AP Economics (Microeconomics)
Three Fundamental Economic Questions
1. What to produce? 2. How to produce? 3. For whom to produce?
Marginal Cost
Additional cost of producing one more unit of output ∆TVC/∆Q - Initially falls due to specialization - MC= ATC or MC= AVC at respective minimums (MC is least when costs are least) - Forms "checkmark"
Game Theory
An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.
Firm
An organization that employs factors of production to produce a good or service that it hopes to profitably sell
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs.
How is equilibrium established?
At a price higher than equilibrium, demand will be less than 500, but supply will be more than 500 and there will be an excess of supply in the short run. Graphically, we say that demand contracts inwards along the curve and supply extends outwards along the curve. Both of these changes are called movements along the demand or supply curve in response to a price change.
AFC
Average Fixed Costs- The fixed costs of production (FC) divided by the quantity (Q) of output produced
ATC
Average Total Cost- The average cost per unit of output. To find it, divide the total cost (TC) by the quantity the firm is producing (Q)
Trade
The exchange of goods by two or more parties of people
PED and revenue
When Total Revenue is at a maximum, MR = zero, and PED = 1.
Unitary Elastic Demand
abs value of Ed is equal to 1
Proportional Tax
Constant tax rate regardless of income
Fixed Cost
Costs that do not vary with the quantity of output produced
Variable Costs
Costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc.
Variable Cost
Costs that vary with the quantity of output produced
Duopoly
Exists when two companies dominate a market.
Command System
Government controls everything; prices, quantities, and factors of production. (Communist society)
Average Cost Pricing
setting price equal to average total cost
Fallacy of Composition
false statement that what is true for the parts is true for the whole and vice versa
Factors of Production (3)
land, labor, physical capital
Imperfectly Competitive Market
markets where individual buyers or sellers can control or influence the price
Pigouvian Taxes
taxes designed to reduce external costs
Elasticity
unitless measure of responsiveness of a relationship to a change in a variable
Elasticity Coefficient
value measuring degree of elasticity
Income Effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
Demand shifts to the left
A decrease in demand shifts the demand curve to the left and reduces price and decreases the quantity supplied.
Supply shifts to the left
A decrease in supply shifts the supply curve to the left, which raises price but reduces the quantity demand.
Determinants of Resource Demand
- Product demand - Productivity (affected by:) 1) Quantity of resources 2) Technology progress 3) Quality of variable resources - Price of other resources 1) Substitute: SE and OE 2) Complement: When machinery and labor are complements, they will have a direct relationship
Shut-Down Decision
- Shut down when TVC exceeds revenue to minimize loss (loss will only be TFC) Short run: MC above SDP is the supply curve for each PC firm Long run: Firms see profit and will continue to enter market, shifting S right until MC=MR=P=ATC= No profit!
AVC and APl
- Work inversely of each other - When APl is highest, AVC is lowest
MC and MPl
- Work inversely of each other - When MPl is highest, MC is lowest
Subsidy
- Works opposite way of a tax
Price ceilings
A price ceiling may be set to prevent price from rising beyond a per-determined level. A price ceiling will only have an effect on the market if it is set below the prevailing market clearing price. A price ceiling is also called a maximum price.
Allocative Efficiency
A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing
Dominant Strategy
A strategy that is best for a player in a game regardless of the strategies chosen by the other players
Subsidies
A subsidy of B - C (U - S) would provide the necessary incentives for universities to supply Q1 places, and for students to take-up this number. If funded in this way, students would contribute part of the real cost of their education by paying C, which is equivalent to the private benefit they expect to derive, and 'society', would contribute a further part of the cost of education (B - C) equivalent to the external benefit which is derived by society. This subsidy would be funded through taxation.
The economic problem
All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.
Opportunity Cost
All that is given up in choosing to produce one good over another (next-best option)
P = MC
Allocative efficiency
Allocative efficiency
Allocative efficiency occurs when consumers pay a market price that reflects the private marginal cost of production. The condition for allocative efficiency for a firm is to produce an output where marginal cost, MC, just equals price, P.
Free Good
Also called a Public Good- A good that cannot profit directly from its existence (fees can be charged for the viewing of a statue, for example, but many people will look at it for free due to lack of regulation). Not necessarily government-owned, non-rivalrous and non-excludable. Markets do NOT provide these, but the govt. CAN force private companies to produce them.
Diseconomies of Scale
An economic concept referring to a situation in which economies of scale no longer functions for a firm. With this principle, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased.
Samuelson's three questions
America's first Nobel Prize winner for economics, the late Paul Samuelson, is often credited with providing the first clear and simple explanation of the economic problem - namely, that in order to solve the problem of scarcity all societies, no matter how big or small, developed or not, must endeavor to answer three basic questions.
Private Good
An item that yields positive benefits to people" that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits
Net welfare loss
Net welfare loss can exist in two situations. Firstly, it exists when the marginal cost to society of a particular economic activity, such as manufacturing 200,000 computers, is greater than the marginal benefit to society. Secondly, it can exist when the marginal benefit of a given economic activity, such as producing 50,000m computers, is greater than the marginal cost.
Total Surplus
Consumer Surplus + Producer Surplus
Consumer surplus
Consumer surplus is derived whenever the price a consumer actually pays is less than they are prepared to pay.
Demand
Consumer willingness and ability to buy products
Law of Supply
DIRECT relationship between price and quantity supplied.
Inelastic
Describes demand that is not very sensitive to price changes
Coase Theorem
Describes the economic efficiency of an economic allocation or outcome in the presence of externalities.
Wealth
Determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts or the accumulation of resources
Black Market
Economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur "under the table" to let participants avoid government price controls or taxes.
Economic Growth using a Production Possibility Frontier (PPF)
Economic growth has two meanings: Firstly, and most commonly, growth is defined as an increase in the output that an economy produces over a period of time, the minimum being two consecutive quarters. The second meaning of economic growth is an increase in what an economy can produce if it is using all its scarce resources. An increase in an economy's productive potential can be shown by an outward shift in the economy's production possibility frontier (PPF).
Cross-Price Elasticity of Demand
Ex,y = (%dQd good X) / (%d Price Y). If Ex,y > 0, goods X and Y are substitutes. If Ex,y < 0, goods X and Y are complementary
Salary
A form of payment from an employer to an employee, which may be specified in an employment contract
Rival
A good is this if one person's use of it decreases the quantity available for someone else.
Demerit Good
A good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves
Artifically Scarce Goods
A good that is excludable but nonrival in consumption.
Inferior Good
A good whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases)
Complementary Good
A good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased
Substitute
A good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased; both in the same direction.
Indifference Map
A graphical representation of a consumer's tastes. Each curve reflects a different level of utility. Curves farther from the origin represent greater consumption levels and, therefore, higher levels of utility. Indifference curves in a consumer's indifference map don't intersect.
Cartel
A group of firms that collude by agreeing to restrict output to increase prices and profits.
Cartel
A grouping of producers that work together to protect their interests. Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided
Mixed System
A mix of some or all types of market systems.
Prisoners Dilemna
A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place
Industry
A particular form or branch of economic or commercial activity.
Short run
A period during which at least one of a firm's resources is fixed
Long run
A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.
Fiscal Policy
A policy in which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.
•Free Float
The exchange rate for a country's currency is determined by the supply and demand of that currency on the international currency markets
Rationing, signalling and incentives
The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated prices. Relative prices, and changes in price, reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand, and away from where they are least demanded.
Quantity Supplied
The quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.
Marginal Tax Rate
The rate at which the tax is paid on each additional unit on taxable income
Marginal Tax Rate
The rate paid on the last dollar earned ∆Taxes Due/∆Taxable Income
Production Function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Price floors
Price may also be set above the natural market price. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price.
Sales maximization graph
Sales maximization means achieving the highest possible sales volume, without making a loss. To the right of Q, the firm will make a loss, and to the left of Q sales are not maximized.
Traditional System
System where traditions, customs, and beliefs control what is produced in a society and how it is distributed.
Average Total Cost
TC/Q - Form "U-Shape" with ATC being x=AFC higher than AVC
Average Fixed Cost
TFC/Q
Average Variable Cost
TVC/Q - Form "U-Shape"
CPI
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
Engel curves
The Engel Curves illustrate the relationship between consumer demand and household income. Engel curves for normal goods slope upwards - the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.
Externality
The cost or benefit that affects a party who did not choose to incur that cost or benefit.
Economies of Scale
The cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale
Lorenz Curve
The curve that illustrates income distribution
Deadweight Loss
The decrease in total surplus that results from an inefficient underproduction or overproduction.
Shut Down Price
the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run
Diminishing Marginal Utility
the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed
Excludable
the property of a good whereby a person can be prevented from using it
Coase Theorem
the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Law of Demand
theory of an inverse relationship between price and quantity buyers are willing to purchase
Gross National Product (GNP)
The value of all finished goods and services produced in a country in one year by its nationals, essentially it is a "broad measure".
Labor
A measure of the work done by human beings
Proportional Tax
A tax in which the average tax rate is the same at all income levels.
Income effect
Demand increases when income increases and falls when income decreases
Fixed Input
an input whose quantity is fixed for a period of time and cannot be varied
Variable Input
an input whose quantity the firm can vary at any time
Egalitarianism
Belief in the equality of all people - Reduces incentive to work hard
Shortage
Demand for a product exceeds the amount supplied by a firm.
Marginal Cost
Extra cost of producing one additional unit of production.
Cost-Push Inflation
Inflation caused by increase in prices of input (such as labor, material, etc.)
MRPL
P*MPL; value firm places on marginal worker; demand curve for labor
Complements in Production
must be produced with initial good
Substitution Effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
Tacit Collusion
when firms limit production and raise prices in a way that raises each others' profits, even though they have not made any formal agreement
Expected Future Income
when future income raises, demand today increases
Decreasing Returns to Scale
when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale
Incentive
when marginal benefits exceed marginal cost
Allocative Efficiency
when marginal cost is equal to marginal benefit
Elastic Demand
when the abs value of Ed is greater than 1, change in qty is greater than that of price
Normal Goods
when there is a direct relationship between income and demand
Ceteris Paribus Assumption
while certain variables change we assume all other things are unchanged--this must be true to be tested for economic analysis
Income Elasticity of Demand (+/-)
∆%Qd/ ∆%Income Measures normal (Lux/nec.) vs. inferior based on consumer income
Price Elasticity of Demand (|a|)
∆%Qd/ ∆%P Measures normal (Lux/nec.) vs. inferior
Cross-Price Elasticity (+/-)
∆%QdX/ ∆%PY Measures comp vs. sub
Price Elasticity of Supply
∆%Qs/ ∆%P
Basic Elasticity Formula
∆%Quantity/ ∆%Price
•Positive externality
A benefit that is enjoyed by a third-party as a result of an economic transaction.
Excise Tax
A tax levied on a particular good or service - federal excise tax on gasoline.
Tariff
A tax on imports or exports between sovereign states.
Economic Growth
economy's ability to produce more with the same amount of resources or less
Money Price
number of dollars given up
Factor Distribution of Income
the division of total income among labor, land, and capital
Minimum Efficiency Scale
the lowest level of output at which a firm can minimize long run ATC
Value of the Marginal Product
the marginal product of an input times the price of the output
In the Short-Run...
Firms can intensify production using existing plants (cannot change capacity size), therefore supply is more elastic.
Marginal Utility per Dollar
the marginal utility from a good that results from spending one more dollar on it
Shift Factors of Supply (5)
1. # of sellers 2. change in technology 3. change in resources and input price 4. expectations of producers 5. price of related goods produced
Price Elasticity of Demand (Ed)
% change in qty. demanded/% change in price
Midpoint formula
((Q2-Q1)/(Q2+Q1))/((P2-P1)/(P2+P1))
Raw
(???) → raw material: Substances used in the primary production of goods
Federal Trade Commission
(WW) 1914 , A government agency established in 1914 to prevent unfair business practices and help maintain a competitive economy, support antitrust suits
Marginal Utility
(economics) the amount that utility increases with an increase of one unit of an economic good or service
% change formula
(point 2-point 1)/point 1 * 100
Bureaucratic Restrictions
*
Sources of Inequality
- Ability - Human capital - Discrimination - Preferences - Market power - Luck and connections
Excise Tax Conclusions
- As Ed falls and Es rises, the greater the consumer's share of tax (less ability to respond to price as they are more inelastic) - As Es falls and Ed rises, the greater the producer's share of tax
PC Profit Maximization
- Cannot change price, only output - TC and TR will continually increase - Choose level where MC=MR Tπ= Equ. Quantity * (P-ATC) TR= Equ. Quantity * Equ. Price TC= Equ. Quantity * (TR-Tπ)
In a Monopoly...
- D is downward sloping (normal) - MR < P - Operates left of the midpoint (elastic upper range of demand)
Graphing Private/ Public Goods
- Dprivate will be lower than Dpublic - Spillover benefits exist at the point where Dpublic meets supply and extends down to Dprivate - Market price is where Dprivate meets supply
PC: Market vs. Firm
- Firm will have perfectly elastic (horizontal) demand curve-- changing price will infinitely affect its demand - Market will not necessarily have perfectly elastic demand curve but changes in firm will not affect market
Deadweight Loss
- Increases as quantity moves further from equilibrium
Market Power in Product Market
- Monopoly hires less than competitive market - Less need for labor - Marginal revenue product is lower
PC Profit Max. Pt 2
- Never leave Qe! OR DIE. - When P=ATC, π=0 - At Qe... - If MC<ATC, loss (ATC will not hit d curve) - If MC>ATC, profit
Bertrand
...
Cournot
...
Stackelberg
...
The 4 Factors of Production
1) Capital 2) Land 3) Labor 4) Entrepreneurship
Characteristics of Oligopoly
1) Few large producers 2) Product can be standard or differentiated 3) Entry barriers 4) Mutual interdependence
MRPL Calculations
1) Find marginal product from total product 2) Find marginal revenue (price) 3) MP x MR= MRPL 4) Stop hiring when MRPL= Wage
Characteristics of Monopolistic Competition
1) Large number of firms 2) Differentiated products 3) Easy entry or exit
Barriers to Enter Monopoly
1) Legal barriers (Ex. patents) 2) Economies of Scale (Larger firms do better) 3) Control of key resources
Characteristics of Perfect Competition
1) Many small independent producers and consumers 2) Produce a standardized product 3) No barriers to entry or exit 4) Firms are "price takers" Example: Agriculture - d=p=MR=AR
Market Economy: Defining Characteristics
1) Private property 2) Freedom to produce, purchase, and sell resources 3) Competition 4) Self-interest 5) Prices
Characteristics of Monopoly
1) Single producer 2) No close substitutes 3) Barriers to Entry 4) Market Power-- "Price Maker"
Factors that Shift Supply Curve (NPFs)
1) Subsidies (Out) and Taxes (In) 2) Technology 3) Other manufactured goods' prices 4) Resource costs 5) Expectations of future prices 6) Number of suppliers
Factors Affecting Demand Elasticity
1) Substitutes - Necessity/ luxury often refers to relative supply (or lack of) substitutes 2) Income 3) Time
Factors that Shift Demand Curve (NPFs)
1) Tastes of consumers 2) Income of consumers 3) Number of consumers 4) Expectations of consumers 5) Related goods' prices (Subs/Comps) 6) Special Circumstances (Nature)
Curve Shift Notes: Draw Graphs!* try
1) When demand increases, EqPrice and EqQuantity both increase. 2) When supply increases, EqPrice decreases and EqQuantity increases. 3) When both shift, predict p and q first. One will be constant (predictable) and the other will change (ambiguous).
4 Complimentary Social Institutions
1. Firm 2. Market 3. Property Rights 4. Money
4 Economic Questions
1. What do I produce and how much? 2. How to produce? 3. To whom is the product for? 4. Who owns/ controls the factors of production?
Shift Factors of Demand (5)
1. number of buyers 2. taste and preferences 3. income 4. expectations of buyers 5. prices of related goods in consumption
Production Possibility Frontier (PPF)
A PPF shows all the possible combinations of two goods, or two options available at one point in time. Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice.
The Lorenz curve
A Lorenz curve shows the % of income earned by a given % of the population. A 'perfect' income distribution would be one where each % received the same % of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income.
Firm
A business concern, esp. Involving a partnership of 2 or more people.
Public Good
A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization
Market Share
A company's product sales as a percentage of total sales for that industry
Net income
A company's total earnings of revenue minus the cost
Regressive Tax
A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.
Sunk Cost
A cost that has already been committed and cannot be recovered
•Negative externality
A cost that is suffered by a third party as a result of an economic transaction.
Production possibilities curve
A curve showing the different combinations of 2 goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed
Long Run Average Total Cost Curve
A curve that indicates the lowest average cost production at each rate output when size or scale of the firm varies. It is also called the planning curve.
Indifference Curve
A curve that shows consumption bundles that give the consumer the same level of satisfaction
Patent
A document granting an inventor sole rights to an invention
Cyclical Unemployment
A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, the business cycle is low and cyclical unemployment will rise.
Monopoly
A firm that is the sole seller of a product without close substitutes
Minimum Efficient Scale
A firm's minimum efficient scale (MES) is the lowest scale necessary to achieve the economies of scale required to operate efficiently and competitively in its industry. No further significant economies of scale can be achieved beyond this scale.
Accounting Profit
A firm's total revenue minus its explicit costs
Embargo
A government order that restricts commerce or exchange with a specified country or the exchange of specific goods
Quota
A government-imposed trade restriction that limits the number, or monetary value, of goods that can be imported or exported during a particular time period.
Production Possibilities Curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
Perfect Competition
Very (very) many firms selling an identical product. Unrestricted/free ease of entry/exit
Price Ceiling
A legal maximum price that a product cannot be sold above-- creates shortage. - The more elastic d and s are, greater the shortage - Can create black market
Price Floor
A legal minimum price that a product cannot be sold below-- creates surplus. - The more elastic d and s are, greater the surplus= greater gov't spending= greater taxes
Diminishing Marginal Product
A level of production in which the marginal product of labor decreases as the number of workers increases; (Gets less additional usefulness)
Trade License
A license or permission issued by the municipal corporation granting permission to carry on a particular trade on a particular address.
Oligopoly
A market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. A market structure in which a few large firms dominate a market.
Deadweight Loss
A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.
Veblen Good
A luxury item whose price does not follow the usual laws of supply and demand. Usually, the higher the price of a particular good the less people will want it.
Monopsony
A market in which a single firm is the only buyer - Wage (labor supply) curve is upward sloping - Marginal factor cost now greater than wage
Monopolistic Competition
A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.
Perfectly Competitive Market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Natural Monopoly
A market that runs most efficiently when one large firm supplies all of the output
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
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
Gini Coefficient
A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.
Elastic
A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
Natural Monopoly
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
Giffen Good
A product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics
Moral Hazard
occurs when banks and other financial institutions take on to much risk, hoping that the Fed and regulators will later bail them out
Nash Equilibrium
A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Productive efficiency
A situation in which the economy could not produce any more of one good without sacrificing production of another good.
Constant Returns to Scale
A situation in which the long-run total cost increases proportionately with output, so average cost is constant
Tax
A sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes
Marginal Cost Pricing
A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question. The opportunity cost is the marginal cost to society.
Indirect Tax
A tax eventually paid to the government through an entity in the supply chain
Progressive Tax
A tax for which the percentage of income paid in taxes increases as income increases
Utility
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Costs
Accounting cost, or actual funds spent carrying out the action, and the opportunity cost, or the amount of money that could have been made by using funds and other resources dedicated to the action on some other objective.
Marginal Revenue
Additional income of selling one more good - In PC, MR=P=AR=D
Marginal Utility
Additional utility received or lost by consumption of the next good ∆TotalU/ ∆Q - Constantly diminishing
Injection
Additions to investment, government spending, or exports. This boosts the circular flow of income and leads to a multiplied expansion of output.
Collusion
An agreement among firms to divide the market, set prices, or limit production
Association (Correlation) v. Causation
one event following another doesn't mean event 1 caused event 2
Clayton Anti-trust Act
An attempt to improve the Sherman Antitrust Act of 1890, this law outlawed interlocking directorates (companies in which the same people served as directors), forbade policies that created monopolies, and made corporate officers responsible for antitrust violations. Benefitting labor, it declared that unions were not conspiracies in restraint of trade and outlawed the use of injunctions in labor disputes unless they were necessary to protect property.
Surplus
An excess amount of goods left over after the market is satisfied.
•Dirty Float
An exchange rate regime in which the country's central bank occasionally intervenes to change the direction or the pace of change of the country's currency value. ... There are several reasons why a central bank intervenes in a currency market that is usually allowed to float.
negative production externalizes
An external cost, such as the cost of pollution from industrial production, makes the marginal social cost (MSC) curve higher than the private marginal cost (MPC). The socially efficient output is where MSC = MSB, at Q1, which is a lower output than the market equilibrium output, at Q.
Demand shifts to the right
An increase in demand shifts the demand curve to the right, and raises price and increase the quantity supply.
Supply shifts to the right
An increase in supply shifts the supply curve to the right, which reduces price and increases the quantity demanded.
Appreciation
An increase in the value of an asset over time
Human Capital
An organization's employees, described in terms of their training, experience, judgment, intelligence, relationships, and insight.
Normal Profit
Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources
Full Employment
Any economic situation that is devoid of cyclical or deficient-demand unemployment. Cyclical unemployment is the fluctuating type of unemployment that rises and falls within the normal course of the business cycle.
Normal Good
Any goods for which demand increases when income increases, and falls when income decreases but price remains constant
Fixed Costs
Are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs.
Keynes
Are the various theories about how in the short run - and especially during recessions - economic output is strongly influenced by aggregate demand.
Producer Surplus
Area above supply curve and below market price.
Consumer Surplus
Area under demand curve and above market price.
Voluntary export restraints (VER)
Arrangements between exporting and ia license or permission issued by the municipal corporation granting permission to carry on a particular trade on a particular address.
Law of Diminishing Marginal Returns
As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product falls.
Marginal
Associated with a specific change in the quantity used of a good or service, as opposed to some notion of the overall significance of that class of good or service, or of some total quantity thereof.
AVC
Average Variable Costs- A firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced
Average fixed costs
Average fixed costs are found by dividing total fixed costs by output. As fixed cost is divided by an increasing output, average fixed costs will continue to fall
Average total cost
Average total cost (ATC) is also called average cost or unit cost. Average total costs are a key cost in the theory of the firm because they indicate how efficiently scarce resources are being used. Average variable costs are found by dividing total fixed variable costs by output.
Average variable costs
Average variable costs are found by dividing total fixed variable costs by output.
Social Benefits/Costs
Benefit- how a good or service benefits society as a whole; Cost- how a good or service harms society as a whole.
Positive Externality
Benefits someone recieves when not involved in the activity - Means there is an underallocation for those resources in the market - Solution is a subsidy for producer - Supply curve will hopefully shift to Dprivate at Qsocial
Buffer stocks
Buffer stocks are stocks of produce which have not yet been taken to market. They can help stabilize prices by taking surplus output and putting it into a 'store', or, with a bad harvest, stock is released from storage.
Capital Goods
Buildings, machines, technology, and tools needed to produce goods and services.
Derived Demand
Business demand that ultimately comes from the demand for consumer goods
Diseconomies of Scale
Can occur if a firm becomes too large (rising LRAC) - Less efficient due to poor management, communication, etc
Constant Returns to Scale
Can occur when Long-Run AC is constant over a variety of plant sizes (Nearly flat LRAC)
Marginal Revenue
Change in revenue resulting from a one-unit increase in output
Marginal Resource Cost
Change in total cost when an additional unit of a resource is hired, other things constant. (Usually, MRC= wage)
Marginal Product of Labor (MPl)
Change in total product resulting from a change in the labor input. MPL = ∆TPL/∆L
Elastic
Changes in quantity are relatively large when price is changed. Often occurs for luxury goods or goods that can be purchased easily elsewhere. Ex: iPods or Sprite
Inelastic
Changes in quantity are relatively small when price is changed. Often occurs for necessities that people are willing to pay for even at a high price. Ex: Vaccines
Unit Elastic
Changes in quantity respond perfectly to price (I.e. The percentage change in quantity will equal the percentage change in price)
COLA
Cost of Living Adjustments
Total Costs
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 labor and raw materials
Spillover Costs
Costs of production that affect people who have no control over how much of a good is produced
Total Variable Cost
Costs that change with variations in output. If output is 0, TVC= 0.
Total Fixed Cost
Costs that do not vary with changes in short-run output, paid even when output is 0
Derived Demand
Demand for industrial products and services is driven by demand for consumer products and services. - Demand for product rising causes price to rise - The MRPL goes up, so the hiring of labor at the current wage goes up
Long-run Monopolistic Competition
Demand continues to shift leftward until just tangent under ATC - DWL equal to triangle: d= ATC,-> d=MC -> MR=MC
Demand Curve
Demand curves generally have a negative slope. There are at least three accepted explanations of why demand curves slope downwards: The law of diminishing marginal utility The income effect The substitution effect
Explicit Costs
Direct, purchased, objective costs
Division of Labor
Division of tasks in a system so an individual may specialize for maximum efficiency
Protectionism
Economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations.
Dis economies of scale
Economic theory predicts that a firm may become less efficient if it becomes too large. The additional costs of becoming too large are called dis economies of scale.
Economic welfare
Economic welfare is the total benefit available to society from an economic transaction or situation. Economic welfare is also called community surplus. Welfare is represented by the area ABE in the diagram below, which is made up of the area for consumer surplus, ABP plus the area for producer surplus, PBE.
Why is the PPF always a bowed out shape?
Economically: a difference in resources either not equally suited or having different productivity in producing one good compared to another Mathematically: an increase of opportunity cost as result from differences in resources
Business Cycle
Economy-wide fluctuations in production, trade, and general economic activity. An expansion is characterized by increasing employment, economic growth, and upward pressure on prices. A peak is the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment, and inflationary pressures on prices are evident. Following a peak, the economy typically enters into a correction which is characterized by a contraction where growth slows, employment declines (unemployment increases), and pricing pressures subside. The slowing ceases at the trough and at this point the economy has hit a bottom from which the next phase of expansion and contraction will emerge. (aka economic cycle/ boom-bust cycle)
(Economic) Development
Efforts that seek to improve the economic well-being and quality of life for a community by creating jobs.
Decreasing Cost Industry
Entry of new firms shifts the cost curves for all firms downward - Takes longer for profit to be eliminated - Lower LR price than constant
Increasing Cost Industry
Entry of new firms shifts the cost curves for all firms upward
Average Costs
Equal to total cost divided by the number of goods produced
Market equilibrium
Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing 'left over'. This is efficient because there is neither an excess of supply and wasted output, nor a shortage - the market clears efficiently. This is a central feature of the price mechanism, and one of its significant benefits.
Technology Spillover
External benefit that results when knowledge spreads among individuals and firms
Marginal Product
Extra output due to the addition of one more unit of input
Economies of Scale
Factors that cause a producer's average cost per unit to fall as output rises
Profit maximization
Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.
In the Market Period...*
Firms are unable to respond to price changes.
In the Long-Run...
Firms can expand or reduce plant capacity, therefore supply is highly price elastic. - Economic profit will= 0 (break even)
Marginal Productivity Theory of Income Distribution
Firms in competitive or perfect product and factor markets pay factors their marginal revenue products.
Sherman Anti-trust Act
First United States law to limit trusts and big business. Said that any trust that was purposefully restraining interstate trade was illegal.
Total Cost
Fixed Cost + Variable Cost
Average Fixed Cost
Fixed cost divided by the quantity of output
MFCL
For a competitive labor market, what is the firms MFC of an additional unit of labor?
Output Effect
For labor; Output rises so more labor is needed Price of Machinery Rises: LD will decrease if OE is greater Price of Machinery Falls: LD will increase if OE is greater
Substitution Effect
For labor; When labor can be replaced by machinery Price of Machinery Rises: LD will increase if SE is greater Price of Machinery Falls: LD will decrease if SE is greater
Total Cost Curves
Given that total fixed costs (TFC) are constant as output increases, the curve is a horizontal line on the cost graph. The total variable cost (TVC) curve slopes up at an accelerating rate, reflecting the law of diminishing marginal returns. The total cost (TC) curve is found by adding total fixed and total variable costs. Its position reflects the amount of fixed costs, and its gradient reflects variable costs.
Merit Good
Goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.
Imports
Goods coming into a country
Inferior Goods
Goods for which demand decreases as consumer income increases (Includes fast food, cheap clothes, etc.)
Normal Goods
Goods for which demand increases as consumer income increases (AKA Superior Goods)
Exports
Goods going out of a country
Private Good
Goods that are both excludable and rival in consumption
Public Good
Goods that are neither excludable nor rival in consumption
Common Resource
Goods that are rival in consumption but not excludable
Lorenz Curve
Graph showing how much the actual distribution of income differs from an equal distribution
Indifference Curve
Graphical representation of different combinations of goods and services that give a consumer equal utility or happiness.
Cartel
Group of firms who choose not to compete and act as a monopolist by maximizing collective profits together
Total Utility
Happiness gained from consumption of a certain amount of a good
Supply
How much of a good or service a producer is willing and able to produce at different prices.
Perfect Competition in the long run
However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits.
Law of Demand
INDIRECT relationship between price and quantity demanded.
Dominant Strategy
Ideal strategy no matter what your opponent does. Firms do NOT always have a dominant strategy. ** Better off doing one thing over another no matter what
Progressive Tax
If income increases, tax increases - Tax bracket is a range on income taxable
Constant Return to Scale
If output increases by that same proportional change as all inputs change
Monopolistic Competition
Imperfect competition where many firms sell differentiated products. Easy but not free ease of entry/exit.
GATT (General Agreement on Tariffs and Trade)
Implemented to further regulate world trade to aide in the economic recovery following the war. Main obj: reduce barriers of international trade.
Allocative Efficiency and DWL occurs...
In ANY market structure where P>MC
Market Economic System
In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.
Merit goods
In a free market, the supply curve reflects marginal private cost (MPC), and the demand curve reflects the marginal private benefit (MPB), or utility, expected from consumption. However, the expected marginal private benefit is likely to be much greater than the actual benefit. This is because individual consumers of merit goods fail to perceive the true benefit to them. Indeed, there is an information failure, which results in the consumer under-consuming. Hence, on the graph, the actual marginal private benefit is higher, and to the right of the expected benefit curve.
Diseconomies of Scale
Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
Perfectly Elastic
In the extreme situation where a small price reduction causes buyers to increase their purchases from zero to all they can obtain. Thus the coefficient is infinite.
Equilibrium in perfect competition
In the short run under perfect competition, firms can make super-normal profits or losses.
Implicit Costs
Indirect opportunity costs
Income Elasticity of Demand
Income Elasticity of Demand: The income elasticity of demand measures the impact of a consumer's income on his or her demand for a product. If the product is a normal good, the income elasticity of demand will be a positive number; if the product is an inferior good, the income elasticity of demand will be a negative number. If income has a strong impact on the consumer's demand for the product, the income elasticity of demand will be a large number in absolute value; if income has a weak impact on the consumer's demand for the product, the income elasticity of demand will be a small number in absolute value.
(Economic) Growth
Increase of the inflation-adjusted market value of the goods and services produced by an economy over time.
Adjusted income
Individual's total gross income minus specific deductions
Demand-Pull Inflation
Inflation as gross domestic product rises and unemployment falls. Imbalance in the aggregate supply and demand (too much money chasing too few goods)
Implicit Cost
Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.
Explicit Cost
Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process.
Internal economies and dis economies
Internal economies and dis economies of scale are associated with the expansion of a single firm. The long run cost curve for most firms is assumed to be 'U' shaped, because of the impact of internal economies and dis economies of scale.
Command Economic System
Is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways.
Normative Statement
opinionated statement about "what ought to be"
Factor Market
Market in which firms purchase the factors of production from households
Factors of production
Land, Labor, Capital, and Entrepreneurship
Antitrust Laws
Laws designed to promote competition and fairness to prevent monopolies
Marginal Cost
opportunity cost of producing one more unit of a good
Profit Max. in Monopoly
MC=MR - Find revenue max price and continue until you hit demand - Also when you hit ATC -Profit= Pmax@d * Qmax
Least-Cost Rule
MPl/Pl=MPk/Pk l= labor and k= capital - Use MPl/MPk to find ratio - Find all applicable to ratio - Sum of all MP should satisfy amount
Profit Maximizing Output
MR=MC
Maximizing Utility
MUa/Pa = MUb/Pb = MUc/Pc... 1) 2)
Physical Capital
Man-made factors of production such as machinery, factories, roads, etc.
Marginal costs
Marginal cost is the cost of producing one extra unit of output. It can be found by calculating the change in total cost when output is increased by one unit.
Income
Money that an individual or business receives in exchange for providing a good or service or through investing capital.
Economies of Scale
Marginal decrease of cost, advantages of larger firms (Falling LRAC) - Specialization and efficiency
Cost Minimizing Rule
Marginal product per dollar spent on each factor is the same.
CR4 Ratio
Market Shares of top 4 firms added - Higher is closer to monopoly - Lower approaches perfect competition - Max is 100%
Free Market System
Market free from government intervention. Prices of goods and services are determined by the open market and consumers.
Price Ceiling
Maximum prices set by the government to a particular good or service.
Average Product of Labor (APl)
Measure of average labor productivity. APL = TPl/L. - At maximum when it intersects MPl
YED (Income Elasticity of Demand)
Measures the responsiveness of demand in response to a change in income.
PES (Price Elasticity of Supply)
Measures the responsiveness of quantity supplied to a change in price.
XE (Cross Elasticity)
Measures the responsiveness of the quantity demanded for a good to a change in the price of another good
The determinants of demand
Measuring the relationship between price and quantity demanded provides information which is used to create a demand schedule, from which a demand curve can be derived. Once a demand curve has been created, other determinants can be added to the model.
Price Floor
Minimum prices set by the government to a particular good or service.
Mixed Economic Systems
Mixed economies may have a distinct private sector, where resources are allocated primarily by market forces. Mixed economies may also have a distinct public sector, where resources are allocated mainly by government, such as defense, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such as healthcare and, which have both public and private provision.
Wages
Monetary compensation paid by an employer to an employee in exchange for work done.
Labor Equilibriums
Monopsony: MFC=MRPL Competitive: W=MRPL
Negative Externality
Negative affects someone when not involved in production of activity - Means there is an overallocation for those resources in the market - Solution is a tax on the one who produces the negative costs
Public Goods
Non-rival and non-excludable, consumption available to many
Analytical/ Positive Economics
Objective statements Ex: Unemployment is at 4.5% this year.
Perfect Price Discrimination
Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.
Currency Manipulation
Occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate and trade policy.
Market Failure
Occurs when a market's allocation of goods is not efficient.
Unemployment
Occurs when a person who is actively searching for employment is unable to find work
Economic Growth
Occurs when an economy's PPC increases due to one or more of the following: 1) Increase in quantity of resources 2) Increase in quality of current resources 3) Advancements in technology
Classical Unemployment
Occurs when real wages for jobs are set above the market-clearing level. It causes the number of job seekers to be higher than the number of vacancies
Structural Unemployment
Occurs when the labor market is not able to provide jobs for everyone who wants to work. There is a mismatch between the skills of the unemployed workers and the skills needed for available jobs. It differs from frictional unemployment because it lasts longer
Choices
One alternative is selected over another
Monopoly
One firm controls the entire market with one unique product. Extremely difficult ease of entry/exit
Factors Affecting Supply Elasticity
Only TIME. Inelastic in short run (changes harder to make in order to supply more) Elastic in long run (more changes made over longer period of time)
Aggregate Demand
Or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels
Aggregate Supply
Or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period
Explicit Costs
Out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials.
PED along a linear demand curve
PED on a linear demand curve will fall continuously as the curve slopes downwards, moving from left to right. PED = 1 at the midpoint of a linear demand curve.
Excise Tax
Per unit tax on production resulting in a vertical shift of supply curve by amount of tax 1) Increase government revenue 2) Decrease consumption of harmful good Tax * New Quantity - Creates loss of efficiency (MB>MC),
There are three extreme cases of PED.
Perfectly elastic, where only one price can be charged. Perfectly inelastic, where only one quantity will be purchased. Unit elasticity, where all the possible price and quantity combinations are of the same value. The resultant curve is called a rectangular hyperbola.
There are three extreme cases of PES.
Perfectly elastic, where supply is infinite at any one price. Perfectly inelastic, where only one quantity can be supplied. Unit elasticity, which graphically is shown as a linear supply curve coming from the origin.
Producer surplus
Producer surplus is the additional private benefit to producers, in terms of profit, gained when the price they receive in the market is more than the minimum they would be prepared to supply for. In other words they received a reward that more than covers their costs of production.
Determinants of supply
Production is the process of turning inputs of scarce resources into an output of goods or services. The role of a firm is to organise scarce resources to satisfy consumer demand in a profitable way. Supply is defined as the willingness and ability of firms to produce a given quantity of output in a given period of time, or at a given point in time, and take it to market.
Productive Efficiency
Production of maximum output for a given level of technology and resources
Allocative Efficiency
Production of the combination of goods giving the most net benefit to society. MB=MC
Productive efficiency
Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firm's short run average total cost curve. This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.
Consumer Goods
Products and services that satisfy human wants directly
Durable Good
Products that aren't consumed quickly and can be used over a period of time.
Average Tax Rate
Proportion of total income paid to taxes Total Taxes Due/ Total Taxable Income
Free Rider
Public/Free goods are plagued by this issue- people who, when not required to pay for a good or service, do not. Problems of a free-rider include: demand for a public good is not expressed by its market; no profit-maximizing firm, in turn, would be willing to produce a public good, yet many in the market may greatly desire it.
Shortage
QDemanded exceeds QSupplied. Price will rise. (Will always return to equilibrium in the long run)
Surplus
QDemanded is less than QSupplied. Price will fall. (Will always return to equilibrium in the long run)
Private Goods
Rival and excludable, consumed by only one person
Labor Market
Refers to the supply and demand for labor, in which employees provide the supply and employers the demand
Government Intervention
Regulations and laws set by the government to help regulate the economy.
Elasticity
Responsiveness of quantity to price
Price Discrimination
Selling at a different price to different consumers, can be achieved if: 1) Monopoly pricing power exists 2) Able to identify different groups of consumers 3) Able to prevent resale between consumers
Tradegy of the Commons
The "commons" is any shared resource, including air, water, energy sources, and food supplies. The tragedy occurs when individuals consume more than their share, with the cost of their doing so dispersed among all, causing the ultimate collapse—the tragedy—of the commons.
Indifference Curve
Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility.
PED (Price Elasticity of Demand)
Shows elasticity of the quantity demanded to a change in its price.
Budget Line
Shows the consumption bundles available to a consumer who spends all of their income; downward sloping
Free-Rider Problem
Some people receive benefit regardless of what they gave up
Gini Ratio
Space between equality and Lorenz curve -AreaA/(AreaA+AreaB) - Closer to 0= More equal
Perfectly Elastic
Straight horizontal line. Quantity responds enormously to changes in price.
Perfectly Inelastic
Straight vertical line. Quantity will not respond no matter what the change in price is.
Market structures
Structures are classified in term of the presence or absence of competition. When competition is absent, the market is said to be concentrated. There is a spectrum, from perfect competition to pure monopoly.
Normative/ Policy Economics
Subjective statements Ex: There should be less unemployment.
Total Welfare
Sum of consumer and producer surpluses-- free market equilibrium provides maximum combined gain to society
Total Surplus
Sum of the consumer and producer surplus.
Herfindahl Index
Sum of the squares of the top 50 firms' market shares - Higher is closer to monopoly - Max is 10 000
Total Cost
Sum of total fixed cost and total variable cost - Vertical distance b/n TC and TVC= TFC
Capital Goods
Tangible assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services
Recessive Tax
Tax rate falls as income rises
Direct Tax
Taxes directly paid to the government by the taxpayer
Adam Smith
The Father of Modern Economics who wrote the Wealth of Nations which said that the division of labor leads to increased productivity. He believed that an interconnected economy was important because the economy could grow faster in the same direction. He also created the idea of the "Invisible Hand" and believed self interest was important to make money.
IMF
The International Monetary Fund- an international organization of 189 countries. Objectives are to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
Comparative Advantage
The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity
Absolute Advantage
The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group
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 using a given amount of resources
Tax Incidence
The actual division of the burden of a tax between buyers and sellers in a market.
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 minus the seller's cost of providing it
Supply and Demand
The amount of a commodity, product, or service available and the desire of buyers for it
Demand
The amounts of a good or service that buyers wish to purchase at various prices during some time period
Supply
The amounts of good or services that sellers will offer at various prices during some periods
Microeconomics
The branch of economics that studies how people make decisions and how these decisions interact
Gross Domestic Product (GDP)
The broadest quantitative measure of a nation's total economic activity. It represents the monetary value of all goods and services produced within a nation's geographical borders.
buffer stock ceiling and floors
The buffer stock managers are likely to establish a price ceiling, above which intervention selling will occur, and a price floor, below which intervention buying will take place.
Perfectly Inelastic
The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Federal Reserve
The central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.
Income Effect (Affects slope of demand curve)
The change in quantity demanded resulting from a change in the consumer's purchasing power (or real income).
Substitution Effect (Affects slope of demand curve)
The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.
Marginal Revenue Product of Labor
The change in revenue that occurs in response to hiring one additional worker. Serves as the firm's demand curve for labor (Wage is supply curve, perfectly elastic)
Marginal Factor Cost
The change in total factor cost resulting from a change in the quantity of factor input, found by dividing the change in total factor cost by the change in quantity of factor input.
Ceteris Paribus
The commonly used Latin phrase meaning 'all other things remaining constant.' The concept of ceteris paribus is important in economics because in the real world, it is usually hard to isolate all the different variables that may influence or change the outcome of what you are studying
Revenue maximization graph
The condition for revenue maximization is, therefore, to produce up to the point where MR = 0. This is also at the same level of output where PED = 1, namely at the mid-point of the average revenue/demand curve.
Elasticity
The degree to which consumers or producers change their demand/amount supplied in response to price/income changes.
Producer Surplus
The difference between the lowest price a producer sells a product for VS what the producer actually sells it for.
Excess Capacity
The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment
Consumer Surplus
The difference of what a consumer is willing to pay VS what the consumer actually pays.
Free Rider Problem
The difficulty groups face in recruiting when potential members can gain the benefits of the group's actions whether they join or not
Tax Incidence
The division of a tax burden between buyers and sellers.
Monetary Policy
The economic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government to achieve economic objectives like inflation, consumption, growth, and liquidity.
Marginal Social Benefit
The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.
Marginal Social Cost
The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
Marginal Revenue Product
The extra revenue produced by one more unit of labor. MRP = change in total revenue/ change in labor
Long run costs
The firm's long run average cost shows what is happening to average cost when the firm expands, and is at a tangent to the series of short run average cost curves. Each short run average cost curve relates to a separate stage or phase of expansion.
Circular Flow
The flow of goods and services in an economic system
Average Propensity to Consume
The fraction of income spent. It is computed by dividing consumption by income (sometimes, disposable income is used as the denominator instead), where C is the amount spent, Y is pre-tax income, and T is taxes. APtC= C/YT
Classical (Hayck)
The idea that private investment, rather than government spending, would promote sustainable growth
Marginal Product
The increase in output that arises from an additional unit of input
Opportunity Cost
The loss of potential gain from other alternatives when one alternative is chosen
Law of Diminishing Marginal Utility (Affects slope of demand curve)
The more one consumes of a good, the less additional utility that last unit consumed provides, therefore consumers are only willing to buy additional units of a good if the price decreases.
Total Revenue
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Implicit Costs
The opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned.
Tax Rate
The percentage of income a person or company pays in taxes.
Concentration Ratio
The percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by x number of firms in the industry.
Break Even Price
The price at which economic profit is zero; price equals average total cost
Exchange Rates
The prices of a nation's currency in terms of another currency. An exchange rate has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.
Average Propensity to Save
The proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income (aka the savings ratio)
Marginal Benefit
the benefits of consuming one more unit of a good/service
Utility
The satisfaction or pleasure a consumer obtains from the consumption of good or service
The firm as price taker
The single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it.
Distribution of Income
The smoothness or equality with which income is dealt out among members of a society. If everyone earns exactly the same amount of money, then the income distribution is perfectly equal
Price Leadership
The strategy by which one or more dominant firms set the pricing practices that all competitors in an industry follow.
Economics
The study of scarcity and choice
Total Product of Labor (TPl)
The total quantity, or total output, of a good produced at each quantity of labor employed
Price Discrimination
the business practice of selling the same good at different prices to different customers
Frictional Unemployment
The time period in between jobs when a worker is searching for work or transitioning from one job to another
Quantity Demanded
The total amount of goods or services demanded at any given point in time. It depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium.
Tax Liability
The total amount of taxes you owe
Average Cost
The total cost divided by the quantity produced.
Labor Supply
The total hours that workers wish to work at a given real wage rate.
Average Variable Cost
The variable cost per unit produced
Minimum price for a negative externalizes of consumption
There are several remedies for negative consumption externalizes, including imposing indirect taxes, and setting minimum prices, imposing fines for over-consumption, controlling supply through a licensing system.
Taxing negative externalize of consumption
There are several remedies for negative consumption externalizes, including imposing indirect taxes, and setting minimum prices, imposing fines for over-consumption, controlling supply through a licensing system.
Perfect Competition and Efficiency
There is maximum allocative and productive efficiency: Equilibrium will occur where P = MC, hence allocative efficiency. In the long run equilibrium will occur at output where MC = ATC, which is productive efficiency.
C+G+I+(x-m)
This measures Aggregate Demand (AD) which is the total spending in an economy. C=consumer spending. G=government spending. I=investment. X=exports. M=imports.
Out of Work
Those who have not looked for work within the past four weeks are no longer counted among the
Areas for total costs
Total Fixed costs and Total Variable costs are the respective areas under the Average Fixed and Average Variable cost curves.
Revenue curves
Total revenue (TR), is the total flow of income to a firm from selling a given quantity of output at a given price, less tax going to the government. The value of TR is found by multiplying price of the product by the quantity sold. Average revenue (AR), is revenue per unit, and is found by dividing TR by the quantity sold, Q. AR is equivalent to the price of the product, where P x Q/Q = P, hence AR is also price. Marginal revenue (MR) is the revenue generated from selling one extra unit of a good or service. It can be found by finding the change in TR following an increase in output of one unit. MR can be both positive and negative.
Economic Profit
Total revenue minus total cost, including both explicit and implicit costs
Economic Profit
Total revenue minus total explicit AND implicit costs (purchased and opportunity costs)
Accounting Profit
Total revenue minus total explicit costs (purchased)
Average Revenue
Total revenue per unit - Equal to price= demand= MR in perfect competition
Average Tax Rate
Total taxes paid divided by total income
Rivalrous
Use of the good prevents its use by another.
Excludable
Use of the good requires some sort of mechanism for distribution (price system).
Central Bank
Usually responsible for the formulation of monetary policy and the regulation of member banks
Marginal Productivity Theory
Wage should be based on productivity - Some are born with more advantage
Expansionary Gap
When actual output exceeds potential output. In other words, the economy is temporarily operating above its long-run potential as measured by real GDP.
Negative consumption externalizes
When certain goods are consumed, such as demerit goods, negative effects can arise on third parties.
Socially Optimal
When d=MC
What qualifies technology as advanced?
When inventions make production efficient
Increasing Returns to Scale
When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale
Collusion
When rival companies cooperate for a mutual benefit
J.S. Mills
Wrote the Principles of the Political Economy which brought together many economist thoughts in one book.
Scarcity
When there is not enough of the resource available to satisfy all the various ways a society wants to use it
Trade Offs
When you give up something in order to have something else
Oligopoly
Where a market or industry is dominated by a smaller number of firms selling similar products. Difficult ease of entry/exit
Specialization
Where an individual concentrates their efforts on producing a limited variety of goods
Crowding Out
Where personal consumption of goods and services are reduced because of increased government spending using up available resources.
Equilibrium
Where the demand for a product is equal to the amount produced/supplied.
Consumer Sovereignty
Where the desires and needs of the consumer control the output of producers
Optimal Consumption
the consumption bundle that maximizes the consumer's total utility given his or her budget constraint
Treasury Secretary
Which member of the presidents cabinet has the job to print, coin and issue money plus collect taxes and pay the governments bills?
Supply and price
Why do supply curves slope upwards? There are a number of explanations of this relationship, including the law of diminishing marginal returns and increasing costs.
Product curves
With a small number of workers, output is low and a division of labor cannot be employed, and workers cannot specialize or develop new skills. However, marginal returns increase quickly as specialization occurs and efficiency increases. This creates the opportunity for labor to develop skills and become more productive. Eventually, marginal returns diminish as the effects of specialization and new skills wear off. This pattern has a considerable impact on the firm's short-run cost curves.
Positive Externalities
a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.
Negative Externalities
a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost
Long Run Industry Supply Curve
a curve that shows how the quantity supplied by an industry varies as the market price varies after all the possible adjustments have been made, including changes in plant size and the number of firms in the industry
Short Run Industry Supply Curve
a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rise above the low point on its average variable cost curve
Unitary Elasticity
a demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of -1)
Copyright
a document granting exclusive right to publish and sell literary or musical or artistic work
Monopsonist
a firm that has market power in the factor market, i.e., a wage-setter.
Economic Theory
a generalization summarizing what we think we understand about economic choices people make and performance of industries/entire economies
Complementary Goods
a good jointly consumed with another
Marginal Revenue Curve
a graphical representation showing how marginal revenue varies as output varies.
Marginal Cost Curve
a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced
Comparative Advantage
ability of a country to produce a good at a lower opportunity cost than another
Pigouvian Subsidy
a payment designed to encourage purchases and activities that yield external benefits
Per Unit Tax
a tax of a specific amount on each unit of a product sold
Negative Income Tax
a tax system that collects revenue from high-income households and gives subsidies to low-income households
Lump Sum Tax
a tax that is a constant amount (the tax revenue of government is the same) at all levels of GDP
Midpoint Method
a technique for calculating the percent change in which changes in a variable are compared with the average, or midpoint, of the starting and final values.
Positive Statement
a testable statement about "what is" or "how something works"
Efficiency Wages
above-equilibrium wages paid by firms to increase worker productivity
Inelastic Demand
abs value of Ed is less than 1
Quantity Effect
after a price increase, fewer units are sold, which tends to lower revenue
Internalizing the Externality
altering incentives so that people take account of the external effects of their actions
How is scarcity represented on a PPF?
as the downward slope
Opportunity Cost
best alternative sacrificed for chosen alternative
What effect does economic growth have on the PPF?
causes outward shift
Sources of Economic Growth (2)
changes in resources, changes in technology
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases
Absolute Advantage
country's ability to produce a good using fewer resources than another
Perfect Competition
equilibrium where MC=MR break even where MC=MR=ATC shutdown where P<AVC P=MC=MR
Post Hoc Fallacy
error in reasoning that one event causes another because first event occurred before second
Total Revenue Test
estimating price elasticity of demand by observing change in total revenue resulting from change in price
Marginal Analysis
examining the effects of additions/subtractions to a current situation and the trade-offs represented
Tradeoff
exchange of giving up one thing to get another
Assumptions of a PPF
fixed resources, fully employed resources, technology unchanged
Tradeoff v. Opportunity Cost
giving up one things for another v. the value
Substitution of Production
goods made using same resources
Expected Future Price
if price is expected to raise, demand today increases
Price Effect
inclination of people to buy less of something at higher prices than they would buy at lower prices
Inferior Goods
inverse relationship between income and demand
Price System
mechanism using forces of supply and demand to create equilibrium through increasing and decreasing price
Perfectly Elastic Demand
price elasticity of demand is infinite, looks like a horizontal line, small change in price brings a huge change in quantity demanded
Perfectly Inelastic Demand
price elasticity of demand is zero, looks like a vertical line, quantity demanded doesn't change according to price
Total Revenue decreases when....
price increases in an elastic range of demand curve
Total Revenue increases when....
price increases in an inelastic range of demand curve
Specialization
producing goods you have a comparative advantage in and then trading
Optimal Output Rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
Monopoly
profit maximization where MC=MR Profit where MC=MR lines up with the demand (P-ATC)*Q P>MR=MC
Relative Price
ratio of money price of one good compared to another, the opportunity cost
Monopolistic Competition
short-run = has positive economic profit long-run= break even Profit= where ATC lines up with demand where MR=MC
Maximum Willingness to Pay Curve
shows highest price a consumer is willing to pay
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
Total Cost Curve
shows how total cost depends on the quantity of output
Minimum Supply Price Curve
shows lowest price a producer must receive in order to produce a number of output
Barrier of Entry
something that prevents other firms from entering an industry. Crucial in protecting the profits of a monopolist. There are four types of barriers to entry: control over scarce resources or inputs, increasing returns to scale, technological superiority, and government-created barriers such as licenses.
Microeconomics
study of choices individual/businesses make, the way those choices interact in markets, and the influence of governments