Xerox) -21 yr time period is arbitrary. They should cover long enough for the inventor to earn a good return, but not so long that it allows the inventor to charge a monopoly price permanently.

Errors in patents

1. Senior citizens are (usually) easy to identify, and for travel, preventing resale is usually quite easy as well. For example, a picture ID is required to board an airplane. Airlines might be expected to oppose implementing the rule since it is costly for them. The fact that they support the rule can be explained by how it aids them in practicing price discrimination, by preventing the resale of discount tickets, which now can easily be matched to the purchasing customers. The demand for air travel by senior citizens is likely to be more elastic than it is for other passengers, especially business travelers, since the purpose of their travel is largely discretionary (often touristic in nature) and since their time is likely to be less costly, making them more willing to seek out information on travel alternatives than the rest of the population. 2. Since the customer must present the coupon at the point of sale, identification is easy. Willingness to search for and cut out coupons suggests a high degree of price consciousness and thus a greater price elasticity of demand. 3. Such students are likely to have more choices of where to attend college. Demand is likely to be more elastic when substitutes are available for it. Enrollment procedures make identification and prevention of resale very easy.

Explain why price discrimination is often found in each of the following settings. Does it make sense in terms of price elasticity of demand? 1-Senior citizen discounts for travel 2-Food sold cheaper if the customer has a coupon for the item 3-College scholarships to students with the best academic records or to students with special athletic, musical, or other skills

When medical care providers are paid according to the services they provide.

Fee-for-service basis

Oligopolistic Competition

Few number of firms, homogenous or differentiated products, mutual interdependence over price, SIGNIFICANT BARRIERS, advertising and brand names as nonprice competition

Oligopolistic Competition

Few number of firms, homogenous or differentiated products, mutual interdependence over price, SIGNIFICANT BARRIERS, advertising and brand names as nonprice competition EXP : Appliances, automobiles

taking the lowest average total cost curve at each level of output 10,000 20,000 30,000 40,000

Figure 8.14 The LRAC curve is found by__. Here, average total cost curves for quantities of capital of 20, 30, 40, and 50 units are shown for the Lifetime Disc Co. At a production level of __CDs per week, Lifetime Disc minimizes its cost per CD by producing with 20 units of capital (point A). At ____ CDs per week, an expansion to a plant size associated with 30 units of capital minimizes cost per unit (point B). The lowest cost per unit is achieved with production of ____ CDs per week using 40 units of capital (point C). If Lifetime Disc chooses to produce _____ CDs per week, it will do so most cheaply with 50 units of capital (point D).

diseconomies

Figure 8.15 The downward-sloping region of the firm's LRAC curve is associated with economies of scale. There may be a horizontal range associated with constant returns to scale. The upward-sloping range of the curve implies ____of scale.

$0, A, $300, D

Figure 8.4 The points shown give the variable costs of producing the quantities of jackets given in the total product curve in Figure 8.1 "Aclome Clothing's Total Product Curve" and Figure 8.2 "From Total Product to the Average and Marginal Product of Labor." Suppose Aclome's workers earn $100 per day. If Aclome produces no jackets, it will use no labor—its variable cost thus equals (Point _′). Producing seven jackets requires three units of labor; Aclome's variable cost equals (Point _′).

2.8

Figure 8.5 Total variable costs for output levels shown in Aclome's total product curve were shown in Figure 8.4 "Computing Variable Costs." To complete the total variable cost curve, you need to know the variable cost for each level of output from zero to 11 jackets per day. The variable costs and quantities of labor given in Figure 8.4 are shown in boldface in the table here and with black dots in the graph. The remaining values were estimated from the total product curve in Figure 8.1 "Aclome Clothing's Total Product Curve" and Figure 8.2 "From Total Product to the Average and Marginal Product of Labor." For example, producing six jackets requires __ workers, for a variable cost of $280.

200

Figure 8.6 Add total fixed cost to the total variable cost to obtain total cost. In this case, Aclome's total fixed cost equals $___per day.

raise reduce lower increase

If advertising reduces competition, it tends to ___ prices and ____ quantities produced. If it enhances competition, it tends to _____ prices and _____ quantities produced.

total cost divided by quantity produced quantity produced increases

Figure 8.8 Total cost figures for Aclome Clothing are taken from Figure 8.7 . The other values are derived from these. Average total cost (ATC) equals ____; it also equals the sum of the average fixed cost (AFC) and average variable cost (AVC) (exceptions in the table are due to rounding to the nearest dollar); average variable cost is variable cost divided by ____. The marginal cost (MC) curve (from Figure 8.7) intersects the ATC and AVC curves at the lowest points on both curves. The AFC curve falls as quantity __.

Total Cost

Firm's cost + externality cost =

competetiveness

Firms in a perfectly competitive world earn zero profit in the long-run. While firms can earn accounting profits in the long-run, they cannot earn economic profits.

where marginal revenue equals marginal cost.

Firms in monopolistic competition determine the profit-maximizing level of output by producing

cartel

Firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms

Costs associated with the use of fixed factors of production

Fixed Costs

Nonprofit research entities Colleges and universities

Government spending for research and development can provide financial support for which of these entities? (Choose all that apply.) Private firms for internal use Nonprofit research entities Colleges and universities Private international firms

The _____a consumer's total utility, the greater that consumer's level of satisfaction.

Higher

presence of imperfect information can discourage both buyers and sellers from participating in the market. Buyers become reluctant to participate because they cannot determine the quality. Sellers of high-quality or medium-quality goods may be reluctant, because it is difficult to demonstrate quality of goods to buyers—since buyers cannot determine which goods have higher quality, they are likely to be unwilling to pay a higher price for goods. When imperfect information is severe and buyers and sellers are discouraged from participating, markets may become extremely thin as a relatively small number of buyer and sellers attempt to communicate enough information that they can agree on a price.

How Imperfect Information Can Affect Equilibrium Price and Quantity

you need to compute the percentage changes in price and quantity demanded between points A and B. Measure the percentage change between two points as the change in the variable divided by the average value of the variable between the two points. Thus, the percentage change in quantity between points A and B is computed relative to the average of the quantity values at points A and B: (60,000 + 40,000)/2 = 50,000. The percentage change in quantity, then, is 20,000/50,000, or 40%. Likewise, the percentage change in price between points A and B is based on the average of the two prices: ($0.80 + $0.70)/2 = $0.75 so there is a percentage change of 0.10/0.75, or 13.33% The price elasticity of demand between points A and B is thus 40%/(13.33%) = 3.00

How do you compute the elasticity

(Affordable care act0 will be funded through additional taxes to include; Increases in Medicare tax by 0.9% and add 3.8% tax on unearned income for high income taxpayers. -Charge of an annual fee on health insurance providers. -Impose other taxes such as 2.3% tax on manufacturers and importers of certain medical devices.

How will the ACA be funded?

The price of gasoline increased this summer. Which decision is not an example of making a decision at the margin?

I sell my car and never drive again.

good is income inelastic.

If a 10 percent decrease in income brings about a 5 percent decrease in the demand for a good, then the

30 pounds,

If a pollution charge is set equal to $1,000, then the firm will have an incentive to reduce pollution by ____ because the $900 cost of these reductions would be less than the cost of paying the pollution charge.

Because the losses to consumers are greater than the benefits to producers, so the net effect is negative. Since the lost consumer surplus is greater than the additional producer surplus, social surplus falls.

If a price floor benefits producers, why does a price floor reduce social surplus?

Advertising and Competition

If advertising creates consumer loyalty to a particular brand, then that loyalty may serve as a barrier to entry to other firms.

An inferior good

If demand of a good decreases when income increases

price Unit Elastic

If the absolute value of the price elasticity of demand is equal to 1, then demand for the product is ________. numbers equal to each other

Unit Elastic

If the absolute value of the price elasticity of demand is equal to 1, then demand for the product is unit elastic.

price Elastic

If the absolute value of the price elasticity of demand is great than 1, then demand for the product is ________.

Elasticity

If the absolute value of the price elasticity of demand is great than 1, then demand for the product is elastic.

Inelastic

If the absolute value of the price elasticity of demand is less than 1, then demand for the product is inelastic.

It will decrease.

If the cross elasticity of demand for beef and pork is positive and you are a producer of the beef and pork producers drop the price of their pork, what will happen to the quantity demand of beef that you sell?

If the marginal benefit of an activity exceeds the marginal cost, the decision maker will gain by increasing the activity.

If the marginal benefit of an activity exceeds the marginal cost, the decision maker will gain by _____ the activity.

marginal decision rule

If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased. If the marginal benefit is less than the marginal cost, the quantity should be reduced.

marginal decision rule

If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased. If the marginal benefit is less than the marginal cost, the quantity should be reduced.Net benefit is maximized at the point at which marginal benefit equals marginal cost. The marginal decision rule is at the heart of the economic way of thinking. The rule basically says this: If the additional benefit of one more unit exceeds the extra cost, do it; if not, do not. This simple logic provides a powerful tool for the analysis of choice. Perhaps more than any other rule in economic analysis, the marginal decision rule typifies the way in which economists analyze problems. The marginal decision rule forms the foundation for the structure economists use to analyze all choices. At first glance, it may seem that a consumer seeking satisfaction from, say, pizza, has little in common with an entrepreneur seeking profit from the production of custom-designed semiconductors. But maximizing choices always follow the marginal decision rule—and that rule holds regardless of what is being maximized or who is doing the maximizing. To see how the logic of maximizing choices works, you will examine a specific problem. You will then extend that problem to the general analysis of maximizing choices.

ratio of marginal utility to price is now less than that for other goods.

If the price of steak rises, a consumer who had been maximizing his or her utility before will buy less steak because its

Law of Diminishing Returns

If you add a variable resource to a fixed resource your output will increase by smaller and smaller amount. Output will increase at a diminishing rate. (Increasing number of waiters without increasing the number of tables)

Producer Expectations

If you expect that in the future the price of your product will go up, you will want to sell your product in the future. This will cause the supply of your product today to go down and the supply of your product in the future to go up. If you think your stock will be of more value tomorrow, you will wait until tomorrow to sell it.

Price Indices

Index numbers assigned to each year that show how prices have changed relative to a specific base year.

An increase in income reduces demand for the good. (Negative income elasticity of demand) -ie; used clothing, beans, urban public transit, poor people shit.

Inferior good

budget constraint

Is a given level of income that determines the maximum amount of goods that may be purchased by a consumer

One hundred fifty dollars is the income that allows Ilana to purchase the same items as before, and thus can be used to measure the substitution effect. Looking only at the income-compensated price change (that is, holding her to the same purchasing power as in the original relative price situation), you will find that the substitution effect is 3 more DVDs (from 5 to 8). The DVDs that she buys beyond 8 constitute her income effect; it is 2 DVDs.

Ilana Drakulic has an entertainment budget of $200 per semester, which she divides among purchasing DVDs, going to concerts, eating in restaurants, and so forth. When the price of DVDs fell from $20 to $10, her purchases rose from 5 per semester to 10 per semester. When asked how many she would have bought if her budget constraint were $150 (since with $150 she could continue to buy 5 DVDs and as before still have $100 for spending on other items), she said she would have bought 8 DVDs. What is the size of her substitution effect? Her income effect?

income compensated price change

Imaginary exercise in which you assume that when the price of a good/service changes, the consumer's income is adjusted so that he or she has just enough to purchase the original combination of goods/services at the new price set.

Price changes affect quantity demanded because they change how much a consumer can buy; a change in price of a good or service affects the purchasing power of a consumer's income affecting the amount of a good the consumer will buy. This effect is stronger when a good or service is important in a typical household's budget.

Importance in Household Budgets

net benefits, marginal benefit curve, marginal cost curve

In Panel (a) ___ are given by the difference between total benefits (as measured by the area under the marginal benefit curve up to any given level of activity) and total costs (as measured by the area under the marginal cost curve up to any given level of activity). Maximum net benefits are found where the ____ intersects the ____ at activity level D. Panel (b) shows that if the level of the activity is restricted to activity level E, net benefits are reduced from the light-green shaded triangle ABC in Panel (a) to the smaller area ABGF. The forgone net benefits, or deadweight loss, is given by the purple-shaded area FGC. If the activity level is increased from D to J, as shown in Panel (c), net benefits declined by the deadweight loss measured by the area CHI.

increasing negative

In Panel (a), the total product curve for a variable factor in the short run shows that the firm experiences ____marginal returns from zero to Fa units of the variable factor (zero to Qa units of output), diminishing marginal returns from Fa to Fb (Qa to Qb units of output), and ____ marginal returns beyond Fb units of the variable factor.

rises total fixed cost

In Panel (c), total cost rises at a decreasing rate over the range of output from zero to Qa This was the range of output that was shown in Panel (a) to exhibit increasing marginal returns. Beyond Qa, the range of diminishing marginal returns, total cost ____at an increasing rate. The total cost at zero units of output (shown as the intercept on the vertical axis) is ____.

marginal benefit and marginal cost

In a competitive market with exclusive and transferable property rights, such as the market for tomatoes, the efficiency condition is met. Buyers and sellers are faced with all of the relevant benefits and costs, and the equilibrium price equals the marginal cost to society of producing that good, here $2.50 per pound. You can interpret the market demand and supply curve as ____ and ____ curves, respectively.

Benefit, cost

In a competitive system in which the interaction of demand and supply determine prices, the corresponding demand and supply curves can be considered marginal ____ and marginal ____ curves, respectfully.

Marginal Revenue

In competitive markets, price will equal marginal revenue.

be a price setter, must be able to identify consumers whose elasticities differ, and must be able to prevent resale of the good or service between consumers.

In order to engage in price discrimination, a firm must

While at a point in time the supply of people with degrees in computer science is very price inelastic, over time the elasticity should rise. That more students were majoring in computer science lends credence to this prediction. As supply becomes more price elastic, salaries in this field should rise more slowly.

In the late 1990s, it was reported on the news that the high-tech industry was worried about being able to find enough workers with computer-related expertise. Job offers for recent college graduates with degrees in computer science went with high salaries. It was also reported that more undergraduates than ever were majoring in computer science. Compare the price elasticity of supply of computer scientists at that point in time to the price elasticity of supply of computer scientists over a longer period of 1999 to 2009.

zero

In the long run, in monopolistic competition, any economic profits or losses will be eliminated by entry or exit, leaving firms with ______ economic profit.

Only perfect competition

In which market structure do firms exist in very large numbers, each firm produces an identical product, and there is freedom of entry and exit?

Which characteristic describes a market economy?

Incentive-based decisions

positive, negative

Income elasticity is ___ for normal goods and ___for inferior goods.

Percentage change in quantity demanded at a specific prices divided by the percentage change in income that produced the demand change

Income elasticity of demand

the marginal product of a variable factor is declining.

It is easy to confuse the concept of diminishing marginal returns with the idea of negative marginal returns. To say a firm is experiencing diminishing marginal returns is not to say its output is falling. Diminishing marginal returns mean that ___. Output is still increasing as the variable factor is increased, but it is increasing by smaller and smaller amounts.As you saw in Figure 8.2 and Figure 8.3, the range of diminishing marginal returns was between the third and seventh workers; over this range of workers, output rose from seven to eleven jackets. Negative marginal returns started after the seventh worker

negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis,

It is easy to go awry on the issue of the slope of the budget line: it is the _______. But does not slope equal the change in the vertical axis divided by the change in the horizontal axis? The answer, of course, is that the definition of slope has not changed. Notice that the Equation gives the vertical change divided by the horizontal change between two points. You then manipulated the Equation a bit to get to the 2nd Equation and found that slope also equaled the negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis. Price is not the variable that is shown on the two axes. The axes show the quantities of the two goods.

Marginal cost

Kathleen owns a firm, but she rents the building. In the short run, Kathleen's rent does not change as her production increases. She noticed her total cost changed from $20,000 to $20,100 when her production increased from 100 units to 101 units. What do economists call Kathleen's cost of producing one additional unit?

Economies of Scale

Labor Specialization & Managerial specialization - workers are more efficient if they work on one task Efficient capital - might be too expensive for small firms - This causes the ATC to fall

Factors of Production

Land, Labor, Capital

Diseconomies of Scale

Large firms often have problems with communication and cooperation, which can cause the Average Total Cost to rise

Marginal product of any variable factor of production will eventually decline, assuming the quantities of other factors of production are unchanged

Law of diminishing marginal returns

price controls

Laws that government enacts to regulate prices are called price controls. Price controls come in two types: a price ceiling keeps a price from rising above a certain level (the "ceiling"), while a price floor keeps a price from falling below a certain level (the "floor").

1. The banks could be engaged in tacit collusion, with Bank A as the price leader. 2. Saudi Arabia seems to be trying to create another oil cartel, a form of overt collusion.

Learn by Doing Which model of oligopoly would seem to be most appropriate for analyzing firms' behavior in each of the situations given below? Whenever Bank A raises interest rates on car loans, other banks in the area do too. In July 1998, Saudi Arabia floated a proposal in which a group of eight or nine major oil-exporting countries (including OPEC members and some nonmembers, such as Mexico) would manage world oil prices by adjusting their production.

-$20,000 Economic profit is TR - explicit costs - implicit costs. TR = $60,000, explicit costs = $25,000 + $20,000, and implicit costs = $35,000

Lisa is a good baker and has decided she wants to open a bakery. In order to do so, she must give up her job teaching school which pays $35,000 per year. In the first year the bakery brings in $60,000 in revenue and costs Lisa $25,000 for an additional worker and $20,000 in supplies. What is Lisa's economic profit?

Define marginal revenue and average revenue. Explain their relationship to price in perfect competition.

MR - increase in TR that results from a one-unit increase in Q AR - TR/Q which = PXQ/Q = Price When the marginal value exceeds the average value, the average value will be rising. When the marginal value is less than the average value, the average value will be falling

Total utility is a conceptual measure of the number of units of utility a consumer gains from consuming a good, service, or activity. ________ utility is the increase in total utility obtained by consuming one more unit of a good, service, or activity.

Marginal

Amount by which an additional unit of an active increases its total benefit. (Amount by which the extra fries increase your satisfaction)

Marginal Benefit

Amount by which total costs rises with an additional unit of output. The ratio of change in total cost to the change in quantity of output

Marginal Cost MC

Amount by which output rises with an additional unit of labor

Marginal Product of Labor (MPL)

Equation 8.1

Marginal Product of Labor (MPL) is measured as the slope of the total product curve for labor.

The maximum amount of one good a consumer would be willing to give up in order to obtain an additional unit of another

Marginal Rate of substitution (MRS)

Marginal Social Cost

Marginal social cost (MSC) is the total cost society pays for the production of another unit or for taking further action in the economy.

Amount by which total utility rises with consumption of an additional unit of a good, service or activity, all other things unchanged: alternately, the additional utility a consumer receives from consuming one more unit of a good, service, or activity, all other things unchanged.

Marginal utility

40

Marie owns a factory and her total cost was $20,000 for production of 500 units. Her total revenue was $ 40,000 and her explicit cost was $15,000. What was her average total cost last year?

When the market on its own does not allocate resources efficiently in a way that balances social cost and benefits; externalities are one example of market failure.

Market Failure.

e.g., cap-and-trade is a permit allowing a firm to emit a certain amount of pollution; firms with more permits than pollution can sell remaining permits to other firms

Marketable permit program

price elasticity of demand

Measure of the relative responsiveness of the quantity demanded to change in price

Nominal GDP

Measured in current prices

elasticity of demand

Measures the way one dependent variable responds to changes in the independent variables

Microeconomics vs. Macroeconomics

Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole.

1.1// Microeconomics & Macroeconomics

Microeconomics: a branch of econ that focuses on the behavior of individuals in various markets Macroeconomics: a branch of econ the takes a wide ranging view of the economy, studying the behavior of economic sectors (households, businesses, government, foreign markets)

1.4// What are mixed economies

Modern Mixed Economy Traditional Mixed Economy emerging economies-recently showing a high rate of economic growth+rising average incomes

Explicit Costs

Monetary Payments (material costs, wages and interest)Explicit costs are out-of-pocket costs, that is, payments made to factors of production such as labor and capital

Explicit Costs

Monetary Payments; i.e. material costs, wages, and interest

Transfer Payment

Money paid to individuals by the government through social programs

Quantity Theory of Money

Money supply times Velocity equals Price Level times Y where Y is the quantity of output

Promise that the buyer's money will be refunded under certain conditions

Money-back guarantee

Why is advertising more important in monopolistic competition than in other market structures?

Mono Comp frim can increase Demand by advertising --costs to adverstising

monopolistic competition

Monopolistic competition is a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit.Restaurants are a monopolistically competitive sector; in most areas there are many firms, each is different, and entry and exit are very easy. Each restaurant has many close substitutes—these may include other restaurants, fast-food outlets, and the deli and frozen-food sections at local supermarkets. Other industries that engage in monopolistic competition include retail stores, barber and beauty shops, auto-repair shops, service stations, banks, and law and accounting firms.The model of monopolistic competition assumes a large number of firms. It also assumes easy entry and exit. This model differs from the model of perfect competition in one key respect: it assumes that the goods and services produced by firms are differentiated. This differentiation may occur by virtue of advertising, convenience of location, product quality, reputation of the seller, or other factors. Product differentiation gives firms producing a particular product some degree of price-setting or monopoly power. However, because of the availability of close substitutes, the price-setting power of monopolistically competitive firms is quite limited

The fact that price in a monopoly exceeds marginal cost suggests that the monopoly solution violates the basic condition for economic efficiency, that the price system must confront decision makers with all of the costs and all of the benefits of their choices.

Monopoly and Efficiency

1-A Price-Setting Firm. The firm must have some degree of monopoly power. It must be a price setter. A price-taking firm can only take the market price as given; it is not in a position to make price choices of any kind. Thus, firms in perfectly competitive markets will not engage in price discrimination. Firms in monopoly, monopolistically competitive, or oligopolistic markets may engage in price discrimination. 2-Distinguishable Customers. The market must be capable of being fairly easily segmented—separated so that customers with different elasticities of demand can be identified and treated differently. 3-Prevention of Resale. The various market segments must be isolated in some way from one another to prevent customers who are offered a lower price from selling to customers who are charged a higher price. If consumers can easily resell a product, then price discrimination is unlikely to be successful. Resale may be particularly difficult for certain services, such as dental checkups.

Monopoly power is one of three conditions that must be met:

Fixed cost

Pie Pizzeria pays $1000 rent each month and the lease will expire in two years. In the short run, Pie Pizzeria's rent does not change as its production increases. What kind of cost is the rent?

give firms a reduction in taxes depending on how much research and development they do.

Policy #2: Tax Breaks for Research and Development -A complementary approach to supporting R&D that does not involve the government's close scrutiny of specific projects is to

Beneficial spillovers to a third party or parties

Positive externalities

If a firm faces a downward-sloping demand curve, marginal revenue is less than ------.

Price

the lowest legal price that can be paid in markets for goods and services, labor, or financial capital. ie. minimum wage sometimes called "price supports"

Price Floors

When demand is --------, total revenue moves in the direction of a price change. When demand is --------, total revenue does not change in response to a price change. When demand is ---------, total revenue moves in the direction of a quantity change.

Price Inelastic; Unit price elastic; price elastic

Give an example of a price floor. Explain its effect on the market using a graph.

Price floor - the lowest legal price that can be paid in markets for goods and services, Minimum wage is an example of the price floor Keeps the demand and supply above the equilibrium and creates a surplus

factors that determine the quantity of good or service sellers are willing to offer for sale

Price is one factor; ceteris paribus, a higher price is likely to induce sellers to offer a greater quantity of a good or service. Production cost is another determinant of supply. Variables that affect production cost include the prices of factors used to produce the good or service, returns from alternative activities, technology, the expectations of sellers, and natural events such as weather changes. Still another factor affecting the quantity of a good that will be offered for sale is the number of sellers—the greater the number of sellers of a particular good or service, the greater will be the quantity offered at any price per time period.

Extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept.

Producer Surplus

Law of Supply

Producers offer more of a good as its price increases and less as its price falls. Price and quantity supplied move in the same direction.

PPC and PPF

Production Possibilities Curve is equivalent to Production Possibilities Frontier The shape of the PPF is typically curved outward, rather than straight. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. Over time, a growing economy will tend to shift the PPF outwards. The shape of the PPF is typically curved outward, rather than straight. • All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use society's resources to produce more of one good without decreasing production of the other good. • The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods.

Law of diminishing marginal returns

Sarah runs a factory that makes dolls in Phoenix, Arizona. Sarah's 3 workers produced 90 dolls per day. Suppose Jill adds one more worker and, as a result, her factory's production increases to 100. Sarah noticed that the last worker added only 10 dolls, but the 3rd worker added 20 dolls. What do economists call this?

Utility

Satisfaction or pleasure - consuming a product. A subjective term that is difficult to quantify.

Specific Taxes

Second type of government intervention. When the government taxes an organization if they must commit the action that they set direct controls to prevent.

Collusion

Secret agreement or cooperation

Buyer pays an extra amount and the seller agrees to fix anything specified in the contract that goes wrong for a set time period.

Service contracts.

Changes in Supply

Shifts in the supply curve due to changes in the determinants of supply (influences on selling plans).

A planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity.

Short Run

Short-Run vs. Long-Run Costs

Short-run = At least one input is fixed. ° Only having one oven Long-run = All inputs are variable. ° Having more than one oven

demand curve.

Short-run equilibrium for a monopolistically competitive firm is identical to that of a monopoly firm. In both cases, the firm produces an output at which marginal revenue equals marginal cost and sets its price according to its

Supply curve

Shows how much of a good will be offered for sale at various prices

Social cost include the private costs of production incurred by the compnay and the external costs of pollution that are passed on to society

Social cost

1. Determine the negative externality. 2. Identify equilibrium price and quantity when only private costs are taken into account and then when social costs are taken into account. 3. Look down columns to where quantity demanded is equal to the quantity supplied without oayin cost of externality. 4. Identify the equilibrium price and quantity when the additional external costs are taken into account. Look at the columns of quantity demanded and quantity supplied after paying the costs of the externality. 5. Consider how taking the externailty into account affects the equilibrium price and quantity.

Steps to Identify Equilibrium Price, and Quantity pg. 60

natural events as a supply shifter

Storms, insect infestations, and drought affect agricultural production and thus the supply of agricultural goods. If something destroys a substantial part of an agricultural crop, the supply curve will shift to the left. EXThe terrible cyclone destroyed some of the country's prime rice growing land. That shifted the supply curve for rice to the left. If there is an unusually good harvest, the supply curve will shift to the right.

Two goods for which an increase in price of one increases the demand for the other

Substitutes

If a 10 percent increase in the price of good X increases the demand of good Y by 5 percent, then X and Y are

Substitutes and the cross price elasticity equals 1/2.

Price of Related Products

Substitution in production. As a producer of footballs and basketballs, if the price of footballs goes down, you will want to produce fewer footballs, and therefore more basketballs.

price inelastic, unit price elastic, price elastic, perfectly inelastic, perfectly elastic

Supply is ____ if the price elasticity of supply is less than 1; it is ___ if the price elasticity of supply is equal to 1; it is ___ if the price elasticity of supply is greater than 1. A vertical supply curve is said to be ___. A horizontal supply curve is said to be ____.

Using the formula for cross price elasticity of demand, you find that eA,B = (−3%)/(10%) = −0.3. Since the eA,B is negative, bagels and cream cheese are complements. Using the formula for income elasticity of demand, you find that ey = (+1%)/(10%) = +0.1. Since ey is positive, bagels are a normal good.

Suppose that when the price of bagels rises by 10%, the demand for cream cheese falls by 3% at the current price, and that when income rises by 10%, the demand for bagels increases by 1% at the current price. Calculate the cross price elasticity of demand for cream cheese with respect to the price of bagels and tell whether bagels and cream cheese are substitutes or complements. Calculate the income elasticity of demand and tell whether bagels are normal or inferior.

time

Suppose the price of electricity rises tomorrow morning. What will happen to the quantity demanded?The answer depends in large part on how much time you allow for a response. If you are interested in the reduction in quantity demanded by tomorrow afternoon, you can expect that the response will be very small. But if you give consumers a year to respond to the price change, you can expect the response to be much greater. You expect that the absolute value of the price elasticity of demand will be greater when more time is allowed for consumer responses. Consider the price elasticity of crude oil demand. estimated short- and long-run price elasticities of demand for crude oil for 1971 to 2000 found that for virtually every country, the price elasticities were negative, and the long-run price elasticities were generally much greater (in absolute value) than were the short-run price elasticities.

As shown in Panel (a), the firm is making economic losses. MR = MC at a quantity of q1 restaurant meals per week, charging a price of P1. The average costs of producing q1 is found from the ATC curve at q1, which gives an average cost of ATC1. The profit per unit for the restaurant is equal to price minus average total cost at the profit maximizing quantity (P1 = ATC1), meaning that some restaurants would be earning negative economic profits, as shown by the shaded area. As shown in Panel (b), in the long run, as some restaurants close down, the demand curve faced by the typical remaining restaurant would shift to the right from D1 to D2. The demand curve shift leads to a corresponding shift in marginal revenue from MR1 to MR2. Price would increase from P1 to P1, and output would increase to q2, above q1. In the new long-run equilibrium, restaurants would again be earning zero economic profit.

Suppose the typical firm in the monopolistically competitive restaurant industry in your town is experiencing economic losses. Using graphs similar to Figure 11.1 and Figure 11.2, explain the effect of the economic losses on the industry in the short run and the long run. Be sure to include in your answer an explanation of what happens to price, output, and economic profit.

price elasticity

The ____ of supply measures the responsiveness of quantity supplied to changes in price. It is the percentage change in quantity supplied divided by the percentage change in price. It is usually positive.

Marginal Decision Rule

The ______ ______ rule states that an activity should be expanded if its marginal benefit exceeds its marginal cost. The marginal benefit of this activity is the utility gained by spending an additional $1 on the good. The marginal cost is the utility lost by spending $1 less on another good. Ex: - Because consumers can be expected to spend the budget they have, utility maximization is a matter of arranging that spending to achieve the highest total utility possible. If a consumer decides to spend more on one good, he or she must spend less on another in order to satisfy the budget constraint.

social benefit

The __________ of an invention, once these spillovers are taken into account, typically exceeds the private benefit to the inventor. If inventors could receive a greater share of the broader social benefits for their work, they would have a greater incentive to seek out new inventions.

slope , Elasticity

The ____of a line is the change in the value of the variable on the vertical axis divided by the change in the value of the variable on the horizontal axis between two points. ____is the ratio of the percentage changes.

Comparative Advantage

The ability of a person (or nation) to produce a good or perform an activity at a LOWER OPPORTUNITY COST than another person (or nation). (see graph on page 14) Would contrast how their opportunity costs differ. comparative advantage and absolute advantage shows how a party can benefit from trade as long as there is a comparative advantage, and that an absolute advantage may not be necessary. Comparative advantage refers either to when a country can produce a good at a lower cost in terms of other goods or when a country has a lower opportunity cost of production. The driving force of trade.

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 - the seller's cost of providing it. The area on the graph that is below the price and above the supply curve.

Producer Surplus

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

Quantity Supplied

The amount a seller is willing and able to sell at a given price during a particular period all other things unchanged.

Marginal Utility

The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged; alternately, the additional utility a consumer receives from consuming one more unit of a good, service, or activity, all other things unchanged. Ex: - The first movie Henry Higgins sees increases his total utility by 36 units. Therefore, the marginal utility of the first movie is 36. The second increases his total utility by 28 units; its marginal utility is 28. The seventh movie does not increase his total utility; its marginal utility is zero.

2.2// Define Quantity Supplied

The amount of product businesses are willing to supply at each price

The short run

The analysis of production and cost begins with a period economists call the short run. Fixed plant size, land and machinery and fixed number of plants. Firms can vary their output by changing resources used for a small period of time.

Benefit

The area under the marginal benefit curve for an activity gives its total ______

Cost

The area under the marginal cost curve gives the activity's total ____

Average Product

The average amount produced by each unit of a variable factor of production.

What is the result of the price increase on the consumer's total utility?

The budget line pivots inward, so total utility decreases.

Price Discrimination

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

Imperfect Information

The buyers and/or sellers don't have all the information for the exchange. Ex: Buying a new car that's a lemon.

Adverse Selection Problem

The buyers of insurance have more information about whether they are high-risk or low-risk than the insurance company does. This creates an asymmetric information problem for the insurance company because buyers who are high-risk tend to want to buy more insurance, without letting the insurance company know about their higher risk.

substitution effect

The change in a consumer's consumption of a good in response to an income-compensated price change

Income effect

The change in consumption of a good, resulting from the implicit change in income because of a price change

Marginal Revenue

The change in total revenue that results from a one-unit increases in the quantity sold.

each firm is a price setter and thus faces a downward-sloping demand curve.

The characteristic that distinguishes monopolistic competition from perfect competition is differentiated products;

increases , increase , reduces

The demand curve shows how changes in price lead to changes in the quantity demanded. A movement from point A to point B shows that a $0.10 reduction in price ____ the number of rides per day by 20,000. A movement from B to A is a $0.10 _____ in price, which _____quantity demanded by 20,000 rides per day.

availability of substitutes

The demand for a good is elastic if a substitute for it is easy to find. ex cars The demand for a good is inelastic if a substitute for it is hard to find. ex gas

After movie streaming services became popular, movie theaters found that their revenue declined. In an attempt to boost revenues, the local movie theater raised the price of a movie. And their revenues fell even more. What can explain this result?

The demand for movie tickets is elastic because of many substitutes.

Consumer Surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price. Below the demand curve and above the price.

Accounting Profit

The difference between total revenue (PxQ) and explicit cost. (TR- Explicit costs)is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit. Example: Calculating Implicit Costs

Economic Profit

The difference between total revenue and economic cost. (TR- Economic costs) AND (TR-Opportunity costs) AND (TR-Explicit costs - Implicit costs)Economic profit is total revenue minus total cost, including both explicit and implicit costs. EP per unit is difference between price and average total cost.

is a Nash equilibrium.

The equilibrium in the prisoners' dilemma

independent variable

The experimental factor that is manipulated; the variable whose effect is being studied.

When a firm is operating ON the PPF

The firm is efficiently using its resources

How is a monopolistically competitive firm similar to a monopoly firm in the short run?

The firm produces an output at which marginal revenue equals marginal cost and sets its price according to its demand curve.

Short-Run Average Cost

The firm's total cost per unit of output when it has one or more fixed inputs.

Input Prices (resource prices)

The first determinant of supply. Higher input prices imply higher costs and lower supply. (An increase in the price of cream that causes the ice cream to cost more to produce. As the price of cream goes up, the supply of cream will go down. If the price of cream goes down, the supply of ice cream will go up.)

third, fourth, a, b

The first two rows of the table give the values for quantities of labor and total product. Marginal product, given in the ____row, is the change in output resulting from a one-unit increase in labor. Average product, given in the ___row, is output per unit of labor. Panel (_) shows the total product curve. The slope of the total product curve is marginal product, which is plotted in Panel (_). Values for marginal product are plotted at the midpoints of the intervals. Average product rises and falls. Where marginal product is above average product, average product rises. Where marginal product is below average product, average product falls. The marginal product curve intersects the average product curve at the maximum point on the average product curve. Figure 8.2

Income Normal Inferior

The first type of determinant. With two types of goods. ______ Goods and ______ Goods

Taste (Preferences)

The fourth determinant of demand.

Opportunity Cost

The full value of the best alternative that is given up, or forgone (value of the next best alternative) EX given the option of two activities person chooses soccer game over going to a concert what you sacrifice / what you gain- core of economic thinking. As the set of available alternatives changes, you expect that the choices individuals make will change. A rainy day could change the opportunity cost of reading a good book; you might expect more reading to get done in bad weather than in good. A high income can be costly to take a day off; you might expect highly paid individuals to work more hours than those who are not paid as well. If individuals are maximizing their level of satisfaction and firms are maximizing profits, then a change in the set of alternatives they face may affect their choices in a predictable way. The emphasis on opportunity costs is an emphasis on the examination of alternatives. One benefit of the economic way of thinking is that it pushes you to think about the value of alternatives in each problem involving choice.It can be money, time or a resource

producer surplus

The gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price.

consumer surplus

The gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price.

The Reallocation Process

The government collects taxes and spends that money on the production of public goods and quasi-public goods. This is an example of the reallocation process.

The Reallocation Process

The government collects taxes and spends that money on the production of public goods and quasi-public goods. This is an example of what process?

price elasticity of demand determinats

The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to a price change. .Most important is the availability of substitutes, the importance of the item in household budget, and time.

reduces

The higher price charged by the monopoly firm compared to the perfectly competitive firm ____ consumer surplus, part of which is transferred to the monopolist. This transfer generates an equity issue.

Households, Businesses (or firms)

Two economic agents in the economy (the circular flow)

Why are price controls inefficient?

The imposition of a price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and quantity, and thus will create an inefficient outcome. But there is an additional twist here. Along with creating inefficiency, price floors and ceilings will also either transfer some consumer surplus to producers or some producer surplus to consumers.

Scarcity Resources

The inability to satisfy everyone's wants - due to limited _______________. economics seeks to solve the problem of scarcity

Implicit Costs

The income you would have earned. The value of the next best use. (Time, depreciation, forgone interest)represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store. Implicit costs also allow for the depreciation of goods, materials, and equipment that are necessary for a company to operate.

The Fallacy of False Cause

The incorrect assumption that one event causes another because the two events tend to occur together.

Marginal Product

The increase in output that arises from an additional unit of input. (▲Q\▲L) = (MP)

lower level of utility, higher level of utility

The indifference curve A shown here gives combinations of skiing and horseback riding that produce the same level of utility. Janet Bain is thus indifferent to which point on the curve she selects. Any point below and to the left of the indifference curve would produce a _____; any point above and to the right of the indifference curve would produce a ______

Shortage

The initial effect of an increase in demand is a _____. is the amount by which the quantity demanded exceeds the quantity supplied at the current price. Exists if the quantity of a good/service demanded exceeds the quantity supplied at the current price.

a recognition that the actions of one firm will produce a response from rivals and that these responses will affect it.

The key characteristics of oligopoly are _____. Each firm is uncertain what its rivals' responses might do.

Moral Hazard

The lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.

Wages

The largest source of income in any economy.

The quantity demanded changes when the price of the good changes.

The law of demand refers to how

marginal benefit curve

The marginal benefit Laurie expects from studying for her accounting exam is shown by the ___. The first hour of study increases her expected score by 14 points, the second hour by 10 points, the third by 6 points, and so on.

Law of Diminishing Marginal Returns

The marginal product of labor will eventually decline when additional units of labor are added to a fixed amount of capital. As long as the marginal product of labor is positive, the total product will increase.

absolute value of the slope of an indifference curve.

The marginal rate of substitution is equal to the ____. It is the maximum amount of one good a consumer is willing to give up to obtain an additional unit of another. Here, it is the number of days of skiing Janet Bain would be willing to give up to obtain an additional day of horseback riding. Notice that the marginal rate of substitution (MRS) declines as she consumes more and more days of horseback riding.

inefficient , QSocial

The market demand curve does not reflect the positive externality of flu vaccinations, so only QMarket will be exchanged. This outcome is ____because the marginal social benefit exceeds the marginal social cost. If the government provides a subsidy to consumers of flu shots, equal to the marginal social benefit minus the marginal private benefit, the level of vaccinations can increase to the socially optimal quantity of ___.

Shutdown point

The minimum level of average variable cost, which occurs at the intersection of the marginal cost curve and the average variable cost curve

Shutdown Point

The minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run. P<AVC

the availability of substitutes, the importance of the item in household budgets, and time.

The most important determinants of the price elasticity of demand for a good or service are

negative, equal to 1.00, is equal to 0.50

The nonlinear demand curves in Panels (c) and (d) have price elasticities of demand that are ___; but, the value of the price elasticity is constant all along each demand curve. The demand curve in Panel (c) has price elasticity of demand ___ throughout its range; in Panel (d) the price elasticity of demand ____ throughout its range. Empirical estimates of demand often show curves like those in panels (c) and (d) that have the same elasticity at every point on the curve.

.

The number of applications filed for patents increased substantially from the mid-1990s into the first years of the 2000s, due in part to the invention of the internet, which has led to many other inventions and to the 1998 Copyright Term Extension Act.

Resource Market (goods and services), Product Market(land, labor, capital and entrepreneurship)

Two markets in the circular flow

price inelastic, unit price elastic, price elastic

When demand is ___, total revenue moves in the direction of a price change. When demand is ____, total revenue does not change in response to a price change. When demand is ____, total revenue moves in the direction of a quantity change.

Total Utility

The number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer's ______ ______, the greater that consumer's level of satisfaction. Ex: - The total utility curve shows that when Henry attends no movies during a month, his total utility from attending movies is zero. As he increases the number of movies he sees, his total utility rises. When he consumes one movie, he obtains 36 units of utility. When he consumes four movies, his total utility is 101. He achieves the maximum level of utility possible, 115, by seeing six movies per month. Seeing the seventh movie adds nothing to his total utility.

Monopoly and the Concentration of Power

The objections to monopoly run much deeper than worries over economic efficiency and high prices. Because it enjoys barriers that block potential rivals, a monopoly firm wields considerable market power. For many people, that concentration of power is objectionable

price ceiling,

The original intersection of demand and supply occurs at E0. If demand shifts from D0 to D1, the new equilibrium would be at E1—unless a ____ prevents the price from rising. If the price is not permitted to rise, the quantity supplied remains at 15,000. However, after the change in demand, the quantity demanded rises to 19,000, resulting in a shortage.

4 Firm Concentration Ratio

The output of the four largest firms / total output in the industry

Inflation Rate

The percent change in prices from year to year.

Unemployment Rate

The percent of people in the labor force who want a job but are not working. Unemployment rate equals the number of people unemployed divided by the number of people in the labor force times one hundred.

Resources (Factors of Production)

The points on PPF indicate full employment of _______. inputs used to create outputs (goods and services).

Principal-agent Problem

The principal-agent problem is also known as agency dilemma or the agency problem, and occurs when one person or entity, a.k.a. the "agent", is able to make decisions and/or take actions on behalf of, or that impact, another person or entity, a.k.a. the "principal".

Productive Efficiency

The production of any particular good in the least costly way.

What will happen to one firm operating in an oligopoly when it raises its price and the other firms do not?

The sales of the firm with the higher price will decline slightly.

Prices of other goods

The second determinant of supply. Substitution in production. As a producer of footballs and basketballs, if the price of footballs goes down, you will want to produce fewer footballs, and therefore more basketballs.

Price of Related Goods Substitute Complementary Goods

The second type of determinant of demands. With two types of goods. ________ Goods and ______ Goods

economies of scale, locational advantages, high sunk costs associated with entry, restricted ownership of key inputs, and government restrictions

The sources of monopoly power include __________, such as exclusive franchises, licensing and certification requirements, and patents.

Herfindahl-Hirschman Index (HHI)

The square of the percentage of the firm's market share, sometimes limited to the largest 50 firms in the market.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

macroeconomics

The study of the economy as a whole is called __________. Focuses on areas of broad growth of production, number of unemployed people, the inflationary increases in prices, government deficits, and levels of exports and imports. Monetary (bank, lenders, interest rate)and fiscal policies (taxes, legislative body). _________ is concerned with the aggregate or total effect, determined by adding across many markets. _______________ studies the behavior of variables that describe the whole economy, such as the value of the total output that the economy produces in a given time period (which is called gross domestic product, or GDP).

Total surplus (AKA social surplus or total surplus)

The sum of consumer and producer surplus - the area between the supply and demand curves up to the equilibrium quantity. (see graph consumer surplus)

Total surplus

The sum of consumer and producer surplus. The area between the supply and demand curves up to the equilibrium quantity.

Efficiency occurs in a market when:

The sum of consumer surplus and producer surplus is maximized.

social surplus

The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus.

The original equilibrium (before the external social cost of pollution is taken into account) is where the private supply curve crosses the demand curve. This original equilibrium is at a price of $15 and a quantity of 440. After taking into account the additional external cost of pollution, the production becomes more costly, and the supply curve shifts up. The new equilibrium will be at a price of $30 and a quantity of 410.

The supply and demand conditions for a manufacturing firm are given. The third column represents a supply curve without taking the social cost of pollution into account. The fourth column represents the supply curve when the firm is required to take the social cost of pollution into account. Identify the equilibrium before the social cost of production is included and after the social cost of production is included. pg 60

Asymmetric Information

When buyers and sellers have different information, it is known as a state of asymmetric information.

number of sellers as a supply shifter

The supply curve for an industry, such as coffee, includes all the sellers in the industry. A change in the number of sellers in an industry changes the quantity available at each price and thus changes supply. An increase in the number of sellers supplying a good or service shifts the supply curve to the right; a reduction in the number of sellers shifts the supply curve to the left. The market for cellular phone service has been affected by an increase in the number of firms offering the service. Over the past decade, new cellular phone companies emerged, shifting the supply curve for cellular phone service to the right.

perfectly inelastic, perfectly elastic

The supply curve in Panel (a) is ___. In Panel (b), the supply curve is ____.

Supply

The supply schedule and supply curve show the relationships between the price of a product and the quantity supplied.

positive relationship between price and quantity supplied.

The supply schedule shows the quantity of coffee that will be supplied in the United States each month at particular prices, all other things unchanged. The same information is given graphically in the supply curve. The values given here suggest a?

total product curve

The table gives output levels per day for Aclome Clothing at various quantities of labor per day, assuming the firm's capital is fixed. These values are then plotted graphically as a _____.

total benefit, marginal benefit, total benefit curve, marginal benefit curve

The table in Panel (a) shows the ____ and ___ of the time Laurie spends studying for her economics exam. Panel (b) shows the ___. Panel (c) shows the ___, which is given by the slope of the total benefit curve in Panel (b).

Cost-benefit analysis

This analysis helps the government to make decisions by weighing whether or not the benefit of having more public goods is worth the loss of the private goods. If so, the government will pursue that course. MB (marginal benefit) > MC (Marginal cost)

Cost-benefit analysis

This analysis helps the government to make decisions by weighing whether or not the benefit of having more public goods is worth the loss of the private goods. If so, the government will pursue that course. Marginal benefit is greater than Marginal cost.

substitution effect, increases the quantity demanded,

This demand curve for Mary Andrews was presented in "Deriving a Market Demand Curve." It shows that a reduction in the price of apples from $2 to $1 per pound increases the quantity Mary demands from 5 pounds of apples to 12. This graph shows that this change consists of a ____ and an income effect. The substitution effect ___ by 4 pounds, the income effect by 3, for a total increase in quantity demanded of 7 pounds.

Labor force

Those above 16 years old, able and willing to work, not institutionalized in jails or hospitals, not in miltary, in school full time, or retired.

The answer depends in large part on how much time you allow for a response. If you are interested in the reduction in quantity demanded by tomorrow afternoon, you can expect that the response will be very small. But if you give consumers a year to respond to the price change, you can expect the response to be much greater. You expect that the absolute value of the price elasticity of demand will be greater when more time is allowed for consumer responses.

Time (determinant of the price elasticity of demand) Suppose the price of electricity rises tomorrow morning. What will happen to the quantity demanded?

Nash equilibrium (noncooperative equilibrium)

When each player (firm) takes the best possible action given the action(s) of the other player(s).

time

Time plays a very important role in the determination of the price elasticity of supply. Look again at the effect of rent increases on the supply of apartments. Suppose apartment rents in a city rise. If you are looking at a supply curve of apartments over a period of a few months, the rent increase is likely to induce apartment owners to rent out a relatively small number of additional apartments. With the higher rents, apartment owners may be more vigorous in reducing their vacancy rates, and, indeed, with more people looking for apartments to rent, this should be fairly easy to accomplish. Attics and basements are easy to renovate and rent out as additional units. In a short period of time, however, the supply response is likely to be fairly modest, implying that the price elasticity of supply is fairly low. A supply curve corresponding to a short period of time would look like S1 in Figure 4.10. It is during such periods that there may be calls for rent controls. If the period of time under consideration is a few years rather than a few months, the supply curve is likely to be much more price elastic. Over time, buildings can be converted from other uses and new apartment complexes can be built. A supply curve corresponding to a longer period of time would look like S2 in Figure 4.10.

Accountant's Goal

To determine how much money is in your account.

Economist's Goal

To determine whether or not you are satisfied with the return in this industry.

dividing the amount of the product forgone by the amount of the product gained.

To find the opportunity cost of producing one more unit of any product while on the production possibilities frontier requires

marginal revenue

To maximize profits or minimize losses, a monopoly firm produces the quantity at which marginal cost equals ______. Its price is given by the point on the demand curve that corresponds to this quantity.

tangent

To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is _____ to the budget line.

Returns from alternative activities as supply shifter

To produce one good or service means forgoing the production of another. The concept of opportunity cost in economics suggests that the value of the activity forgone is the opportunity cost of the activity chosen; this cost should affect supply.EX one opportunity cost of producing eggs is not selling chickens. An increase in the price people are willing to pay for fresh chicken would make it more profitable to sell chickens and would thus increase the opportunity cost of producing eggs. It would shift the supply curve for eggs to the left, reflecting a decrease in supply.

Giffen good

To qualify as a Giffen good, a good must be inferior and must have an income effect strong enough to overcome the substitution effect. In such a situation, purchases of the item are such a large percentage of the diet of the poor that when the item's price rises, the implicit income of the poor falls drastically. In order to subsist, the poor reduce consumption of other goods so they can buy more of the staple.

Cost that does not vary without output in calculation

Total Fixed Cost TFC

Profit

Total Revenue (TR) minus Total Cost (TC)

Cost that varies with the level of output in calculation

Total Variable Cost TVC

Total Cost

Total cost (TC) describes the total economic 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 labour and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery.

fixed and variable costs

Total cost in the short run includes

Average Costs

Total costs / output

Average Revenue (AR)

Total revenue divided by the quantity of the product sold.

rises and demand is inelastic.

Total revenue increases if the price of the good

Economic Profit

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

Economic Profits

Total revenue minus total cost, including both explicit and implicit costs. (Total Revenue - Explicit Cost - Implicit Cost)

Total utility

Total satisfaction

Average Variable Cost (AVC)

Total variable costs divided by quantity of output.

Property right that allows the owner of a resource to sell or lease it to someone else

Transferable property right

Negative

Trash dumped upstream flows downstream past your office building. Negative or positive externality

In a market with n identical firms that produce at marginal costs of c and without fixed costs, and which compete by setting their quantities, the equilibrium outcome converges to the equilibrium outcome under Bertrand competition, if the number of firms n becomes very large.

True

The market for crude oil is a good example for a market with Cournot competition.

True

Monopoly

Type of market that has only one firm NO rivals, no close substitute product, entry barriers are blocked( economies of scale, advantage of location, high sunk costs, a dominant position in ownership, govt restrictions), public relations advertising is used as nonprice competition, price maker EXP (Utilities) determines its own price. It selects from its demand curve the price that corresponds to the quantity the firm has chosen to produce in order to earn the maximum profit possible. The entry of new firms, which eliminates profit in the long run in a competitive market, cannot occur in the monopoly model. Could be only dentist, theater, doctor for miles (location)

Monopoly

Type of market that has only one firm, no close substitute product, entry barriers are blocked, public relations advertising is used as nonprice competition, price maker.

Imperfect Competition

Types of ______ _______ Monopolistic Competition Oligopoly Competition Pure Monopoly/monopoly

If a good has an external cost, the:

Unregulated competitive market produces more output than is efficient.

If two goods are unrelated, a change in the price of one will not affect the demand for the other—the cross price elasticity of demand is zero.

Unrelated

1.00

Using the arc elasticity of demand, calculate the price elasticity of demand for Red Bull drink when the price drops from $3.00 to $2.50 and the quantity demanded rises from 10 cans to 12.

Goods and services you buy because they provide you with satisfaction, feeling better off because you have purchased them.

Utility

Utility maximization

Utility is maximized when total outlays equal the budget available and when the ratios of marginal utility to price are equal for all goods and services a consumer consumes; this is the utility-maximizing condition.

1. The point at which utility is maximized must be within the attainable region defined by the budget line. 2. The point at which utility is maximized must be on the highest indifference curve consistent with condition 1.

Utility maximization is therefore a matter of selecting a combination of two goods that satisfies two conditions:

Full Employement

Utilizing all of the resources in the economy that are available to you

30

Valarie owns a firm and she paid $15,000 in wages and $20,000 in rent for production of 500 units of goods. Her rent does not change as her output increases, but her labor cost does. What is Valarie's average variable cost?

Promise to fix or replace the good for a certain period of time

Warranty

Positive Externalities

Ways to correct ___________ _________ : Private bargaining : A company offers to help pay for education to offset cost in order to improve your value as an employee. Government intervention that includes subsidy to consumers, subsidy to producers and government provision (free product such as vaccination). having music you love played outside that you love coming in windows (mostly tech) can be a flu shot

Cheaper

We obtain marginal utility from additional units of a good, so we will buy more only if that good is ______

Cheaper

We obtain marginal utility from additional units of a good, so we will buy more only if that good is cheaper.

Amount that a seller is paid for a good minus the seller's actual cost. Producer surplus equals the difference between the amount that a seller is paid for a good and the seller's actual cost.

What describes producer surplus? Allocation of resources when net benefits are maximized. Gain in net benefits. The amount that a seller is paid for a good minus the seller's actual cost. Marginal benefit above the market price.

Advertising can increase or decrease competition affecting firms' ability to enter a market. Advertising may decrease competition if it draws customers away from rival firms. Less competition leads to higher prices and decreased production as supply decreases. Advertising is one way that firms can differentiate their products, which may also increase the competitiveness of a market. More competition leads to lower prices and increased production as supply increases.

What describes the differing perspectives on advertising? Advertising can increase competition, which leads to higher prices and decreased production quantities. Advertising can increase or decrease competition affecting firms' ability to exit a market. Advertising can decrease competition, which makes it harder for firms to exit the market. Advertising can increase or decrease competition affecting firms' ability to enter a market.

Deadweight loss Refers to the loss of net benefit that results when not pursing an activity at the most efficient level.

What does the failure to carry out an activity at the efficient level cost?

slope , elasticity

When computing elasticity at different points on a linear demand curve, the ____ is constant—that is, it does not change—but the value for _____ will change.

They are able to choose from many differentiated products. With monopolistic competition, there are several competitors selling products that may be similar but also have important differences (i.e., they are differentiated).

What is a characteristic of monopolistic competition from the view of consumers? They perceive quality as uniform across the various products. They must settle for only what they can obtain. They have no way to discern the difference of products from various sellers. They are able to choose from many differentiated products.

A monopsony has a single buyer for a good or service, whereas a monopoly has a single seller.

What is a main distinction between a monopoly and a monopsony? A monopsony has a single buyer for a good or service, whereas a monopoly has a single seller. A monopsony exists whenever a firm faces an upward-sloping demand curve. A monopsony has a single seller for a good or service, whereas a monopoly has a single buyer. A monopsony exists whenever a firm faces a downward-sloping supply curve.

Produce output where MR = MC and charge a price from the demand curve Profits are maximized at the quantity where MR = MC; the price is taken from the demand curve at that quantity.

What is a monopolist able to do to maximize profits? Set the price at the level that will maximize its per unit profit Produce output where MR = MC and charge a price from the demand curve Produce maximum output where price is equal to its marginal cost Set output at MR = MC and set price at the demand curve's highest point

divide capital's marginal product by its price: MPK / PK. The price of capital is the "rent" paid for the use of a unit of capital for a given period. If the firm already owns the capital, then this rent is an opportunity cost; it represents the return the firm could get by renting the capital to another user or by selling it and earning interest on the money thus gained.

What is the marginal benefit, say, of an additional $1 spent on capital? An additional unit of capital produces the marginal product of capital. To determine the marginal benefit of $1 spent on capital;

1-The government's grant of an exclusive franchise to the drug gave the firm monopoly power. 2-While John and Mary have the only shop in town, this is an easy entry business. Further, there may be competitors in the nearby town. John and Mary probably have monopoly power, but they do not have a monopoly. 3-Natural monopoly 4-Owning who resource or government license/copyright

What is the source of monopoly power—if any—in each of the following situations? The U.S. Food and Drug Administration granted Burroughs Wellcome exclusive rights until 2005 to manufacture and distribute AZT, a drug used in the treatment of AIDS. John and Mary Doe run the only shoe repair shop in town. One utility company distributes residential electricity in your town. Monsanto owns most of the corn seed in the US and farmers are not allowed to reuse seeds and must buy their seeds from Monsanto.

Game theory is used to explain how decisions are made by two competitors in a market based on the anticipated reactions of the firms.

What is the study of strategy that uses an analytical approach to understand how an oligopoly firm makes decisions that determine the payoffs they receive? Monopoly Collusion Game theory Prisoners' dilemma

3 basic economic questions

What to produce? How to produce? For whom to produce?

Marginal Cost

What you give up to get one additional unit of something.

Resources are

Whatever can be used to produce goods and services for human consumption

price discrimination

When a firm charges different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers, the firm is engaging in ______________

Market Efficiency

When a market is capable of producing output high enough to meet consumer demand.

Rivalry

When a person buys and consumes a product, the product will not be available for others.

Non-Rivalry

When a person buys and consumes a product, the product will still be available for others.

dominant strategy

When a player's best strategy is the same regardless of the action of the other player

Quantity demanded, Quantity supplied.

When a price ceiling is set below the equilibrium price, _____ will exceed _______, and excess demand or shortages will result.

Quantity supplied, quantity demanded

When a price floor is set above equilibrium price, ______ will exceed_____, and excess supply or surpluses will result.

Binding Not Binding

When a price floor or price ceiling has an effect on the market it is _______. When it doesn't it is ______ ________.

Law of Diminishing Returns

When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.

positive, negative, upward , negative

When applied to labor supply, the price elasticity of supply is usually ___ but can be ____. If higher wages induce people to work more, the labor supply curve is ___ sloping and the price elasticity of supply is positive. In some very high-paying professions, the labor supply curve may have a ____slope, which leads to a negative price elasticity of supply.

Positive, negative, upward, positive

When applied to labor supply, the price elasticity of supply is usually ______ but can be ______. If higher wages induce people to work more, the labor supply curve is ______ sloping and the price elasticity of supply is ______. In some very high-paying professions, the labor supply curve may have a negative slope, which leads to a negative price elasticity of supply.

Overt Collusion (Spoken, open or traceable)

When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits. Cartels - restrict output to increase price.

Constant Returns to Scale

When firms produces more and their long-run average total cost remains the same

Adverse Selection

When groups with inherently higher risks than the average person seek out insurance, thus straining the insurance system.

MR = MC.

When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where:

Absolute Advantage

When one person (or nation) is more productive than another - TAKES LESS TIME or resources to produce a good or perform an activity - we say that person (or nation) has an ________ ______. Look at how many of the item each country produces.

Perfectly elastic demand

When the demand curve is a horizontal line. Any increase in price will mean that the product will not sell.

closer

When the increments used to measure time allocated to studying economics are made smaller, in this case 12 minutes instead of whole hours, the area under the marginal benefit curve is ___to the total benefit of studying that amount of time.

Overproduction relative to the efficient level will occur.

When the production of a good has a marginal external cost (negative externality), which of the following occurs in an unregulated market?

Two

When we are talking about the basic economic model of production, the assumption is we only have ___ items to produce: ___ goods or services, such as pizza and cola.

Inferior

When your income increases you buy less of this kind of good. The demand curve for this good will shift left as income increases. (Ramen Noodles, Spam, Expired Products, Cheap Meat)

Normal

When your income increases you buy more of this kind of good. The demand curve for this good will shift to the right as income increases.

Normal Goods

When your income increases you buy more of this kind of good. The demand curve for this good will shift to the right as income increases.

Adverse Selection

Whenever one party has special knowledge about some kind of characteristic, then there is the problem of adverse selection and, in the case of insurance, buyers know more about their own histories than the insurance companies; those in dangerous jobs or high-risk lifestyles tend to seek insurance.

With economies of scale, a firm can produce goods at a lower cost per unit than its rivals, thereby driving them out of the market.

Which barrier to entry involves a firm having a lower per unit cost than its rivals so that it can drive them out of the market and gain monopoly control? Government restriction Dominant position in ownership Economies of scale Location

a decrease in the price of a resource used to produce gasoline, such as crude oil

Which of the following increases the supply of gasoline?

MR = MC

Which of the following is ALWAYS true when a single-price monopolist maximizes its profit?

The U.S. government makes it a policy to use only predetermined CO2 emission reducing technologies.

Which statement is an example of command-and-control policy? The U.S. government makes it a policy to use only predetermined CO2 emission reducing technologies. The U.S. government determines which CO2 emission reducing technologies are cleaner and subsidizes their use.

Economies of scale Economies of scale occur when the long-run average cost curve falls as output increases.

Which term refers to the decrease of long-run average costs for a firm as it increases output? Diseconomies of scale Factors to scale Economies of scale Constant returns to scale

Increase in demand

Will cause a shift to the right

Unemployment

Workers that are actively looking for a job but aren't working

positive statement

a statement of fact or a hypothesis ex microsoft larges producer of operating systems in the world

The absolute value of price elasticity of demand tends to be greater when more time is allowed for consumers to respond. Over time, riders of the commuter rail system can organize car pools, move, or otherwise adjust to the fare increase. Using the formula for price elasticity of demand and plugging in values for the estimate of price elasticity (0.3) and the percentage change in price (5%) and then rearranging terms, you can solve for the percentage change in quantity demanded as: eD = %Δ in Q/%Δ in P; 0.3 = %Δ in Q/5%; (0.3)(5%) = %Δ in Q = 1.5%. Ridership falls by 1.5% in the first few months. Using the formula for price elasticity of demand and plugging in values for the estimate of price elasticity over a few years (1.5) and the percentage change in price (5%), you can solve for the percentage change in quantity demanded as eD = %Δ in Q/%Δ in P; 1.5 = %Δ in Q/5%; (1.5)(5%) = %Δ in Q = 7.5%. Ridership falls by 7.5% over a few years. Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic. Total revenue falls after a few years, since demand changes and becomes price elastic.

You are now ready to play the part of the manager of the public transit system. Your finance officer has just advised you that the system faces a deficit. Your board does not want you to cut service, which means that you cannot cut costs. Your only hope is to increase revenue. Would a fare increase boost revenue? You consult the economist on your staff who has researched studies on public transportation elasticities. She reports that the estimated price elasticity of demand for the first few months after a price change is about 0.3, but that after several years, it will be about 1.5. Explain why the estimated values for price elasticity of demand differ. Compute what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%. Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%. What happens to total revenue now and after several years if you choose to raise fares?

Suppose the demand for cherries sold from roadside stands in Michigan is perfectly elastic. The owner of one roadside stand raises the price of cherries by 10%, as a result

Zero cherries are sold at this stand.

Perfectly inelastic, Price inelastic, price inelastic

____ demand means that the change in quantity is zero for any percentage change in price; the demand curve in this case is vertical. _____ demand means only that the percentage change in quantity is less than the percentage change in price, NOT that the change in quantity is zero. ____ demand, the demand curve itself is still downward sloping.

Social Surplus

_____ is the sum of consumer surplus and producer surplus

Microeconomics

_________ describes the interactions of producers and consumers in individual markets, such as the market for cars. Focuses on the actions of individual agents within the economy ex households, workers and businesses. how household spends its budget, what combo of good/svc will buy, decide to work full/part time, how much will save for future or borrow to spend beyond their current means. Firm-how much product to produce and sell, prices, how many workers will be hired, expand/downsize/close, consumer behavior. focuses on individuals, firms, and industries.

supply curve (marginal cost)

a change in supply results from a change in a supply shifter an implies a SHIFT of the supply curve to the right or left. A change in price produces a change in quantity supplied and induces a movement along the supply curve. A change in price does NOT shift the supply curve. The second caution relates to the interpretation of increases and decreases in supply. an increase in supply is shown as a shift of the supply curve to the right; the curve shifts in the direction of increasing quantity with respect to the horizontal axis. a reduction in supply is shown as a shift of the supply curve to the left; the curve shifts in the direction of decreasing quantity with respect to the horizontal axis. Because the supply curve is upward sloping, a shift to the right produces a new curve that in a sense lies "below" the original curve. Students sometimes make the mistake of thinking of such a shift as a shift "down" and therefore as a reduction in supply. Similarly, it is easy to make the mistake of showing an increase in supply with a new curve that lies "above" the original curve. But that is a reduction in supply! focus on the fact that an increase in supply is an increase in the quantity supplied at each price and shifts the supply curve in the direction of increased quantity on the horizontal axis. Similarly, a reduction in supply is a reduction in the quantity supplied at each price and shifts the supply curve in the direction of a lower quantity on the horizontal axis. (page 25)

Production Possibilities Frontier (PPF)

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

long-run average cost curve

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

choice at the margin

a decision to do a little more or a little less of something

Law of demand

a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded.

demand schedule

a table that shows the quantities of a good or service demanded at different prices during a particular period all other things unchanged.

Demand schedule

a table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged.

decrease in demand

a leftward shift of the demand curve. The equilibrium price falls. As the price falls to the new equilibrium level, the quantity supplied decreases. Demand shifters that could reduce the demand for coffee include a shift in preferences that makes people want to consume less coffee; an increase in the price of a complement, such as doughnuts; a reduction in the price of a substitute, such as tea; a reduction in income; a reduction in population; and a change in buyer expectations that leads people to expect lower prices for coffee in the future.

decrease in supply

a leftward shift of the supply curve. The equilibrium price rises. As the price rises to the new equilibrium level, the quantity demanded decreases. Possible supply shifters that could reduce supply include an increase in the prices of inputs used in the production of coffee, an increase in the returns available from alternative uses of these inputs, a decline in production because of problems in technology (perhaps caused by a restriction on pesticides used to protect coffee beans), a reduction in the number of coffee-producing firms, or a natural event, such as excessive rain.

Perfection Competition

a market structure in which a large number of firms all produce the same product

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 (% change in quantity demanded)/ (% change in price)

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good. The value of the cross-price elasticity for complementary goods will thus be negative. Complements: Two goods that complement each other have a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.

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

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 all other things unchanged

Monopolostic Competition

a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit.

perfect competition

a model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers.

perfect competition

a model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers. The model of perfect competition also assumes that it is easy for new firms to enter the market and for existing ones to leave. And finally, it assumes that buyers and sellers have complete information about market conditions.

The Prisoners' Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

marketable permit program

a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms

short run

a planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity.

increase in demand

a rightward shift of the demand curve. As the price rises to the new equilibrium level, the quantity supplied increases . Notice that the supply curve does not shift; rather, there is a movement along the supply curve. Demand shifters that could cause an increase in demand include a shift in preferences that leads to greater coffee consumption; a lower price for a complement to coffee, such as doughnuts; a higher price for a substitute for coffee, such as tea; an increase in income; and an increase in population. A change in buyer expectations, perhaps due to predictions of bad weather lowering expected yields on coffee plants and increasing future coffee prices, could also increase current demand.

increase in supply

a rightward shift of the supply curve. The equilibrium price falls. As the price falls to the new equilibrium level, the quantity of coffee demanded increases. Notice that the demand curve does not shift; rather, there is movement along the demand curve. Possible supply shifters that could increase supply include a reduction in the price of an input such as labor, a decline in the returns available from alternative uses of the inputs that produce coffee, an improvement in the technology of coffee production, good weather, and an increase in the number of coffee-producing firms.

market failure

a situation in which a market left on its own fails to allocate resources efficientlyWhen there is market failure, the private market fails to achieve efficient output, because either firms do not account for all costs incurred in the production of output and/or consumers do not account for all benefits obtained (a positive externality). In the case of pollution, at the market output, social costs of production exceed social benefits to consumers and the market produces too much of the product.

imperfect information

a situation where either the buyer or the seller, or both, are uncertain about the qualities of what is being bought and sold. dont have all the nec. info. quantity NOT all info is KNOWN EX lemon car, poor quality employee.

demand shifter

a variable that can change the quantity of a good or service demanded at each price. this affects the all other conditions and it no longer applies shifters include consumer preferences, prices of related goods an services, income, demographic characteristics, and buyer expectations.

2.3// what are the effects of changes in supply on equilibrium

an increase ↑ in supply= causes equilibrium price to fall & equilibrium quantity to increase a decrease in supply= causes equilibrium price to rise & equilibrium quantity fall

variable factor of production

an input whose quantity can be altered in the short run ex labor/food

oligopoly

an oligopoly, the fourth and final market structure that you will study, the market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it. The firms that dominate an oligopoly recognize that they are interdependent: What one firm does affects each of the others. This interdependence stands in sharp contrast to the models of perfect competition and monopolistic competition, where it is assumed that each firm is so small that it believes the rest of the market will, in effect, ignore what it does. A perfectly competitive firm responds to the market, not to the actions of any other firm. A monopolistically competitive firm responds to its own demand, not to the actions of specific rivals. These presumptions greatly simplify the analysis of perfect competition and monopolistic competition. That luxury does not exist in oligopoly, where the interdependence of firms is the defining characteristic of the market. Some oligopoly industries make standardized products: steel, aluminum, wire, and industrial tools. Others make differentiated products: cigarettes, automobiles, computers, ready-to-eat breakfast cereal, and soft drinks.

midpoint method percentage changes relative to the average value of each variable between two points

arc elasticity also called the

law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline.When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive. The curvature of the production possibilities frontier shows that as additional resources are added to education—moving from left to right along the horizontal axis—the original gains are fairly large, but gradually diminish. THIS law IS the reason the PPF has a curved shape

Which change in the budget line results from a corresponding price change?

budget line slope changes

The demand schedules for Mary Andrews, Ellen Smith, and Koy Keino are given in the table. Their individual demand curves are plotted in Panel (a). The market demand curve for all three is shown in Panel (b). Individual demand curves, then, reflect utility-maximizing adjustment by consumers to various market prices. Once again, you can see that as the price falls, consumers tend to _____. Demand curves are downward-sloping as the law of demand asserts.

buy more of a good

Firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms

cartel

2.1// What is the difference between change in DEMAND & change in QUANTITY DEMANDED

change in demand- the demand curve ITSELF SHIFTS left or right. caused by demand factors change in quantity demand- MOVEMENT ALONG the demand curve. caused by change in price

An important distinction between monopoly and monopolistic competition, however, emerges from the assumption of ----------.

easy entry and exit. (In the short run, the model of monopolistic competition looks exactly like the model of monopoly.)

1.4// Explain market economy & pros and cons

economic system that's based on PRIVATE OWNERSHIP & the use of markets in economic decision making=CAPITALISM !! PROS: consumer sovereignty, innovation CONS: income distribution, instability

Price of factors of production as supply shifter

change in price of labor or other factor will change the cost of producing any given quantity of the good/service. This change in the cost of production will change the quantity that suppliers are willing to offer at any price. An increase in factor prices should decrease the quantity suppliers will offer at any price, shifting the supply curve to the left. A reduction in factor prices increases the quantity suppliers will offer at any price, shifting the supply curve to the right. EX coffee growers must pay a higher wage to the workers they hire to harvest coffee or must pay more for fertilizer. Such increases in production cost will cause them to produce a smaller quantity at each price, shifting the supply curve for coffee to the left. A reduction in any of these costs increases supply, shifting the supply curve to the right.

2.2// What is the difference between change in SUPPLY & change in QUANTITY SUPPLIED

change in supply- caused by FACTORS of supply -the supply curve ITSELF SHIFTS<or> change in quantity supplied- caused by change in PRICE -MOVEMENT ALONG the curve

2.2// What causes SUPPLY to change and what causes QUANTITY SUPPLIED to change?

change in supply- caused by FACTORS of supply change in quantities supply- caused by change in PRICE of a product

circular flow diagram

consists of two groups-household an firms and interact in two markets the goods and services markets in which firms sell and household buy an the factor market in which households sell factors of production to business firms or other employees. It provides an overview of demand and supply in product and factor markets and suggests how these markets are linked to each other.

choice at the margin

decision to do a little more or little less of something. EXAssessing choices at the margin can lead to extremely useful insights. example, the problem of curtailing water consumption when the amount of water available falls short of the amount people now use. Economists argue that one way to induce people to conserve water is to raise its price. A common response to this recommendation is that a higher price would have no effect on water consumption, because water is a necessity. Many people assert that prices do not affect water consumption because people "need" water. But choices in water consumption, like virtually all choices, are made at the margin. Individuals do not make choices about whether they should or should not consume water. Rather, they decide whether to consume a little more or a little less water. Think of that starting point as the edge from which a choice at the margin in water consumption is made. Could a higher price cause you to use less water take shorter showers, or water your lawn less? Could a higher price cause people to reduce their use, say, to 104 gallons per person per day? To 103? When you examine the choice to consume water at the margin, the notion that a higher price would reduce consumption seems much more plausible. Prices affect the consumption of water because choices in water consumption, like other choices, are made at the margin.

an industry that has only 2 firms

duopoly

To show how responsive quantity demanded is to a change in price, you apply the concept of elasticity. The price elasticity of demand for a good or service, eD, is the percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service, all other things unchanged

eD=% change in quantity demanded divided % change in price

preferences as a demand shifter

effect demand, starbucks increased demand for coffee, cigarettes demand decrease bad for health. A change in preferences that makes one good/service more popular will shift the demand curve right a change that makes it less popular will shift the demand curve left.

formula to calculate price elasticity of demand

elastic demand= change in QD divide average QD /change in price divide average price -if ED if greater than 1, demand is ELASTIC &QD is sensitive to price changes -if ED is less than 1, its INELASTIC -if ED is 1, its UNIT-ELASTIC

explain elastic supply & inelastic supply

elastic supply: the % change in quantity supplied is greater then % change in price inelastic supply: the % in quantity supplied is less than % change in price

formula to calculate price elasticity of supply

elastic supply= change in QS divide average QS / change in price divide average price

additional costs of pollution

ex co required to pay 100 pollution each time produces a fridge production becomes more costly and the entire supply curve shifts up by 100 taking the additional external costs of pollution into account results in a higher price, a lower quantity of production, and a lower quantity of pollution.

2.2// Define supply factors

factors that causes an increase or decrease in supply

Productivity efficiency

given the available inputs and tech it is impossible to produce more of one good without increasing the quantity that is produced of another good. it is impossible to produce more of one good without decreasing the quantity that is produced of another good. (see page 13 graph)

govt encourage innovation

guarantee intellectual property rights (patents), govt assistance w/ the cost of r&d (fund directly-grant, tax breaks), cooperative research ventures between university and companies.

law of diminishing marginal returns

holds that the marginal product of any variable factor of production will eventually decline, assuming the quantities of other factors of production are unchanged.

law of diminishing returns

holds that the marginal product of any variable factor of production will eventually decline, assuming the quantities of other factors of production are unchanged.

Scarcity

human wants for goods, services, and resources exceed what is available

1.4// the invisible hand

term used by Adam Smith -describes the natural social benefits resulting from individuals actions

JCPenney guarantees to refund a customer's money if the customer is not satisfied with the quality of the clothing. This guarantee is a way of addressing the problem of:

imperfect information.

a shift in a curve

implies new values of one variable at each value of the other variable

income elasticity, cross price elasticity, price elasticity, price elasticity, income elasticity, cross price elasticity

income elasticity of demand and cross price elasticity of demand are primarily concerned with whether the measured value of these elasticities is positive or negative. In the case of ____ of demand, this tells you whether the good or service is normal or inferior. In the case of _____ of demand it tells you whether two goods are substitutes or complements. With ___ of demand you were concerned with whether the measured absolute value of this elasticity was greater than, less than, or equal to 1 because this gave you information about what happens to total revenue as price changes. The terms elastic and inelastic apply to _____ of demand. They are not used to describe____ of demand or ____ of demand.

income as a demand shifter

income rise consumption rise income falls consumption falls ex cars, jewelry. income rise more fresh fruit less canned . Normal good a good for which demand increases when income increases shift to right. Inferior good good which demand increases when income increases cause demand curve to go to the left want better goods opposite of a normal good. Causes shift on demand curve NOT movement along the curve

What does Microeconomics perspective focus on?

individuals, firms, industries

movement along a curve

is a change from one point on the curve to another that occurs when the dependent variable changes in response to a change in the independent variable. If, for example, the ski resort can sell tickets at $50, they will sell 250 tickets at point D'. If the price increases to $60, the ski resort is willing to sell 300 tickets at point E'. This is a movement along a curve; the curve itself does not shift.

Model

is a set of simplifying assumptions about some aspect of the real world.

Total variable cost (TVC)

is cost that varies with the level of output.

2.2// Define supply

it's the relationship between a product's price and quantity supplied, shown using a schedule/curve

resources AKA factors of production

labor, tool, land, raw material, time needed to produce goods and services people want

For virtually all goods and services, a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded

law of demand

command and control regulation

laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used ex tailpipe to reduce but can not eliminate pollution it is inflexible requires same standards for all polluters and control tech. has loopholes and shortcomings

The firm will want to produce whatever quantity it chooses at as low a cost as possible

least cost method

price elasticity of supply, changes over 3 production periods:

long run-perfectly elastic (all products can be varied) short run- elastic or inelastic (at least one) immediate run- perfectly inelastic (none can)

1.1// define rational behavior

making choices by logically weighing the pros/cons of available actions and choosing the most attractive option

A perfectly competitive firm's price equals -----------.

marginal cost

To maximize profits or minimize losses, a monopoly firm produces the quantity at which ----------- equals --------------. Its price is given by the point on the demand curve that corresponds to this quantity.

marginal cost; marginal revenue

The marginal decision rule states that an activity should be expanded if its marginal benefit exceeds its marginal cost

marginal decision rule

How much utility is gained by spending another $1 on a good? The equation is the ______ of the good divided by its _______. The utility gained by spending an additional dollar on good X, for example, is: Suppose the marginal utility of good X is 4 and its price is $2. an extra $1 spent on X buys _ additional units of utility. If marginal utility of good X is 1 and its price is $2, an extra $1 spent on X buys _ additional units of utility

marginal utility, price. MUx/Px Ex; 2 (MUxPx=42=2). 0.5 (MUxPx=12=0.5).

2 property rights (exclusive/transferable)

must be exclusive and transferable 1-exclusive property right is one that allows its owner to prevent others from using the resource. The owner of a house, for example, has the right to exclude others from the use of the house. If this right did not exist, ownership would have little value; it is not likely that the property could be exchanged in a market. And the inability to sell property would limit the incentive of owners to maintain it. 2-A transferable property right is one that allows the owner of a resource to sell or lease it to someone else. In the absence of transferability, no exchange could occur.

cross-price elasticity of demand

of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good, ceteris paribus.

perfectly elastic supply & perfectly inelastic supply

perfectly elastic supply- constant price, horizontal curve perfectly inelastic supply-constant QS, verticle curve

demographic characteristics as a demand shifter

physical and observable characteristics of individuals, including gender, ethnicity, and age. in general the greater the population greater demand. ex age 65 inc= demand medical services, cruises, motor homes increase. increase in birth rates after 1975 raise demand for infant supplies, teachers, soccer coaches, college education. demand can shift as a result of changes in both the number and characteristics of buyers

1.1// positive VS normative economics

positive econ AKA Emperial: the study of economic facts and why the economy operates as it does. FACTS normative econ: the study of how the economy ought to operate. OPINIONS. AGREE/DISAGREE

price controls 2 types

price ceiling(rent control/gas prices govt imposed)- keeps a price from rising above a certain level. price floor(min. wage)- keeps price from falling below a certain level. neither causes demand or supply to change only set limits can cause a different choice of quantity demanded along a demand curve but DO NOT move the demand curve. Cause a different choice of quantity along a supply curve, but not shift the supply curve. CAN NOT change the equilibrium price

When a firm charges different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers,

price discrimination

what are the different price controls and explain each

price floor- legal minimum price (must be set ABOVE equilibrium) , causes surpluses price ceiling-legal maximum price (must be set BELOW equilibrium), causes shortages

prices of related goods and services as a demand shifter

price of doughnuts falls people who drink coffee enjoy dunking doughnuts in their coffee; the lower price of doughnuts might therefore increase the demand for coffee, shifting the demand curve for coffee to the right. A lower price for tea, however, would be likely to reduce coffee demand, shifting the demand curve for coffee to the left. In general, if a reduction in the price of one good increases the demand for another, the two goods are called complements used with each other donuts and coffee. If a reduction in the price of one good reduces the demand for another, the two goods are called substitutes ex tea for coffee. Changes relationship with demand shifting the curve left or right with all constant

Specialization

production of possibilities suggest specialization occurs. implies that an economy is producing the goods/serv in which it has a comparative advantage. Nations specialize as well. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Hong Kong, huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. Its land is devoted largely to nonagricultural use. • Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production for the remaining goods.

labor intensive

production that uses a large amount of labor reducing the capital ratio

perfectly inelastic

quantity does not respond at all to changes in price (E=0) demand curve is vertical

1.1// how do consumers think

rationally

implicit costs

resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store. Implicit costs also allow for the depreciation of goods, materials, and equipment that are necessary for a company to operate.

The utility of a good or service is determined by how much ---------- a particular consumer obtains from it. Utility is not a quality inherent in the good or service itself.

satisfaction

asymmetric information

situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace ex gemstones being treated with oils to enhance color ONE party has more info than the other party

2.3// what does 'The Law of Diminishing Marginal Utility' state?

states that as a consumer buys more units of a particular product, that consumer's extra satisfaction from each additional unit falls

2.2// Define Law of Supply

states that there is a DIRECT relationship between a product's price & quantity supplied. P↑QS↑

2.1// The Law of demand

states that there is an INVERSE relationship between a products price and the quantity demanded. P↑QD↓ , P↓QD↑

A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account

strategic choice

Quantity Demanded

the quantity buyers are willing and able to buy at a particular price during a particular period all other things unchanged (ceteris paribus) price related moves on curve does not shift

quantity demanded

the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged.

quantity supplied

the quantity sellers are willing to sell at a particular price during a particular period, all other things unchanged.

price elasticity of supply

the ratio of the percentage change in quantity supplied of a good or service to the percentage change in its price, all other things unchanged

2.1// Demand

the relationship between various possible prices of a product & the quantities of that product consumers are willing to buy -price is the independent variable

Natural Resources

the resources of nature that can be used for the production of goods and services.

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

economic loss

the situation in which a firm's total revenue is less than its total cost, including all implicit costs

Adverse Selection

the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction ex patient knows they are high risk ins but ins co does not (asymmetric information)

consumer surplus, producer surplus,

the somewhat triangular area labeled by F shows the area of ____, which shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of $90, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of _____, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at a price of $45, firms would have been willing to supply a quantity of 14 million.

Economics

the study of how people, individually and through institutions, make decisions about producing and consuming goods and services, and how they face the problem of scarcity. Focuses on opportunity costs, the assumption of maximization in terms of ones own self interest, and the analysis of choices at the margin. Uses models to test theories.

What is a social (total) surplus?

the sum of Consumer surplus and Producer surplus

2.1// Define Market Demand

the sum of all consumer's quantity demanded for a product at each price -can be shown as a schedule or a curve

2.2// Market Supply

the sum of all producers' quantities supplied at each price

social surplus

the sum of consumer surplus and producer surplus

2.2// how is a decrease or increase of supply shown on a graph?

the supply curve ITSELF shifts to right if its an increase, and shifts to left< if its a decrease in supply

Net Benefit

the total benefit of the activity minus its opportunity cost.

accounting profit

total revenue minus total explicit cost

contraint

which is a boundary that limits the range of choices that can be made. It is assumed that consumers seek the greatest satisfaction possible within the limits of their incomes or budgets. A firm cannot produce beyond the limits of its production capacity at any point in time.

Monopolistic Competition

° Large number of firms. ° Differentiated products (substitutes, but not perfect substitutes). ° Compete on price, quality and marketing. ° Free entry and exit.

Price Maker: Monopoly

° Market demand is the same as the firm demand. ° Firm has price setting power. WHY?: ° Single firms ° Unique product. ° Barriers to entry

Monopoly Firm: Summary

° Price Maker ° Maximize profit by choosing output and price level ° Produce where MR = MC ° May have profit or loss ° Profits can be sustained in the long run b/c of barriers to entry

Perfect Competitive Firm: Summary

° Price Taker ° Maximize profits by choosing output level ° Produce where MR = MC ° Short-run: May have profit or loss ° Long-run: Zero economic profit

Product Differentiation

° There are substitutes available, but not perfect subs. ° Consumers will not immediately switch products if price increases. ° Firm has price setting power. ° Demand is downward sloping.

Reducing Moral Hazard

• Cost sharing: - Coinsurance - Co-payments - Deductibles (high = more cost sharing)

Characteristics of an Oligopoly

• High barriers to entry. • High concentration ratio - small number of large firms dominate the market. • Firms are interdependent (face a kinked demand curve). • Product differentiation. • Non-price competition.

Benefits of Specialization and Trade

• It makes people more physically productive • It makes people wealthier even without increasing their physical productivity

Factors Causing a Change in Demand

• Preferences • Prices of related goods and services • Income • Demographic Characteristics • Buyer expectations

Factors Causing a Change in Quantity Demand

• Price of good or service

Reducing Imperfect Information

• Service contracts • Money-back guarantees • Warranties • 90-day trial contract

Short-Run Costs

• Total cost • Marginal cost • Average

Three Economic Questions

• What to produce? • How to produce? • For whom to produce?

Movement along a demand curve that results from a change in price

Change in quantity demanded

Movement along the supply curve caused by a change in price

Change in quantity supplied.

A shift in the supply curve

Change in supply

What are the characteristics of monopolistic competition? Give your own example of a monopolistically competitive market.

1) large # of firms 2) differentiated products 3) compete on price, quality, and marketing 4) free entry/exit Resturants, furniture stores

What are the characteristics or assumptions of the perfect competition model?

1) price taker 2) identical products 3) free entry/exit 4) many buyers/sellers 5) everyone has info on prices

surplus , shortage

A ___exists if the quantity of a good or service supplied exceeds the quantity demanded at the current price; it causes downward pressure on price. A ___ exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price; it causes upward pressure on price.

a, b, c,d

A change in demand or in supply changes the equilibrium solution in the model. Panels (_) and (_) show an increase and a decrease in demand, respectively; panels (_) and (_) show an increase and a decrease in supply, respectively.

Since going to the movies is a substitute for watching a DVD at home, an increase in the price of going to the movies should cause more people to switch from going to the movies to staying at home and renting DVDs. Thus, the demand curve for DVD rentals will shift to the right when the price of movie theater tickets increases [Panel (a)]. A decrease in family income will cause the demand curve to shift to the left if DVD rentals are a normal good but to the right if DVD rentals are an inferior good. The latter may be the case for some families, since staying at home and watching DVDs is a cheaper form of entertainment than taking the family to the movies. For most others, however, DVD rentals are probably a normal good [Panel (b)]. An increase in the price of DVD rentals does not shift the demand curve for DVD rentals at all; rather, an increase in price, say from P1 to P2, is a movement upward to the left along the demand curve. At a higher price, people will rent fewer DVDs, say Q2 instead of Q1, ceteris paribus [Panel (c)].

All other things unchanged, what happens to the demand curve for DVD rentals if there is (a) an increase in the price of movie theater tickets, (b) a decrease in family income, or (c) an increase in the price of DVD rentals? In answering this problem, draw and carefully label a set of axes. On the horizontal axis of your graph, show the quantity of DVD rentals. It is necessary to specify the time period to which your quantity pertains (e.g., "per period," "per week," or "per year"). On the vertical axis, show the price per DVD rental. Since you do not have specific data on prices and quantities demanded, make a "free-hand" drawing of the curve or curves you are asked to examine. Focus on the general shape and position of the curve(s) before and after events occur. Draw new curve(s) to show what happens in each of the circumstances given. The curves could shift to the left or to the right, or stay where they are.

A change in supply that reduces the quantity supplied at each price shifts the supply curve to the left.

At a price of $6 per pound, the original quantity supplied was 25 million pounds of coffee per month (point A). With a new supply curve S3, the quantity supplied at that price falls to 15 million pounds of coffee per month (point A″). What is being shown in the graph?

Shift in a demand curve

Change in demand

Two goods for which an increase in price of one reduces the demand for the other

Complements

decrease, left

Consider the owners of oil deposits. . Oil pumped out of the ground and used today will be unavailable in the future. If a change in the international political climate leads many owners to expect that oil prices will rise in the future, they may decide to leave their oil in the ground, planning to sell it later when the price is higher. Thus, there will be a _____ in supply; the supply curve for oil will shift to the ____.

Table that shows the quantities of a good or service demanded at a different price during a particular period, ceteris paribus

Demand schedule

Difference between total revenue and total cost.

Economic Profit

A reduction in demand occurs when the quantities of a good or service demanded fall at each price.

Here, the demand schedule shows a lower quantity of coffee demanded at each price. The reduction shifts the demand curve for coffee to D3 from D1. The quantity demanded at a price of $6 per pound, for example, falls from 25 million pounds per month (point A) to 15 million pounds of coffee per month (point A″). What is being shown in this graph?

A fictional device imagined by Francis Edgeworth, one of the most important contributors to theory of consumer behavior, that continually registers the height of pleasure experienced by an individual. "the delicate index now flickering with the flutter of passions, now steadied by intellectual activity, now sunk whole hours in the neighborhood of zero, or momentarily springing up towards infinity"

Hedonimeter

DVD rental store clerks are a factor of production in the DVD rental market. An increase in their wages raises the cost of production, thereby causing the supply curve of DVD rentals to shift to the left [Panel (a)]. An increase in the price of DVD rentals does not shift the supply curve at all; rather, it corresponds to a movement upward to the right along the supply curve. At a higher price of P2 instead of P1, a greater quantity of DVD rentals, say Q2 instead of Q1, will be supplied [Panel (b)]. An increase in the number of stores renting DVDs will cause the supply curve to shift to the right [Panel (c)].

If all other things are unchanged, what happens to the supply curve for DVD rentals if there is (a) an increase in wages paid to DVD rental store clerks, (b) an increase in the price of DVD rentals, or (c) an increase in the number of DVD rental stores? Draw a graph that shows what happens to the supply curve in each circumstance. The supply curve can shift to the left or to the right, or stay where it is. Remember to label the axes and curves, and remember to specify the time period (e.g., "DVDs rented per week").

that direction,

If simultaneous shifts in demand and supply cause equilibrium price or quantity to move in the same direction, then equilibrium price or quantity clearly moves in ____. If the shift in one of the curves causes equilibrium price or quantity to rise while the shift in the other curve causes equilibrium price or quantity to fall, then the relative amount by which each curve shifts is critical to figuring out what happens to that variable.

Left, right

If something destroys a substantial part of a agricultural crop, the supply curve will shift to the ____. If there is an unusaully good harvest, the supply curve will shift to the ___

When there are many seller of a good, an increase in price results in an increase in quantity supplied.

Law of supply

What are marginal benefit and marginal cost? How do they relate to demand and supply?

Marginal benefit - the amount of an additional unit increases its total benefit Marginal cost - the amount of an additional unit increases its total cost Value is what we get, price is what we pay. We measure value as the maximum price that a person is willing to pay. But willingness to pay determines demand Marginal cost is the minimum price that a firm is willing to accept. But the minimum supply-price determines supply.

Model that uses demand and supply curves to explain the determination of price and quantity in a market

Model of demand and supply

What is the difference between a monopoly and a monopolistically competitive firm?

Mono Comp has a large # of firms and free entry/exit. Mono doesn't Mono makes their profits in short run. Mono Comp can make their profit in the short run but new firms will enter bringing economic profit to 0

industries that contain more than a few firms, each of which offers a similar but not identical product in a market with easy entry and exit.

Monopolistic Competition

A change in the price of labor or some other factor of production will change the cost of producing any given quantity of the good or service. In turn, cost of production will change the quantity that suppliers are willing to offer at any price.

Prices of Factors of production

Storms, insect infestations, and drought affect agricultural production and this the supply of agricultural goods.

Natural Events

market dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.

Oligopoly

To produce one good or service means forgoing the production of another. The concept of opportunity cost in economics suggests that the value of the activity forgone is the opportunity cost of the activity chosen; this cost should affect supply. Ex;, one opportunity cost of producing eggs is not selling chickens. An increase in the price people are willing to pay for fresh chicken would make it more profitable to sell chickens and would thus increase the opportunity cost of producing eggs. It would shift the supply curve for eggs to the left, reflecting a decrease in supply.

Returns from Alternative Activities

Table that shows quantities supplied at different prices during a particular period, ceteris paribus,

Supply schedule

Put the quantity of the good you are asked to analyze on the horizontal axis and its price on the vertical axis. Draw a downward-sloping line for demand and an upward-sloping line for supply. The initial equilibrium price is determined by the intersection of the two curves. Label the equilibrium solution.use a number for the equilibrium price instead of the letter "P." Pick a price that seems plausible, say, 79 cents per pound. Step 2 can be the most difficult step; the problem is to decide which curve to shift. The key is to remember the difference between a change in demand or supply and a change in quantity demanded or supplied. At each price, ask yourself whether the given event would change the quantity demanded. Would the fact that a bug has attacked the pea crop change the quantity demanded at a price of 79 cents per pound? Clearly not; none of the demand shifters have changed. The event would, however, reduce the quantity supplied at this price, and the supply curve would shift to the left. There is a change in supply and a reduction in the quantity demanded. There is no change in demand. Next check to see whether the result you have obtained makes sense. The graph in Step 2 makes sense; it shows price rising and quantity demanded falling.

Suppose you are told that an invasion of pod-crunching insects has gobbled up half the crop of fresh peas and you are asked to use demand and supply analysis to predict what will happen to the price and quantity of peas demanded and supplied. What should you do?

an overview of demand and supply in product and factor markets and suggests how these markets are linked to one another.

The circular flow model provides

Scarcity

The human wants for goods, services and resources exceed what is available.

shortage There is not a shortage where two curves cross as the quantity demanded equals the quantity supplied.

What exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price? shortage surplus

in which direction each of the curves shifts and the extent to which each curve shifts.

To determine what happens to equilibrium price and equilibrium quantity when both the supply and demand curves shift, you must know

unlimited wants cannot be satisfied by the limited resources.

To economists, scarcity means that

An increase in the price of movie theater tickets (a substitute for DVD rentals) will cause the demand curve for DVD rentals to shift to the right. An increase in the wages paid to DVD rental store clerks (an increase in the cost of a factor of production) shifts the supply curve to the left. Each event taken separately causes equilibrium price to rise. Whether equilibrium quantity will be higher or lower depends on which curve shifted more. If the demand curve shifted more, then the equilibrium quantity of DVD rentals will rise [Panel (a)]. If the supply curve shifted more, then the equilibrium quantity of DVD rentals will fall [Panel (b)]. If the curves shifted by the same amount, then the equilibrium quantity of DVD rentals would not change [Panel (c)].

What happens to the equilibrium price and the equilibrium quantity of DVD rentals if the price of movie theater tickets increases and wages paid to DVD rental store clerks increase, all other things unchanged? Be sure to show all possible scenarios, as was done in Figure 3.19. Again, you do not need actual numbers to arrive at an answer. Just focus on the general position of the curve(s) before and after events occurred.

Equilibrium price The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves.

What is determined by the intersection of the demand and supply curves? Equilibrium price Surplus Ceteris Paribus Shortage

Demand increases An increase of income, whether for an individual or in aggregate, will shift demand.

What would we expect to happen if consumer income increased? Demand increases Quantity demanded increases Quantity demanded decreases Supply increases

Absolute Advantage

When one person or nation is more productive than another.

Explain how scarcity leads to trade offs.

When scarce resources are used, people are forced to make choices that have an opportunity cost.

Buyer expectations Buyer expectations is a determinant of demand, not supply. Supply shifters include (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers.

Which of the variables is not considered a supply shifter? Number of sellers Buyer expectations Natural events Technology