fall 2019 micro exam 1, micro 2, Micro econ part 3

private enterprise ( free market) economy

-consumers and businesses voluntarily buy and sell things - all economies have a mixture of private and public ownership - US one of the most "marketized" economy

rule 2

-continue to operate in the short run so long as TR>TVC -loss if continues to produce TC- TR

fixed cost

-cost of a fixed input -does not change when the output changes

total cost

-cost of fixed inputs and variable input -opportunity cost

demand is elastic (value)

-elastic value > 1

surplus

-excess quantity supplied over quantity demanded -sellers cant sell what they desire at current price -prices decrease

Relatively open (closed) economy

-exports and imports are large (small) share of GDP

multiple input decisions ( marginal rule for optimal input proportions)

-firm must compare the money earned from spending money on different inputs

economic profit >0

-firms decisions are optimal - its price and output yield a profit larger than any alternative

maximize total profit

-for each output level calculate TRA -TC - find the largest value

constant returns to scale

-increase inputs by X%, output rises by X% -average cost remains constant -long run average cost curve constant

decreasing returns to scale

-increase inputs by X%, output rises by less than X% -average cost increases as output increase -long run average cost curve rises as output expands

economies of scale or increasing returns to scale

-increasing inputs by X%, output rises by more than X% -average cost decreases as output increases -long run average cost curve declines as output expands

multiple input decisions

-least costly combinations of inputs depends on relative prices of inputs

gross domestic product (GDP)

-measure if the size of the economy -total amount it produces

availability of close substitutes (narrowly defined)

-more elastic

economic proft

-net earnings

long run equilibrium

-new firms enter industry -industry short- run supply curve increases -market price falls -each firm decreases output -entry continues until firms earn zero economic profit -

quantity demanded

-number of units of a good that consumers are willing and can afford to buy over a specified period of time -depends on price, other things equal

quantity supplied

-number of units of a good that producer want to sell over a specified period of time -as the price rises (falls), quantity supplied rises (falls)

average physical product (APP)

-output per unit of input -APP= TPP/X, where X = quantity of the input

measuring utility

-pleasure -units of another good -money

zero economic profit

-positive accounting profit -break even

the law of supply and demand

-quantity demanded = quantity supplied -in free market, forces of supply and demand push the price towards equilibrium

income elasticity of demand

-ratio of percentage change in quantity demanded to percentage change in income -income elastic vs. income inelastic

economic profit =0

-satisfactory decisions - its price and output yield as much profit as the best available alternative

production possibilities frontier (PPF)

-shows different combinations of two goods produced, given available resources and existing technology -slope is the opportunity cost - bowed outward

total physical product (TPP)

-total output from different quantities of an input, holding all other products constant

average revenue

-total revenue divided by quantity -AR=TR/Q = PxQ/Q= P - revenue per unit of output

W+R+int+ pie

GDP income equation

outputs/ factor of production

Goods and services that consumers and others want to acquire

law of comparative advantage

One country is said to have a comparative advantage over another in the production of a particular good relative to other goods if it produces that good less inefficiently than it produces other goods, as compared with the other country.

profit maximizing condition

P=AR=MR=MC

maximizing profit in the longrun equilibrium

P=MC

role of government

United states economys more contentious here than in most other countries.

marginal fixed costs (MFC)

are always zero

monopoly

are any excess of the profits earned persistently by a monopoly firm over and above those that would be earned if the industry were perfectly competitive.

barriers to entry

are attributes of a market that make it more difficult or expensive for a new firm to open for business than it was for the firms already present in that market.

externalities

are really just failures to price resources so that markets will allocate them efficiently. One effective way to deal with _______ may be to use taxes and subsidies, making polluters pay for the costs they impose on society and paying the generators of beneficial ____________for the incidental benefits of their activities (which can be considered as an offset or deduction from the social cost of the activity).

increase spending on input Y

if MRP/$ (input X ) < MRP/$ (input Y)

optimal combination of inputs same MRP per dollar

if MRP/$ (input X) =MRP/$ (input Y)

increase spending on input X

if MRP/$ (input X) > MRP /$ ( input Y)

An economy will be most efficient

if people specialize in doing what they do best and then trade with one another

substitution

if prices rise i substitute away from the higher priced good to a relatively cheaper good.

income effect

if prices rises i am relvatively poorer so i purchase less of the god

marginal cost

increase in total cost from the production of one additional unit of output -slope of the total cost curve

marginal physical product (MPP)

increase in total output from a one unit increase in the input quantity all other inputs constant -first increases then decreases

marginal variable cost

increase in total variable cost from one additional unit of output

availability of close substitutes (no substitutes: )

inelastic

nature of the good (necessities)

inelastic

passage of time (shortrun)

inelastic demand

share of consumers budget (small)

inelastic demand

price taker

no choice but to accept the market price

economic profit <0

not optimal - there exists at least one alternative price - output combination that is more profitable

perfect competition

occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available.

maximize profit

output quantity: MR =MC

Y2-Y1/ Y1 x100

percent change

70% of total gDP

percent of americas consumer spending

recession

period in which GDP declines

efficient

points in the frontier are

economies of scale

production costs per unit fall, as output increases

American Workforce

production, service sector, government, agricultural

antitrust laws

promote social objection

regulation

promote social objections

elasticity of demand

ratio of percentage change in quantity demanded to percentage change in price

short run -period of time

some of the firms cost commitments will not have ended

law of increasing costs

states that as the production of a good expands, the opportunity cost of producing another unit generally increase

trade off

substiute one input for another

output selection (what) production planning (how) distribution (whom)

the three coordination tasks in the economy

role of economic theory

theory is a deliberate simplification of a relationship uses to explain how it works -correlation and causeation

short-run trade off between inflation and unemployment

there is an inverse relationship between unemployment and inflation.

average cost

total cost divided by quantity produced

total cost equation

total fixed cost + TVC

average fixed cost (AFC)

total fixed cost/ quantity produced

total profit

total revenue - total cost

average variable cost

total variable cost/ quantity produced

-horizontal at the market price - =p=d=MR=AR

under perfect competition firms demand curve is ....

1. Legal restrictions 2. Patents 3. Control of a scarce resource or input 4. Deliberately erected entry barriers 5. Large sunk costs 6. Technical superiority 7. Economies of scale

what are the barriers to entry

-numerous buyers and sellers -homogeneity of products -freedom of entry and exit -perfect information

what are the four conditions of perfect competition

-pure monopoly -perfect competition -monopolistic competition -oligopoly

what are the four markets?

1. perfectly elastic demand curve 2. perfectly inelastic demand curve 3. straight line demand curve 4. unit elastic demand curve

what are the four shapes of elasticity

-consumer income -population size and compostion - consumer preference -prices of related goods (substitutes, complements)

what can cause the demand curve to shift

-industry size: #firms -technological progress -prices of inputs -prices related outputs

what can cause the supply curve to shift

consumer surplus

what consumers are willing to pay minus what consumers actually pay Cs= Total utility -total expenditures

1. nature of the good 2. availability of close substitutes 3. share of consumers budget 4. passage of time

what determines demand elasticity

C+I+G+(x-m)= GDP

what is the formula for calculating GDP

15%

what percent of GDP is comprised of imports and exports

profit <0

when P<AC

profit >0

when P>AC

unit-elastic

when a given percentage price change leads to the same percentage change in quantity demanded.

-it explains why trade benefits both countries both parties gain in free voluntary trade

why is law of comparative advantage important

-unemployment -inputs assigned to wrong tasks -goods produced at the wrong scale -favoritism -restrictive labor practices

why would an economy produce inefficiently (inside PPF)

break even

zero economic proft

productivity in US economy

$53,000 per person, $116000 per worker

negative marginal returns

- MPP<0 so TPP decreases

optimal quantity of input

- MRP > P of input: use more input -MRP <P of input: use less input -MRP = Price of input: optimal quantity of input

demand is inelastic

- a decrease (increase) in price will cause TR to decrease (increase)

demand schedule

- a table that shows how the quantity demanded changes as the price changes, other things equal -as price rises (falls), quantity demanded falls (rises)

optimal decision making

- decisions made best serve objectives of decisioon maker -explicit or implicit comparison with possible alternatives -common method: marginal analysis

complements

- decrease in the price of one good increases the quantity demanded of the other good -cross price elasticity (negative)

demand is inelastic (value)

- elasticity < 1

unit elastic demand curve

- elasticity =1 - 10% rise in price, 10% drop in quantity demanded

long run for the industry

- firms can enter and exit -firm can adjust its output

perfectly elastic demand curve

- horizontal demand curve -infinitely elastic -firms that sells good with many close substitutes

availability of close substitutes (close substitutes)

- more elastic

firms goal is to maximize profits

- profits = total revenue - total costs -profit maximized when MRP = P

cross elasticity of demand

- ratio of percentage change in quantity demanded of X to percentage change in price of Y -determines the relationship between two goods

price elasticity of supply

- ratio of percentage change in quantity supplied to percentage change in price -elastic and inelastic supply

perfectly inelastic demand curve

- vertical demand curve -zero elasticity -very inexpensive items, necessities

diminishing marginal returns

-MPP decreases and MPP> 0, so TPP increases at al decreasing rate

increasing marginal returns

-MPP increases so TPP increases at an increasing rate

shifts of the demand curve

-a change in the price of a good: movement -change in other variables: shift

economic profit

-accounting profit minus opportunity costs - the difference between the earnings offered by alternative investments

marginal revenue

-addition to total revenue from the addition of one unit to total output -slope of the total revenue curve =MR1=TR1-TR0 - change in revenue resulting from the addition of one incremental unit of output.

marginal revenue product (MRP) of an input

-additional revenue the producer earns from the increased sales when it uses an additional unit of the input

law of demand

-as price rises quantity demanded of a good declines.

US economy

-biggest national economy -just under 320 million people - working population is 144 million in 2013

division of labor

-break a task into smaller and smaller specialized tasks workers become more adept at a particular task

shifts of the supply curve

-change in the price of a good: movement -change in other variable: shift

straight-line demand curve

-constant slope -as price falls elasticity gets smaller: more inelastic

price elasticity of demand formula

= ((Q1-Q0)/ average of Q0 and Q1)/ ((p1-P0)-average of P0 and P1)

inelastic

A demand curve is inelastic when a given percentage price change leads to a smaller percentage change in quantity demanded.

kinked demand curve

A kinked demand curve is a demand curve that changes its slope abruptly at some level of output.

price floors

A legal minimum below which the price charged for a commodity is not permitted to fall

price ceilings

A maximum that the price charged for a commodity cannot legally exceed

boom

A period of increasing real GDP is known as a

pure monopoly

A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which it is very difficult or impossible for another firm to coexist.

efficiency

A set of outputs is said to be produced efficiently if, given current technological knowledge, there is no way one can produce larger amounts of any output without using larger input amounts or giving up some quantity of another output.

average cost equation

AFC +AVC

oligopoly

An oligopoly is a market dominated by a few sellers, at least several of which are large enough relative to the total market to be able to influence the market price.

how to use resources efficiently

At Big Drop Coffee, some employees brew coffee, others deal with customers, and others prepare sandwiches. This best exemplifies how a market system performs which coordination task required in the economy?

numerous buyers and seller

Competitive markets contain so many buyers and sellers that each one constitutes a negligible portion of the whole—so small, in fact, that each player's decisions have no effect on price. This requirement rules out trade associations or other collusive arrangements in which firms work together to influence price.

perfect information

Each firm and each customer is well informed about available products and prices. They know whether one supplier is selling at a lower price than another.

output selection

How much of each commodity should be produced, given limited supplies of the needed input resources?

distribution

How should the resulting products be divided among consumers?

elasticity of demand and impact upon total revenue

If demand for the seller's product is elastic, a price increase will actually decrease total revenue. If demand is exactly unit-elastic, a rise in price will leave total revenue unaffected. If demand is inelastic, a rise in price will raise total revenue. The opposite changes will occur when price falls.

inputs of production

Land, labor, capital

marginal cost equation

MFC+MVC=0+MVC= MVC

MRP

MPP x price of output = MRP

optimization of profit

Marginal Revenue = Marginal Cost

monopolistic competition

Monopolistic competition refers to a market in which products are heterogeneous but which is otherwise the same as a market that is perfectly competitive.

freedom of entry and exit

New firms desiring to enter the market face no impediments that previous entrants can avoid, so new firms can easily come in and compete with older firms. Similarly, if production and sale of the good prove unprofitable, no barriers prevent firms from leaving the market.

perfect competition

Perfect competition occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available

Main attributes of the four market form

Perfect competition, monopoly, monopolistic competition, and oligopoly

inferior good

Quantity demanded decreases (increases ) when real income increases (decreases)

normal good

Quantity demanded increases (decreases) when real income increases (decreases

shut down or continue

Rule 1. The firm will make a loss if total revenue (TR) is less than total cost (TC). In that case, it should plan to shut down, either in the short run or in the long run. Rule 2. The firm should continue to operate in the short run if TR exceeds total short-run variable cost (TVC).

- relatively "closed"

Share of exports has grown over time, but compared to other countries the U.S is a _______ _______ economy

profit

TR-TC

correlation

Two variables are said to be correlated if they tend to go up or down together. Correlation need not imply causation.

rule 1

The firm makes a loss if TR < TC, and will have to shut down sooner or later

law of diminishing the marginal utility

The more of a good a consumer has the less marginal utility an additional unit contributes to overall satisfaction, all other things remain unchanged

homogeneity of product

The product offered by any seller is identical to that supplied by any other seller. (E.g., No. 1 red winter wheat is a homogeneous product; different brands of toothpaste are not.) Because products are homogeneous, consumers do not care from which firm they buy, so competition is more powerful.

Game Theory

The theory deals with the issue of interdependence directly, taking for granted that the managers of business firms make decisions on the assumption that rival managers are also strategic decision makers. uses two fundamental concepts: strategy and the payoff matrix.

true

True or False: Economists today believe monetary and fiscal policy can help reduce the magnitude of fluctuations in real GDP.

production planning

What quantity of each of the available inputs should be used to produce each good?

-Chinese imports account for less than 20% of all imports into the United States. -The standard of living in the United States (as measured by real GDP per person) is higher now than it was 50 years ago.

Which of the following are facts about the U.S. economy?

rule 2: if marginal net utility is negative

a buyer can get a higher total net utility by cutting back the quantity they bought

demand is elastic

a decrease (increase) in price will cause TR to increase(decrease) -a change in price will leave TR the same

demand curve

a graphical representation of a demand schedule

law of diminishing marginal returns

an increase in the amount of ant one input holding the amounts of all others constant ultimately leads to lower marginal returns to the expanding input.

real GDP

adjusts for changes in purchasing power of money (for inflation)

total revenue

amount of money firm receives from its consumers Price X quantity = ?

specialization

consists of the performance of particular tasks by particular individuals who are best suited to that task. ( a system of exchange must be in place)

"invisible hand"

by pursuing their own self- interests, people in a market system " are led by an invisible hand" to promote the well being of the community -self interest does not mean selfish -"invisible hand" means not peoples intent

if marginal net utility is positive

consumer buying too small a quantity to maximize total net utility

monetary policy

control of money and interest rates

fiscal policy

control of taxes and government spending

total variable cost

cost of variable input

variable cost

cost that changes with output

total fixed cost

cost that does not vary with output

price ceilings

create a shortage

price floors

create a surplus

substitutes

decrease in the price of one good decreases the quantity demanded of the other good -cross price elasticity(positive)

difference in values

due to disparate beliefs on vaule judgement (economists may disagree about the right trade-off between efficiency and equality.)

scarcity

fact that resources are always limited

theory of consumer choice

each consumer spends income in the way that yields the greatest amount of satisfaction, or utility

nature of the good (luxury)

elastic

passage of time (longrun)

elastic demand

share of consumers budget (large)

elastic demand

market mechanism

ensures that the products of the economy are divided among consumers in a rational manner, meaning that this distribution tends to fit in with the preferences of the different purchasers.

demand curve: shifts inward (left)v

equilibrium price falls and quantity falls

supply shifts inward (left)

equilibrium price falls and quantity falls

demand shifts outward (right)

equilibrium price rises and quantity rises

suppy shifts outward (right)

equilibrium price rises and quantity rises

shortage

excess quantity demanded over quantity supplied -buyers cant purchase what they desire at current price -prices increase

short run for the industry

fixed number of firms

positive economics

focuses on the description, quantification, and explanation of economic developments, expectations, relies on objective data analysis, relevant facts, and associated figures

long run (period of time long enough)

for all of the firms current commitments to come to an end

outputs

goods and services produced by a firm or economy

opportunity cost and monetary costs

goods that have a high (low) opportunity cost have a high ( low) monetary costs>

supply curve

graphical representation of a supply schedule - shows the relationship between price and quantity supplied, holding other determinants constant.

marginal analysis

is a method for calculating optimal choices—the choices that best promote the decision maker's objective. It works by testing whether, and by how much, a small change in a decision will move things toward or away from the goal.

perfectly competitive firm

is a price taker, can not influence the price

price discrimination

is the sale of a given product at different prices to different customers of the firm when there are no differences in the costs of supplying these customers. Prices are also discriminatory if it costs more to supply one customer than another but they are charged the same price.

opportunity cost

is the value of the next best alternative that must be given up.

normative economics

judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.

inputs/ factors of production

labor, machinery, buildings, natural resources Capital ( equipment, tools machinery)

imperfect information

lack of conclusive data and evidence indicating what the optimal size of the tax cut should be

elasticity

measure of responsiveness

An efficient allocation of resources

requires the prices that will be reached at equilibrium if there is perfect competition be equal to marginal cost; that is, P=MC

1. scarce 2. unlimited

resources are ______ and wants are ______

payoff matrix

shows how much each of two competitors (players) can expect to earn, depending on the strategic choices each of them makes.

supply schedule

table that shows how the quantity supplied changes as the price changes, other things equal

optimal decision

the decision that best serves the objectives of the decision maker

P>min AVC

the firm will produce nothing unless

Adam smith

the founder of modern economics, first marveled at how division of labor raised efficiency and productivity when he visited a pin factory

total monetary utility

the maximum amount of money a consumer is willing to give up in exchange for a quantity of a good

marginal utility

the maximum amount of money a consumer is willing to pay for one more unit of the good