2106 POM Final Review

Better management and technology

Improvements in management and technology that increase labor productivity, thus increasing the amount each laborer can produce and therefore shifting the labor demand curve to the right.

Unequally

Income is distributed ________________.

Unions

Organizations representing workers who bond together to ensure that they are able to jointly negotiate with their employers; boost wages of their members, which decreases labor supply.

Wealth

Refers to all assets that a person currently has, including things like savings, a car, a home, etc; is much more unequal than income.

Stock

Something that is measured at one specific time, representing the assets you currently have (-ex.- wealth).

Intrinsic motivation

The desire to do something for internal reasons like enjoyment or pride; corporate culture should seek to harness this by developing core ideals for workers to align with.

Marginal private benefit

The external benefit from one extra unit enjoyed by the buyer.

Marginal private costs

The extra cost from one extra unit paid by the seller (i.e., the supply curve).

Income

The money you receive in a given period of time such as a month or year.

Intensive margin

The number of hours each worker supplies.

Extensive margin

The number of people in the workforce.

Marginal revenue product

The product of the marginal product of labor and the price an employer can sell it for; extra revenue of an additional worker.

Socially optimal outcome

The quantity produced where marginal social benefit equals marginal social cost; is the most efficient for society as a whole (buyers, sellers, and bystanders included).

Marginal social cost

The sum of all marginal costs, no matter who pays them; lies above the supply curve.

Tragedy of the commons

The tendency to overconsume a common resource; occurs when rival goods are non-excludable; can be solved by assigning property rights.

Labor supply

The time you spend working in the market.

Statistical discrimination

Using observations about the average characteristics of a group to make inferences about an individual; employers make up for a lack of info using stereotypes.

1) Prejudice 2) Implicit bias 3) Statistical discrimination

What are the types of labor discrimination?

Nonwage benefits

What is an important extrinsic motivator for employees beyond wage?

Scale effect

When the price of capital goods declines, a business can produce for cheaper, meaning production increases and so does labor.

Changing number of potential workers

When the size or demographics of a population change, the potential labor supply does as well (-ex- population becomes older, resulting in less effective labor).

Substitution effect (capital goods)

When workers and machines perform the same job, and the price of machines falls, the demand for workers to do the same job also falls.

Wages

A amount of money equivalent to price in the labor market; are determined by supply and demand.

Monopsony power

A business uses its bargaining power as a major buyer to pay lower prices, including lower wages for its workers; can be solved by minimum wage laws.

Externality

A side effect of an activity that affects bystanders whose interests aren't taken into account.

Free-rider problem

A situation that arises when someone can enjoy the benefits of a good w/o bearing the costs.

Private bargaining

A solution for the externality problem that focuses on side payments between suppliers and bystanders.

Laws, rules, and permits

A solution for the externality problem used when it is impossible for corrective taxes/subsidies to solve externality problems.

Corrective tax (Pigouvian tax)

A tax designed to induce people to take account of the negative externalities they cause; lawsuits, norms, and social sanctions all have the same effect.

Poverty line

A threshold income below which a family is considered to be in poverty; the spending value has not changed over time but has been adjusted for inflation.

Positive externality

An activity whose side effects benefit bystanders.

Negative externality

An activity whose side effects harm and often impose costs on bystanders (-ex.- pollution).

Negative externality

An airport that has to pay for soundproofing for nearby homes is an example of what.

External benefit

A benefit accrued to bystanders.

Changing benefits of not working

A change in the benefits of not working alters the demand to work (-ex.- government program makes college more affordable and decreases the amount of young workers).

Five forces framework

A conceptual system used to systematically describe the competitive forces in your market.

External cost

A cost imposed on 3rd-party bystanders.

Signal

A costly action that you take to credibly convey information that otherwise would be hard for someone to verify.

Compensating differential

A difference in wages required to offset the undesirable (or desirable) aspects of the job.

Non-excludable good

A good that can be consumed even if they are not paid for (-ex.- fish).

Public good

A good that is both nonrival and non-excludable, and which is afflicted by the free-rider problem.

Club good

A good that is excludable but nonrival in consumption; businesses often try to make these out of public goods (-ex.- cable TV, Netflix).

Common resource

A good that is rival and also nonexcludable (-ex.- fish, parks).

Nonrival good

A good that more than one person at a time can consume (-ex.- Netflix).

Excludable good

A good that must be paid for in order to consume (-ex.- clothes).

Rival good

A good that only one person can consume at a time (-ex.- apples).

Labor supply and demand curves

A graph with hourly wage on the y-axis (price) and hours of work on the x-axis (quantity supplied).

Efficiency wage

A higher wage paid to encourage a greater worker productivity by increasing worker effort and reducing worker turnover.

Quota

A limit on maximum quantity of a good or service that can be sold; helpful in correcting negative externalities from overproduction.

Advertising

A media message that aims to shift and steepen your firm demand curve by increasing product demand; aims to create customer loyalty.

Hurdle method

A method of price discrimination that says you only offer lower prices to those buyers who are willing to overcome some kind of hurdle.

Market demand curve

A monopoly leads to a firm demand curve that appears just as a _________________________ would.

Positive externality

A person that benefits from another person getting a vaccination is an example of what.

Human capital

A person's stock of accumulated productive skills; more of it raises your productivity and means you get paid more.

Prejudice

A preconceived bias against a group that's not based on reason or experience; costly to both worker and employer.

Cap and trade

A quantity regulation implemented by allocating a fixed number of permits, which can then be traded; effective when socially optimal quantity is known, but not price.

Natural monopoly

A single business can service the whole market at a lower cost than multiple businesses can; occurs when marginal costs continuously decrease as you expand your output (-ex.- water, gas, electricity providers). Results in government intervention typically.

Monopsonist

A single buyer for a product/service of many sellers.

Regressive tax

A tax where those with lower incomes pay a higher share of their income compared to people with higher incomes; most taxes that fund social insurance programs are of this type.

Informational advertising

Advertising that aims to inform you about a product.

Persuasive advertising

Advertising that tries to persuade or manipulate you into believing that you'll enjoy a particular product.

Contracts

Agreements that solve the hold-up problem by committing both sides to specific terms for the duration of their relationship.

Collusion

Agreements to limit competition by agreeing to not offer lower prices or better products; reduces competition as the banded firms act as a monopolist.

Total income

All of the income received from all sources.

Explicit financial costs

All of the money that leaves your business.

Redistribution

An action that can increase total wellbeing (utility) by giving money from the rich to the poor.

Utility

An individual's level of well-being.

Search goods

Any good that you can easily evaluate before buying; lend themselves to informational advertising.

Switching costs

Any impediment that makes it difficult or costly for your customers to buy from another business instead; create customer lock-in.

Half

Approximately __________ of the economic advantage or disadvantage enjoyed by your parents is transmitted to their kids.

Permanent income

Average lifetime income which is less susceptible than annual income to temporary ups-and-downs; accounts for income differences between young and old people.

Profit margin

Average revenue (price) minus the average cost.

Product positioning

Balancing both supply-side and demand-side concerns so that a product can supply an underserved part of the market; is a product of non-price competition and yields market power.

Non-price competition

Businesses compete by differentiating their products; do so by offering different features, services, or via brand reputation; includes product positioning.

Substitute capital goods

Capital goods where a decrease in the price of the good means the labor demand curve shifts down/left.

Complement capital goods

Capital goods where a decrease in the price of the good means the labor demand curve shifts up/right.

Nonwage benefits, subsidies, and income taxes

Change the total compensation a worker gets at any given wage, shifting their willingness to work and therefore the labor supply curve.

Group pricing

Charging different prices to different groups of people; is a form of price discrimination.

More profitable

Competitors leaving makes your market __________________; you gain back customers (demand curve shifts up) and you gain market power (demand curve becomes less elastic).

Deterrence strategies

Convincing potential rivals that if they do enter your market, you'll respond so aggressively that they'll wish they'd never entered.

Average cost

Cost per unit calculated by adding your business's fixed and variable costs (total costs) and then dividing by the quantity you produce; curve is U-shaped due to initial spreading of fixed costs and later rise of variable costs.

Tax avoidance

Doing things explicitly to try to reduce the taxes you owe via loopholes in the tax system.

Product differentiation

Efforts by sellers to make their products different from those of their competitors.

Means-tested

Eligibility for the social safety net depends on your income and sometimes other tests that keep the wealthy from receiving benefits.

Implicit bias

Employer's judgements are shaped by their unconscious attribution of particular qualities to members of specific groups; employers often unaware it occurs.

Labor demand curve

Equal to the marginal revenue product of labor curve.

Intensity, type

Five forces framework considers both __________ and ____________ of existing competition.

P - deltaP x Q

Formula for marginal revenue (considering both effects)?

1) changes in product demand. 2) changes in the price of capital. 3) better management and technology. 4) nonwage benefits, subsidies, and taxes.

Four factors that shift labor demand curves?

Price ceilings

Governments use _____________ to help limit the abuse of market power.

Firm demand curve

Graph that summarizes the quantity that buyers demand from an individual firm as it changes price; is shaped by market power.

Rational rule for employers

Hire additional workers as long as their marginal revenue product is greater than or equal to the wage (their marginal cost).

Case theorem

If bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved via private bargaining.

Nonwage benefits, subsidies, and taxes

If the benefits an employer gives to their employees increases or decreases, the labor demand curve will shift left or right respectively. Also, if taxes increase, labor demand will shift left; if subsidies increase, labor demand will shift right.

Changes in product demand

If the demand for what you sell increases, so does the price of what you sell; as a result, marginal revenue product increases and the labor demand curve shifts right/up.

Changes in the price of capital

If the price of capital goods rises or falls, the labor demand curve can either shift left or right depending on whether the capital good in question is a complement or substitute.

Changing wages in other occupations

If wages in a labor-competitive industry rise, workers will leave their industry in pursuit of higher wages, thus affecting the labor supply curve for multiple industries.

Forgone wages

If you don't launch this start-up, how much will you earn pursuing your next best career option?

Bargaining power

Imperfect competition among buyers gives them more ______________.

Relationship-specific investments

Investments that are worth more in the context of a specific business relationship; money spent that will be wasted if you initiate another relationship.

No

Is advertising valuable in a perfectly competitive market, where all companies benefit from advertisement of the same product?

Relative poverty

Judges poverty relative to the material living standards of your contemporary society (-ex.- US has different poverty line than Venezuela).

Absolute poverty

Judges the adequacy of resources relative to an absolute or unchanging standard (-ex.- poverty line is set the same for all countries).

Inelastic

Labor is typically agreed to be elastic or inelastic?

Minimum wage laws

Laws that act as a price floor by raising the minimum wage above the equilibrium wage; may create unemployment by increasing the quantity of labor supplied and decreasing the quantity of labor demanded.

Merger laws

Laws that prevent competing businesses from combining to consolidate market power.

Licensing laws

Laws that restrict labor supply by requiring workers in jobs like doctors, interior decorators, and dentists to receive a qualifying permit.

Pay-for-performance plan

Link each worker's income to their performance on the job as an incentive for better work.

Deadweight loss

Loss of economic surplus due to internalization of a negative externality, which reduces economic efficiency.

Perfectly competitive labor market

Lots of businesses are looking to hire from a large pool of workers with similar skills; employers must pay the market wage.

Diminishing

Marginal utility is generally considered to be _______________ because your 100,000th dollar has much less value to you than your 1,000th dollar.

Independent pricing strategies

Market power allows a seller to pursue __________________.

Total economic surplus

Market power distorts market forces, leading to market outcomes that do not maximize ____________________.

Labor market

Market where the worker is the supplier (of labor) and the employer is the demander.

Perfectly competitive

Markets in which all businesses sell an identical good and there are many buyers/sellers, each of whom is small relative to the size of the market; sellers have no market power.

Monopolistic competition

Markets in which many small businesses compete, each selling differentiated products; sellers have some degree of market power.

Monopolistic

Markets in which there is only one seller; this seller has a lot of market power (-ex.- NBA, IRS, USPS).

Oligopolistic

Markets with only a handful of large sellers, each of which have some degree of market power.

Substitution effect (labor supply)

Measures how people respond to a relative change in prices; the higher a worker's wage is, the more workers will substitute work for leisure.

Income effect

Measures how people's choices change when they have more income; opposite effect of substitution because as workers earn higher wages, they began to demand leisure more over work.

Wage elasticity of labor supply

Measures how the quantity of labor supplied responds to a change in the wage.

Flow

Money that accrues over time.

Short, long

Most poverty spells are ____________ but most poor people are in poverty for a ___________ time.

Extrinsic motivation

Motivating workers to gain external rewards such as higher pay.

1) Coupons 2) Haggling 3) Slightly worse service 4) Imperfect goods 5) Alternate versions of a good

Name some examples of hurdles?

Less profitable

New competitors make your market _______________; you lose some customers (lower demand curve) and you lose market power (flattening your firm's demand curve).

Free entry

No factors exist that make it particularly difficult/costly for a new business to enter/exit the market.

Tax evasion

Not honestly reporting all of your income (-ex.- being paid off the books and not reporting that income to the IRS).

Barriers to entry

Obstacles that make it difficult for new businesses to enter the market; prevent competition to a degree, thus preserving profits.

High differentiation

Occurs when markets are positioned far apart.

Labor market discrimination

Occurs when people are treated differently based on characteristics like their gender, race, religion, social class, sexuality, or disability.

Economic profit

Occurs whenever the profit margin is positive; anytime the firm demand curve leis above the average cost curve, there's an opportunity to make economic profits.

Hold-up problem

Once you've made relationship-specific investments, you lose bargaining power; this might force you into a worse deal.

Progressive tax system

One in which those with more income tend to pay a higher share of their income in taxes; act as an equalizing force.

Flat

Perfect competition leads to a firm demand curve that is ____________.

Underproduction problem

Price discrimination can help solve the ________________ by increasing the amount you sell until it reaches the efficient quantity.

Rational rule for society

Produce more of a product as long as its marginal social benefit is at least as large as the marginal social cost.

Social insurance

Protections against bad outcomes like disability, illness, or unemployment which act as insurance that's provided socially by everyone in society rather than by a private company; funded via taxes.

Equality-efficiency tradeoff

Redistribution can increase equality but can result in lower average incomes due to distorted incentives.

More

Relative poverty measures say that ________ people are in poverty than absolute poverty measures.

Average revenue

Revenue per unit calculated by dividing total product revenue by its quantity supplied; is equivalent to the price if you charge everyone the same amount. Is equivalent to the firm demand curve.

In-kind transfers

Safety net programs that provide specific goods in place of tax breaks or additional income.

Rational rule for sellers

Sell one more item if the marginal revenue is greater than or equal to marginal cost.

Bundling

Selling different goods together as a package; constitutes a hurdle.

Job-specific skills

Skills that are only useful in a job with one particular employer; worth investing in.

General skills

Skills that would be useful to many employers; try to avoid investing in these as an employer.

Medicare

Social health insurance for people 65 and older.

Disability insurance

Social insurance against developing a work-limiting disability.

Workers' compensation

Social insurance against getting injured at work.

Unemployment insurance

Social insurance against losing your job through no fault of your own.

Social security

Social insurance against outliving your savings or dying before your kids are grown.

Monitor

Some jobs pay more because it's harder to __________ effort.

Threat of entry

Startups/existing businesses that might expand into your market; can intensify competition; varies in strength due to barriers to entry.

Step 1: Find where the marginal revenue curve is equal to the marginal cost curve; note the quantity at this location. Step 2: Find the corresponding price to this quantity on the firm demand curve, which is located above the marginal revenue curve).

Steps for determining quantity/price for a firm with market power?

Switching costs

Substitutes are a bigger threat when _________________ are low.

More

Successful product differentiation gives you __________ market power.

Income taxes

Taxes collected on all income regardless of its source; includes earned income (wages) and unearned income (investments, gifts).

Not

The US poor are _________ members of the global poor.

Marginal revenue

The addition to total revenue that you get from selling one more unit; measures your incentive to increase production.

Marginal utility

The boost to utility that you get from an extra dollar; decreases as you get richer.

Social safety net

The cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution; funded via taxes.

Transfers

The cash, goods, and services the government provides some people; help reduce inequality along with taxes.

Derived demand

The demand for labor depends on the demand for the stuff they make for you to sell.

Market power

The extent to which a seller can charge a higher price without losing many sales to competing sellers.

Intergenerational mobility

The extent to which your economic circumstances are independent of those of your parents.

Marginal external benefit

The extra external benefit from one more unit.

Marginal external cost

The extra external cost from one extra unit.

Marginal product of labor

The extra output you produce from hiring an extra worker (a quantity).

Underinvestment, unproductive investments

The hold-up problem can lead to ________________________ and ___________________.

Below, faster

The marginal revenue curve lies _________ the firm demand curve and declines _____________.

Reservation price

The maximum price that a customer will pay; equivalent to a customer's marginal benefit.

Utilitarianism

The political philosophy that government should try to maximize total utility in society; champions redistribution.

Output effect

The revenue increase from selling one more unit (P).

Discount effect

The revenue loss from cutting the price on all the previous units sold (deltaP x Q).

Competition policy

The set of laws that ensure that markets remain competitive.

Poverty rate

The share of people whose family income falls below the poverty line; does not account for benefits that are given to the poor and changes over time.

Imperfect competition

The situation of facing at least a few market competitors and/or selling products that differ at least a little from those of competitors.

Price discrimination

The strategy of selling the same product at different prices.

Effective marginal tax rate

The sum of higher taxes and reduced benefits accruing from each dollar you earn; contribute to the poverty trap.

Marginal social benefit

The sum of marginal external benefits and marginal private benefits.

Long run

The time horizon over which new rivals may enter or expand into your market and existing rivals can contract or exit the market; can adjust production capacity in this perspective.

Accounting profit

The total revenue your business receives minus your total outlays (explicit financial costs).

Next best alternative

The value of the best option outside of the current deal; improving it improves your bargaining power.

Exemptible

The wealthy are adept at skirting tax regulations because they spend more money on __________________ things.

Price competition

This occurs when businesses compete to win customers by offering lower prices; occurs most often when rivals sell similar products, prices are easily observed, and switching costs for consumers are low.

Economic profit

Total revenue minus both explicit financial costs and the implicit opportunity cost.

Government regulation

Used by the government to control entry to solve market failure; sometimes used after persuasion from corporate lobbyists (-ex.- patents, registration fees, licenses)

1) Your business has market power. 2) You can prevent resale of your product. 3) You can target the right prices to the right consumers.

What are the conditions for price discrimination?

1) Segment your market into groups whose demand differs. 2) Target your group discounts based on verifiable characteristics. 3) Base group discounts on difficult-to-change characteristics.

What are the criteria for determining price groups?

1) Has administrative costs that subtract from what you can redistribute. 2) Can reduce the incentive to work by taking money from paychecks and making lower incomes advantageous for benefit recipients. 3) Lead to tax avoidance, tax evasion, and fraud. 4) Result in lower efficiency.

What are the drawbacks of redistribution?

1) Existing competitors 2) Potential competitors 3) Threat of potential substitutes 4) Bargaining power of suppliers 5) Bargaining power of buyers

What are the five factors within the Five Factor framework?

1) Having experience creates efficiency gains as you learn how to improve output over time. 2) Mass production is more efficient than producing in small batches (advantageous to incumbents). 3) Research and development can create new strategies to produce products cheaper. 4) Relationships with suppliers can get your business access to cheaper inputs and therefore lower average costs. 5) Access to key inputs can freeze your competitors out of the market.

What are the five main ways to gain a cost advantage (supply-side strategy) over your competitors so that you can maintain positive profit margins?

1) Market power leads to higher prices. 2) Market power leads to an inefficiently smaller quantity due to an underproduction problem. 3) Market power yields larger economic profits for the firm. 4) Business with market power can survive even with inefficiently high costs.

What are the four main results of market power?

1) Creating customer lock-in (demand-side). 2) Developing unique cost advantages (supply-side). 3) Mobilizing the government to prevent entry (regulation). 4) Convincing potential entrants that you'll crush them.

What are the four main types of barriers to entry?

1) Prevents recipients from making bad choices with extra money. 2) Taxpayers who ultimately fund these programs care more about reducing things like hunger or homelessness than about giving money away. 3) Providing in-kind goods only valued by the poor (not money) helps ensure that only the poor get it. 4) Most in-kind transfers act as a compliment to work instead of a substitute, encouraging recipients to not rely solely on the safety net.

What are the pros of in-kind transfers?

1) Makes it clear that you can increase production and cut prices if new rivals enter the market. 2) Increases fixed costs in the present but decreases marginal cost in the future. 3) Commits your company to vigorous competition with any new rivals.

What are the three effects of building excess capacity?

1) Perfectly competitive 2) Monopoly 3) Oligopoly 4) Monopolistic competition

What are the types of market structures?

Boosts demand and allows you to steal customers from rivals

What is the focus of advertising in a imperfectly competitive market?

Used to shift the demand curve

What is the focus of advertising in a monopolistic market?

Nonrival and non-excludable

What two good classifications must exist for the free-rider problem to exist?

Brand proliferation

When a brand expands the diversity of a certain type of product so much that there are no available niches for newcomers to occupy.

Perfect price discrimination

When a seller charges each individual customer their reservation price; yields the highest possible price on each sale and ensures you make every possible sale where a customers marginal benefits are greater than your marginal costs.

Zero

When free entry and exit exist, economic profits tend towards _______________.

Demand-side

When product positioning, you want to make your product attractive to as many people as possible by positioning your product near your rivals.

Supply-side

When product positioning, you want to position your product to be as different from your competitors' as possible to reduce price competition.

Quantity discount

When the per-unit price is lower when you buy a larger quantity (-ex.- buy one get one free).

Vertical integration

When two companies at different stages of a production chain combine to form one company.

Short run

When you currently face a fixed set of competitors with given production capacity and your goal is simply to outcompete these rivals.

Government

Who typically administers public goods?

Financial resources signal readiness for a competition

Why do some companies keep vast quantities of money in savings without investing it, returning it to shareholders, or anything else?

Rational rule for workers

Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure.

Rational rule for entry

You should enter a new market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost.

Rational rule for exit

You should exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

Bargaining power

Your ability to negotiate a better deal for yourself; is determined by your next best alternative.

Total profit

Your per-unit profit margin multiplied by the quantity that you sell.

Network effect

Your product becomes more useful the more people use it, which disadvantages newcomers; creates customer lock-in.

Reputation

__________________ creates brand loyalty and provides a huge advantage for incumbents; creates customer lock-in.

Forgone interest

if you don't invest your funds in this start-up, how much annual interest will you earn by investing it elsewhere?

Leisure

Any activity outside of work, including sleeping, chores, or relaxation.