EOCN 221 (Final)
How do you calculate price elasticity?
(% change price) / (% change demand)
How is comparative advantage different than absolute advantage? Which matters more?
Absolute advantage: the ability to produce the same good using fewer inputs than another producer; the two are different because
What is a price floor?
When the minimum price that can be legally charged is above the market price
What is tournament theory?
a compensation scheme in which payment is based on relative performance
What are private costs?
a cost paid by the consumer or the producer
What is comparative advantage? How do you calculate it?
a country has comparative advantage in producing goods for which is has the lowest opportunity costs
What are compensating differentials?
a difference in wages that offsets differences in working conditions for otherwise similar jobs
What is tying?
a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good, e.g. printer and ink
What are inferior goods?
a good for which demand decreases when income increases
What are normal goods?
a good for which demand increases when income increases
What is a network good?
a good whose value to one consumer increases the more that other consumers use the good
What is a cartel?
a group of suppliers that tries to act as if they were a monopoly
How much will a person consume if there is more than one good? (utility maximizing rule)
a person will keep consuming until the marginal utility of each is equal
What is Nash equilibrium?
a situation in which no player has an incentive to change strategy unilaterally
What is a natural monopoly?
a situation when a single firm can supply the entire market at a lower cost than two or more firms
What is a dominant strategy?
a strategy that has a higher payoff than any other strategy no matter the strategies of other players
What is a tariff?
a tax on imports
What does this mean: "at the equilibrium quantity there are no unexploited gains from trade nor any wasteful trades"?
all of the trades are mutually beneficial
What is piece-rate?
any payment system that pays workers directly for their output
What is preference-based discrimination?
based on a plain, flat-out dislike of some group of people, such as a race, religion, or gender; 3 types : discrimination by employers, discrimination by customers, and discrimination by employees
Why is the demand curve is downward sloping and what are the reasons for it to shift?
by nature, few consumers will be willing to buy a product at a higher price than at a lower price
Explain why the supply curve is upward sloping and reasons for it to shift.
by nature, the higher the price, the more suppliers are going to be willing to produce
What is the "optimal output rule" for firms trying to maximize profit?
keep producing additional units so long as the revenue from producing an additional unit exceeds the cost of producing an additional unit
What is an anti-trust policy?
laws that give the government the power to regulate or prohibit business practices that may be anti-competitive
What is "economies of scale"?
mean that costs per unit fall with increases in production; refers to the amount saved with mass production
What is cross-price elasticity?
measure how responsive the quantity demanded of good A is to the price of good B; (% change, A) / (% change, B) ; ans > 0 = subs, but ans < 0 = compliments
What is price elasticity of demand?
measures how responsive the quantity demanded is to a change in price; more responsive = more elastic
What is income elasticity?
measures how responsive the quantity of demand of a good is with the respect to changes in income; (% change, Qd) / (% change, income) ; ans >0=normal good, if ans <0=inferior good, if ans >1=luxury good
What is elasticity of supply?
measures how responsive the quantity supplied is to a change in price; more responsive = more elastic
What are zero profits, and are they really mean a true profit of zero?
normal profits; occur when P=AC; when earning zero profits, price of outputs is just enough to cover normal payments to the labor and capital
What is ability risk?
occurs when two people of different abilities are put against each other; ex. Tiger Woods and an amateur golfer together in a golf tournament
Why might the labor supply curve bend backwards?
past a certain wage and hour point, a person might decide to "buy" his or her vacation with the additional money, and not work
What is a subsidy?
reverse tax: instead of taking money away from consumers (or producers), the government gives money to consumers (or producers; who gets the subsidy does not depend on who gets the check from the government; who benefits from a subsidy does depend on the relative elasticities of demand and supply; subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss).
What are the costs of price ceilings?
shortages, reductions in quality, wasteful lines ad search costs, a loss of gains from trades, and a misallocation of resources
What is a prisoner's dilemma?
situations where the pursuit of individual interest leads to a group outcome that is in the interest of no one
Why would a gov't impose a price floor?
stabilize an unstable industry (ex. milk); wage
What are the costs of price floors?
surpluses, lost gains from trade (deadweight loss), wasteful increases in quality, and misallocation of resources
What is a commodity tax?
taxes on goods, such as fuel, liquor, and cigarettes; who writes the check is not necessarily the person who pays in the end; who pays is based on elasticity; commodity taxes raise revenue and create lost gains from trade (deadweight loss)
What are marginal costs?
the change in total cost from producing an additional unit; (change in cost / change in quantity)
What is marginal utility?
the change in utility from consuming an additional unit; calculate by (MU/ P)
What is demand?
the consumer's desire for a good or service
What is consumer surplus?
the consumer's gain from exchange, or the difference between the max. price a consumer is willing to pay for a certain quantity and the market price
What does "marginal" mean?
the cost or benefit of adding an additional unit
What are social costs?
the cost to everyone, the private cost plus the external cost
Why do people and countries trade?
the division of knowledge, economies of scale, create competition, comparative advantage
What is protectionism?
the economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers
Why are goods with negative production externalities overproduced/produced at more than the socially efficient level?
the external costs is not realized until later and is often missed
What is the concept of marginal product of labor?
the increase in a firm's revenues created by hiring an additional laborer
How are elasticity and tax incidence related; in which case do the consumers or producers bear more of the tax?
the less elastic of the two always ends up paying the price of the tax in the end
What is Blat?
the political pull, or favors, that a person has; usually occur only in a society with price controls (specifically price ceilings)
What is market power?
the power to raise price above marginal cost without fear that other firms will enter the market
What is arbitrage?
the practice of taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market
What is Coase's Thm?
the principle that if transactions costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities
What is producer surplus?
the producer's gain from trade, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity
What is bundling?
the requirement that products be bought together in a bundle or package
What is price discrimination?
the selling of the same product at different prices to different customers
What are tradable pollution permits, and why are they a new favorite policy?
there are a set number of permits that are given to each firm/corp. and they the proceed to trade amongst themselves; it is a new favorite because everyone benefits from the deal
What are the changes to consumer and producer surplus when a price ceiling is imposed?
there are losses to both consumer and producer surpluses
Why are the "gains from trade" (total consumer and producer surplus) are maximized at the free market equilibrium price and quantity?
there is no deadweight loss
Why would the government impose a price ceiling?
to lower the price of housing/apartments for the poor, but it would create a shortage in housing (a better option would be to use vouchers, which would increase the supply of housing); to discipline monopolies
What is total utility?
total satisfaction received from the consumption of a product
What is a quota?
trade quota: a restriction on the quantity of goods that can be imported -- imports greater than the quota amount are forbidden or heavily taxed
What is a substitute?
two goods where good A can be used in the place of good B
What is a complement?
two goods where good A is usually used along with good B
What is the basic rule for deciding how much of a resource to hire?
wage=MP
What is a price ceiling?
when the maximum price that can be legally charged is below the market price; result in shortages, reductions in quality, wasteful lines ad search costs, a loss of gains from trades, and a misallocation of resources
What are the characteristics of competition?
where the product being sold is similar across sellers, there are many buyers and sellers, each small relative to the total market, or there are many potential sellers
Why is it believed that competitive firms will end up with zero profit?
with competitive industries, there are many different firms competing for the business so every supplier will lower prices down to zero costs in the hopes of attracting all of the consumers
What is OPEC is and how does it manipulate the price of oil?
it united suppliers and made oil available only t
What are the main arguments against free trade listed in the text and are the legitimate?
job loss, child labor, national security, key industries
What are increasing and decreasing cost industries?
increasing cost industry: an industry in which the costs of production increase with greater output; shown with an upward sloped supply curve decreasing cost industry: an industry in which the costs of production decrease with an increase in industry output; shown with a downward sloping supply curve
What are the ten big ideas presented in this chapter?
1. incentives matter 2. good institutions align self interest with the social interest 3. trade-offs are everywhere 4. thinking on the margin 5. tampering with the laws of supply and demand has consequences 6. the importance of wealth and economic growth 7. institutions matter 8. economic booms and busts cannot be avoided but can be moderated 9. prices rise when the gov't prints too much money 10. central banking is a hard job
What are the determinants of elasticity of demand?
fundamental one is how easy it is to substitute one good for another; the fewer substitutes for a good, the less elastic; the more substitutes for a good, the more elastic the demand.
How are total revenue and elasticity related?
inelastic=price and revenue move together; elastic=rev goes down when price goes up
Who is Vernon Smith?
In 1956, Vernon Smith launched a revolution in economics by testing the supply and demand model in the lab. Smith's early experiments were simple. He took a group of undergraduate students and broke them into two groups, buyers and sellers. Buyers were given a card, which indicated their maximum willingness to pay. Sellers were given a card, which indicated their cost, the minimum price at which they would be willing to sell. The buyers and sellers were then instructed to call out bids and offers ("I will sell for $3.00" or "I will pay $1.50"). Each student could earn a profit by the difference between their willingness to pay or sell and the contract price. For example, if you were a buyer and your card said $3.00 and you were able to make a deal with a seller to buy for $2.00, then you would have made a $1.00 profit.
What are the determinants of elasticity of supply?
fundamental one is how quickly per-unit costs increase with an increase in production; if increased production requires much higher per-unit costs, then supply will be less elastic—or inelastic; if production can increase with constant per-unit costs, then supply will be elastic
What are the costs to society of monopolies?
high deadweight loss
If the government imposes an import tariff, what will happen to imports, consumer surpluses, and producer surpluses?
imports will decrease, consumer surplus decreases, producer surplus increases
What is the effect price discrimination has on producer surplus?
it maximizes producer because each customer pays the highest amount he or she is willing to pay
What are Pigouvian taxes and subsidies?
Pigouvian tax:a tax on a good with external costs Pigouvian subsidy: a subsidy on a good with external benefits
What is collusion?
chpt 13
Why does collusion create higher profits?
chpt 13
Why don't all oligopoly firms collude?
chpt 13
How do firms experience costs in the short run?
chpt. 10
What are diseconomies of scale?
chpt. 10
What is creative destruction?
chpt. 10
What does the marginal productivity theory of wages say about income distribution?
chpt. 14
What are some solutions to pollution?
command and control and tradable allowances
What is the "optimal consumption rule"?
consumer should allocate spending so that the marginal utility per dollar is equal for all purchases; if price of apples inc., they buy less apples
What is a "social surplus"?
consumer surplus + producer surplus + everyone's surplus
How does a person decide how much of each good to consumer given their prices and marginal utilities?
consumer's choice
How much will a person consume if price = 0?
consumer's choice
Why do modern economies exhibit specialization and trade?
consumer's choice
What are externalities and what are their causes?
costs or benefits that are received by people other than the consumers and producers
What are sunk costs?
costs that are put into the business that can never be recovered
What are fixed costs?
costs that don't vary with output
What are variable costs?
costs that vary with output
What is statistical discrimination?
discrimination using information about group averages to make conclusions about individuals
How can game theory help us predict cheating?
economists can create a table to predict what each "players" dominant strategy is and whether cheating is in their best interest
What are barriers to entry?
factors that increase the cost to new firms of entering an industry