Baylor University: ECO 2306 Final Vocabulary Study

How do you calculate elasticity?

(Change in Q/Mid point)/(Change in P/Mid point) Sign does not matter

Absolute advantage

A situation in which a country can produce a unit of a good using fewer units of resources.

Nash equilibrium

A situation where both players chose their best strategies.

Dominant Strategy

A strategy that is best for a player in a game regardless of the other players strategies. (i.e. choosing strategy A every time.)

Private Goods

Excludable, rivalrous

Marginal Rate of Substitution

MRS. A rate at which a consumer is willing to trade one good for another. Measured by MUx/MUy

Pareto Improvement

Making at least one individual better off while making no one else worse off.

Characteristics of Competitive Markets

Many Buyers and Sellers Free Entry or Exit Identical Products

Export

Money coming in, goods or services going out.

Import

Money going out, goods or services coming in.

Pareto Efficiency

No one can be made better off without making someone else worse off.

Public Goods

Non-excludable, non-rivalrous

Common Resources

Non-excludable, rivalrous

A specific technological advance causes movement of...

One of the intercepts

Determinants of demand

Own price, prices of related goods, income, tastes, expectations

In competitive Markets P=

P=AR=MR

Profit Maximization of Monopolies

P=AR>MR=MC

Short Run supply curve of a competitive firm is

P=MC where P>=AVC

What is the profit maximization for a competitive firm?

P=MR=MC

Law of Demand

Price goes up, quantity demanded goes down. Vice versa.

Total Surplus

Producer + Consumer surplus

Cross price elasticity?

Same formula remains for elasticity, however, Quantity of Good A goes on top and Price of Good B goes on bottom. Used to see how price change in one good affects the demand of another good. Sign matters.

Income elasticity?

Same formula remains for elasticity, however, instead of price, we use income. Sign matters. Used to see the effects of a change in income on demand.

Gains from trade

The amount a country's consumption increases due to a trade. Measured by After-trade Consumption - Initial Consumption

Producer surplus

The amount a seller is paid minus the amount of the seller's cost.

Consumer surplus

The amount the buyer is willing to pay minus the amount the buyer actually pays

Marginal Analysis

The decision to choose one alternative over another based on its marginal benefit. Marginal Benefit > Marginal Cost

Per-Unit Tax

The government makes buyers and sellers pay a specific amount for each unit.

Diminishing Marginal Product

The idea that marginal product of an input declines as the quantity of the input increases. Vice versa.

Marginal Product

The increase in output from one additional input

Compliments

Two goods that are often consumed together. An increase in the price of good A leads to a decrease in the demand of good B. (i.e. Milk and Cookies)

Substitutes

Two goods that can replace each other. An increase in price of good A leads to an increase in demand of good B. (i.e. Coke and Pepsi)

Shortage

When quantity demanded is greater than quantity supplied.

Surplus

When quantity demanded is less than quantity supplied.

Market Equilibrium

Where Demand meets Supply.

Comparative advantage

Where a country can produce a unit of a good at a lower opportunity cost.

Price Discrimination

Where a monopoly charges different prices on different people based on their demand

Club goods

excludable, non-rivalrous

A party with a more elastic curve takes elastic curve takes a ___________ burden of tax

smaller

Surplus due to imports imply

CS increase, PS decreases, TS increases

Examples of Public Solutions

Corrective Tax, Subsidy, Tradable Permits, Regulation

Incidence of Tax

How the tax burden is shared amongst the two parties of buyers and sellers.

Optimization

I=PxQx+PyQy, MRS = Px/Py

Economies of Scale

Idea that ATC falls as Q increases. Diseconomies of Scale is the exact opposite.

How does one determine whether a country is an importer or exporter?

If a country is producing a surplus, they will export. If a country is producing a shortage, they will import.

Relationship between elasticity and Revenue

If inelastic, a price increase leads to an increase in revenue and expenditure If elastic, a price increase leads to a decrease in revenue and expenditure

Deadweight loss of a Monopoly

1/2 x (Pm-MC) (Qc-Qm)

Income effect

A change in consumption due to a change in purchasing power, a bad guy, depends on whether a good is normal or inferior.

Substitution effect

A change in consumption due to a price change, a good guy, always follows the rule (law of demand)

Price Ceiling

A legal maximum on the price of a good or service. Causes a shortage if binding

Price floor

A legal minimum on the price of a good or service. Causes a surplus if binding

Budget Constraint

A limit on the consumption bundles that a consumer can afford. Determined by income power

Surplus due to exports imply

CS decreases, PS increases, TS increases

Accounting Profit vs. Economic Profit

Accounting Profit = Total Revenue - Explicit Costs Economics Profit = Total Revenue - Explicit Costs - Implicit Costs

Characteristics of Perfectly Competitive Markets

All goods are identical Buyers and sellers are so numerous that no one can affect the market price. (Each participant is a price taker, not price maker)

In the long run...

All inputs are variable

Production Possibilities Frontier

Also referred to as PPF. A curve showing the combination of goods that can be produced in a given time period if an economy's resources are fully and efficiently employed.

Terms of trade

An international trade price of a good expressed in terms of another. (i.e. 1 lb of meat for 4 potatoes)

Giffen Goods

An odd good where increase in price raises quantity demanded Income effect is always greater than substitution effect.

General technological advance causes movement of...

Both intercepts

Increasing Marginal Costs are represented by a ___________ PPF

Bowed out

Both Tariffs and Quotas cause...

Deadweight Loss

Tax creates _________________

Deadweight Loss

Higher elasticities imply higher __________________

Deadweight losses

Positive Externality shifts the ____________ curve up

Demand

Oligopoly

Dominated by a few large firms Few sellers offer similar or identical products Significant barriers to entry

Elasticity Test

Elastic > 1 Inelastic < 1 Unit Elastic = 1

Economic Growth

Increase in the capacity of an economy to produce goods and services. Expansion of a PPF occurs.

Inferior Goods

Goods for which an increase in income leads to a decrease in demand

Normal Goods

Goods for which an increase in income leads to an increase in demand

Characteristics of a natural Monopoly

Significant Economies of Scale Competition from other firms raises average cost

Tragedy of the commons

Since common resources are non-excludable, anyone is free to use them, however, they are rivalrous and in most cases, people will use up the resources until they are gone.

In the short run...

Some inputs are fixed

Constant Marginal Costs are represented by a __________ PPF

Straight line or linear

Negative Externality shifts the _____________ curve up

Supply

Monopolies do not have...

Supply curves

The main difference between tariffs and quotas

Tariffs increase government revenues while quotas do not.

The Laffer Curve illustrates that...

Tax revenue rises and eventually falls

Concentration Ratio

The percentage of the market's total output supplied by its top four firms

Law of Supply

The quantity supplied of a good rises when the price of the good rises. vice versa.

Production Function

The relationship between the quantity of inputs vs the quantity of outputs

Cost Function

The relationship between the quantity of output produced and total cost of production.

Game theory

The study of how people behave in strategic situations

Market Demand

The sum of individual demands

Market Supply

The sum of individual supplies

Opportunity Cost

The value of the next best alternative to any activity. Think, "what you give up to get something."

Effects of perfect price discrimination

Total surplus in a monopoly = total surplus in a competitive market

An increase in tax causes a(n) ________________ in deadweight loss

increase